Public confrontation between the Ministry of Strategic Industries and Ukroboronprom State Concern is gaining momentum.

It all started with an appeal by Ukroboronprom's management – that came as a bolt out of the blue – to the state leadership, where they accused the Ministry of Strategic Industries of interference, as well as of a systematic blocking of reform of the country's defense industry.

The ministry's first deputy chief, Valery Ivashchenko, called the appeal "a declaration of war."

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The government intends to create a new Aerospace Systems Holding

At the same time, he emphasized that the real reason for the sharp response on the part of the defense giant's management is the ministry's attempt to take Antonov Design Bureau from under Ukroboronprom's control, along with five other state aviation companies. Based on Antonov, the Cabinet intends to create a new Aerospace Systems Holding within the framework of defense industry reform.

As further developments proved, most likely, this explanation might as well be true: it was precisely Antonov that became the bone of contention to spark a real fallout between Ukroboronprom and the ministry.

Or rather, it was those millions of hryvnias that the company annually pays the Concern. These funds are forwarded to be distributed between other defense firms that are part of Ukroboronprom and also used to pay salaries to a "team of reformers", whom the Ministry is said to be trying to sack.

In 2018-2020, Antonov paid UAH 208 million in contributions, of which UAH 150 million was paid this year alone.

Other aviation enterprises, for which the war is being waged, also annually transfer to Ukroboronprom tens of millions of hryvnias, which is also a substantial amount of money.

It is clear that no one would like to lose such a cash cow, so the state-owned defense concern rushed to publicly defend its interests.

It's noteworthy that just a few days after its reverberating statement, the entire team of Ukroboronprom's management held a briefing. Acting CEO Ihor Fomenko said that with their appeal to the president, prime minister, and NSDC secretary, the team sought to "bring the discussion of the defense industry reform to a whole new level." At the same time, Fomenko added he never wished to "embarrass or, God forbid, offend anyone."

This sounded rather strange, especially considering the steps that followed: the defense company announced it had decided to change the corporate governance system at Antonov Design Bureau. The main innovation is that a supervisory board is being created, which will become the "supreme governing body with an independent control function."

It is not yet clear why a unitary enterprise needs to set up another body that can significantly slow down production routine, which would affect its financial performance.

Moreover, some media reports claimed that Ukroboronprom began to secretly register ownership rights to property of a number of state-owned enterprises that are part of it, including property of Antonov Design Bureau.

The state company hastened to assure that they are only following the procedure prescribed by law, and that once rights to property are registered, the enterprises will also be registered as property owners.

This didn't sound too convincing so it's not surprising Antonov's professional unions, along with their colleagues from the aviation industry, accused Ukroboronprom's management of an attempt to destroy the industry at someone's behest.

Antonov Design Bureau is set to become the base for a new holding

It is worth remembering here that more than a month ago, Vice Prime Minister Oleh Urusky, who also heads the Ministry of Strategic Industry, told in detail about his view on the process of transformation in defense industry. At the same time, he spoke of plans to make Antonov the base for a new holding.

And when the government moved from words to action, the bureaucratic struggle between the two agencies got into a public spotlight.

In their statements, both the ministry and the SOE seek to achieve the same goal – to corporatize defense firms and merge them into specialized holdings.

Apparently, though, the transformation process affects so many interests that each party seeks to carry it out in line with its own scenario.

Whatever anyone says, the new ministry is a government body, while Ukroboronprom is a state-owned business entity, albeit with expanded powers. Therefore, the Vice PM's team will sooner or later either rein in the rivaling company or risk losing its authority.

Therefore, it is quite possible that President Volodymyr Zelensky could become the last resort in this dispute.

One of the factors that ensured his election win was the corruption scandal involving Ukroboromprom's procurement schemes. The head of state promised to eradicate corruption and reform the defense company.

To this end, Zelensky appointed ex-Minister of Economy Aivaras Abromavicius Ukroboronprom CEO. The latter, by the way, left the Concern a month and a half ago, stating that he was returning to business, and also subtly hinted that the newly-created Ministry of Strategic Industry better not mess with his "team of reformers" he was leaving behind.

Anyway, in the near future we are likely to see the defense giant's management reformatted, while the defense industry as such will eventually be supervised by the relevant ministry. Or perhaps Ukraine's international partners may try to convince the president not to sack the incumbent Ukroboronprom team, but then a reasonable question would arise: what was the point in creating a ministry that has no influence over the entrusted industry?

Dmytro Shvarts