Ukraine has spent close to one trillion hryvnias [about US$23.62 billion] on weapons procurement this year, including both domestic production and imports. That figure exceeds what the state allocated to pensions, policing, education or healthcare.
According to estimates by the Ukrainian Council of Defence Industry, the planned volume of domestically produced military equipment and ammunition this year stands at US$12 billion. That is almost twice the output of Ukraine's entire IT sector.
Around US$25 billion has passed through Ukraine's defence industry since the beginning of Russia's full-scale invasion. Many development teams have grown from small start-ups into large companies employing thousands of people during this time.
The products themselves are evolving as well. Ukrainian weapons are becoming more technologically sophisticated, of higher quality and increasingly reliant on locally produced components. Ukrainian companies now manufacture millions of drones, hundreds of thousands of shells, tens of thousands of ground robots, thousands of armoured vehicles, hundreds of artillery systems and are gradually developing their own cruise missile technology, while rapidly mastering new types of weapons.
But is this enough to secure a decisive advantage on the battlefield? Probably not.
First, there is still not enough funding to fully utilise domestic production capacity and many factories continue to operate below full output. Second, the Russians are also evolving technologically and are investing far greater resources to prevent Ukrainian weapons and troops from achieving battlefield success.
Third, the industry itself is becoming larger and more complex. Factories are increasingly vulnerable to missile strikes, require more working capital, predictable contracting conditions, full mobilisation exemptions for staff, government support for domestic production and standardisation, priority in procurement over foreign suppliers, access to technology and effective public investment.
Most of these challenges fall within the responsibility of the state apparatus. In some areas progress has been made; in others, serious gaps remain, posing risks to the industry's future development.
Oboronka, a project of Mezha Media, a technology and IT news platform within Ukrainska Pravda's holding company, spoke to leaders of Ukraine's three largest defence industry associations – the Ukrainian Council of the Defence Industry, the National Association of Ukrainian Defence Industries (NAUDI) and Tech Force in Ukraine – to review the state of the defence industry in 2025 and to highlight the challenges it will face next year.
The era of "easy" growth is over
Ukraine's defence industry has grown every year. According to former minister of strategic industries Herman Smetanin, weapons production amounted to US$1 billion in 2022, US$3 billion in 2023 and US$9 billion in 2024.
Growth continued in 2025, but it no longer looks as dramatic as in previous years. The figure now stands at around US$12 billion and that assumes all contracts are delivered on time – an expectation few consider realistic.
Why has the era of exponential annual growth come to an end? The explanation is simple: Ukraine can no longer significantly increase its defence budget year after year. The period of "easy", extensive growth is over.
Further expansion now requires Ukrainian defence companies to take market share from foreign weapons suppliers. The data suggests this shift towards domestic procurement is progressing successfully. According to the Defence Procurement Agency, in 2024, 46% of weapons were ordered from Ukrainian manufacturers, with the remainder imported. In 2025, the domestic share rose to 76%.
The push to the "Ukrainization" of weapons production is taking place in two ways. Firstly, companies are mastering the production of new items that match foreign equivalents in both price and quality. Secondly, engineers are developing innovative weapon systems that are beginning to replace conventional solutions on the battlefield.
For example, according to Oboronka, Ukraine has made significant progress this year in mass-producing artillery and mortar ammunition, a sector previously almost entirely dependent on imports.
Engineers and the military have also successfully deployed several innovative systems that have made Ukraine almost a monopoly producer: interceptor drones, ground-based robotic systems, tactical electronic warfare systems, uncrewed surface vessels, bomber drones and deep-strike capabilities.
Beyond replacing imports, component manufacturing could become a major growth driver in 2026. While many weapons are assembled domestically, significant funds still flow abroad for drone electronics, small engines, materials and explosives.
Some companies have announced the beginning of local production of these components, but dependence on foreign suppliers – particularly China – remains high.
For domestic production to scale up, greater state involvement is essential. Support policies for component manufacturers are only just emerging. In 2025, the Ministry of Defence and Brave1, a Ukrainian defence-tech cluster, launched targeted grant programmes.
However, a major obstacle remains unequal tax conditions: Chinese components can be imported without customs duties or VAT, while Ukrainian-made components are taxed in full. In effect, state policy continues to incentivise imports over domestic production.
Billions for defence from partners
Western partners have made a substantial contribution to industry growth over the past year. Defence officials, private industry associations and diplomats jointly persuaded partners to finance contracts already signed with Ukrainian manufacturers, a mechanism known as the Danish model. This freed up additional state funds for domestic procurement.
Funding via the Danish model alone reached an estimated US$1.4 billion in 2025, around 10% of annual production volume. Other financing frameworks also exist, including Dutch, British and German models.
For example, the Ukrainian company Kramatorsk Heavy Duty Machine Tool Building Plant recently received a major order from Germany for 200 Bohdana self-propelled artillery systems, on the condition that they are mounted on Mercedes‑Benz chassis – a typical example of the German model.
Can Ukraine attract even more Western funding next year? That will depend on the continued confiscation of Russian assets, Ukraine's ability to act as a mutually beneficial technological partner and its capacity to produce large volumes quickly and to a high standard.
Reputation also matters. Scandals such as the one involving Fire Point, publicly linked to corruption allegations surrounding Tymur Mindich, do little to encourage Western politicians to invest more in Ukraine's defence sector.
A shortage of people
Officials often point to "production capacity" figures to demonstrate the sector's potential. The Ministry of Strategic Industries estimated capacity at US$20 billion in 2024, rising to $35 billion in 2025, while the Council of Defence Industry forecasts US$50 billion for 2026.
But the ability to produce more weapons is closely tied to workforce numbers. When companies report their capacity, they estimate how many facilities they can build, machines they can purchase and people they can hire.
People are the industry's main bottleneck. They determine production volumes, quality, maintenance and the speed of technological development.
Employment in the defence sector is growing. The workforce rose from around 300,000 in 2023 to over 400,000 in 2025, according to the Council of the Defence Industry.
But even that is not enough. A clear indicator of labour shortages can be seen in the FPV drone sector, where manufacturers have set up training schools from scratch, teaching recruits how to solder and even paying extra for a week of training if the trainee is subsequently employed.
If Ukraine fails to continue recruiting workers for defence plants, the much‑touted US$50 billion capacity could prove illusory. Labour shortages may become the industry's next glass ceiling.
To keep people flowing into factories, a robust mobilisation exemption system is essential. The government has taken important steps, including allowing companies to reserve 100% of staff and granting temporary 45‑day exemptions to resolve documentation issues.
However, NAUDI and the Council of the Defence Industry warn that recent rule changes may reintroduce problems. Under the updated Regulation No. 76, companies can only exempt the number of employees declared when receiving "critical facility" status, leaving no clear mechanism to protect newly hired staff as companies expand.
The labour shortage goes far beyond mobilisation rules.
"Aside from exemptions, there are three key areas. Firstly, encouraging people to return from abroad. An €800 salary at a Czech factory is far worse than €1,200 at a Ukrainian defence plant, but people need to hear this, especially given the Russian disinformation they consume abroad.
Secondly, integrating war veterans into the defence industry. They have invaluable practical experience, but many have disabilities and require retraining and proper integration, something the state must support.
Thirdly, education. Technical professions must become more attractive and training facilities need better equipment. The state may need to shift budget-funded education towards technical fields," said Serhii Honcharov, Executive Director of NAUDI.
Finally, the industry must think more seriously about employing women. Women make up 82% of the unemployed population in Ukraine and could become a vital labour reserve for defence manufacturing.
Strikes on industrial facilities
As defence companies grow larger and supply chains become more complex, repairing factories after missile strikes becomes increasingly expensive. Industry sources told Oboronka that attacks on weapons manufacturing facilities increased in 2025, further complicating the sector's development.
The threat of strikes deters capital from being invested in defence businesses, slows the development of technologies and in some cases may lead to companies being dissolved.
"If a missile hits here, that means bankruptcy. During every attack I go out onto the balcony and look towards my plant to see whether there are any flashes from that direction," one defence businessman told Oboronka in his finished-products workshop.
There will not be enough state-owned protected underground premises for everyone because the number of companies has grown very large. In conversations with Oboronka, entrepreneurs often complain that it is difficult even to find ordinary above-ground premises – landlords simply refuse to rent their buildings to weapons manufacturers.
The only way to maintain the sector's financial stability under missile strikes is an adequate response from clients to force majeure events and at least some assistance from the state in dealing with the aftermath of strikes or relocation. At present, the system forces private manufacturers not only to rebuild plants but also to rework destroyed products at their own expense. There is no system of insurance against weapons strikes in Ukraine at all.
Some manufacturers are able to overcome the consequences of strikes by investing their profits in rebuilding. Others, because of the specifics of production and the high value of destroyed property, end up "in a hole".
The government must have the task of avoiding a situation where a company is left one-on-one with its losses, because in the end the military will suffer from undelivered weapons.
The eternal question is where to find the money for this.
First, part of the funding could be allocated by the state through dedicated programmes for the development of the defence industry. Second, the defence associations NAUDI and Technological Forces of Ukraine (TFU) are proposing that the government turn to Western partners, who could help finance the rebuilding of factories using the proceeds from confiscated Russian assets – in the same way as has been done in the energy sector.
Private sector gaining weight
The weight of private companies in the domestic arms market is growing noticeably. According to rough estimates by Oboronka, based on open data, the private sector's share had already reached about 60% at the beginning of 2025. It is likely higher now.
The private segment of the market itself is also transforming from within. Large companies are absorbing smaller teams.
The merger process is happening in small steps. For example, the FPV drone manufacturer Vyriy bought a controlling stake in companies developing unmanned ground vehicles, reconnaissance drones and strike drones. Ukrainska Bronetekhnika bought the VOLS buggy design in order to roll out mass production. And a number of successful large drone manufacturers have already taken on as subcontractors companies that were unable to sell their product on their own.
The rapid development of private arms production is something very new for Ukraine. But it is notable that multi-billion-dollar government investments in expanding production capacity are still concentrated mainly at state-owned plants.
There are so-called "measures for reforming and developing the defence industry", for which the government allocates about US$1 billion every year.
These investment programmes are rarely mentioned publicly. High-ranking sources from the defence sector told us that the system for distributing these funds effectively operates in manual mode: a very limited circle of people knows the results of these programmes and resources are allocated exclusively to state contractors.
On the one hand, this is logical, as state investment in state-owned plants is much easier to justify legally and "morally". On the other hand, the opacity of the system for market participants, the lack of competition for the implementation of strategic projects, and the disregard for a dynamic private sector raise questions about the effectiveness of the use of these funds and about the risks of corruption.
For the private sector, the remaining option is to receive grants from the state cluster Brave1. This instrument remains a good opportunity to obtain an initial boost for development (up to US$188.960), but these funds are insufficient to implement truly capital-intensive projects that require investment of hundreds of millions. Over the whole of 2025, the cluster distributed only US$68.5 million.
Procurement will change
The backbone of the defence industry system is procurement. The sector's performance largely depends on the quality and speed of contracting. Since 2022, weapons procurement in Ukraine has been handled by many different bodies, but over the past year these powers have gradually been consolidated by the Defence Procurement Agency (DPA) of the Ministry of Defence.
Arsen Zhumadilov, head of the DPA, told Oboronka that as of 26 December, contract fulfilment stood at 91% of the military's needs for this year. The previous year, due to a number of failed contracts and budget reallocations, this figure was only about 50%.
In 2024, the most problematic area of procurement was ammunition. According to Oboronka, there has also been a significant shortfall in ammunition contract fulfilment this year, both from domestic manufacturers and through imports. Zhumadilov acknowledges that ammunition shortfalls do occur, but does not consider the problem to be "systemic".
Another vulnerable point in the state weapons supply system is drones. This year, the Ministry of Defence reported the delivery of three million FPV drones, but some of them turned out to be unfit for combat use.
The reason may lie not only in the poor quality of the drones themselves, but also in the fact that the Logistics Forces Command has been distributing these UAVs among units over many months. During this time, the drones lose their technological relevance.
From the start of 2026, the DOT-Chain Defence procurement platform will operate at full capacity. This is a new service of the Defence Procurement Agency that allows military units, using a marketplace model, to order drones directly from manufacturers with state funds, without waiting for numerous approvals from the General Staff and the Ministry of Defence.
In the summer of 2025, the platform was launched on a pilot basis and accounted for no more than 7% of all FPV drones supplied by the Ministry of Defence. However, in 2026 the authorities plan to shift 70% of purchases of these UAVs to the service.
On the one hand, this will improve competition among manufacturers, minimise corruption risks and provide the military with technologically up-to-date drones. On the other hand, a key challenge for the DPA will be ensuring that manufacturers have sufficient working capital.
At present, drone companies are effectively selling surplus stock from their warehouses on DOT-Chain, while the bulk of production is carried out under annual contracts with large advance payments. Whether there will be room for such large advances within the DOT-Chain system, where contracts are effectively concluded for a couple of weeks, will depend on the administrative capacity and creativity of the DPA.
Another weak point of the procurement system is that it is unable to distinguish between Ukrainian and foreign suppliers. The key factor in procurement currently remains the lowest price. Oboronka has reported that because of this, a large Ukrainian plant producing 155 mm shells stood idle in 2025, as the state chose to purchase these shells abroad.
Zhumadilov expects that as early as January 2026 Ukraine will begin applying a "qualification criterion" of domestic sourcing in ammunition procurement. Put simply, this means that a legally formalised rule will appear under which weapons produced domestically will be prioritised for contracting, with the remainder sourced through imports. However, launching this mechanism requires a final order from the Ministry of Defence, which is still "in the approval process".
Another shortcoming frequently mentioned by Oboronka's sources is the prevalence of short-term contracts. The state is unable to plan weapons procurement more than one year ahead. As a result, manufacturers are guaranteed orders only until the end of the year, followed by several months of downtime until a new contract and complete uncertainty. This lack of predictability prevents businesses from investing in complex long-term projects and from securing financing for them.
The problem of short-term planning is linked not only to the state's inability to operate with a long-term horizon, but also to rapidly changing trends on the front line – weapons that were needed in one year may lose their relevance the next.
Zhumadilov says that the Ministry of Defence is exploring various options to extend manufacturers' planning horizons. However, at present it is impossible to obtain a truly "rock-solid" guarantee of financing orders years in advance.
The struggle for long-term contracts in the defence sector has continued for the fourth year of the full-scale war. And the more complex production becomes, the greater this need is.
"Ukraine's defence industry has become quite technologically advanced. And the more technologically sophisticated the defence industry is, the more subcontractors and partners are involved in delivering projects, and the longer the production cycle of the final product," Goncharov explains.
Investments are low, but exports and Defence City are coming soon
In 2025, the defence industry attracted US$105 million in foreign investment for the development of companies.
"This is not just a small amount. It is nothing. By comparison, the NATO Innovation Fund is €1 billion plus venture capital. Not all investment in Ukrainian companies has even been made in Ukraine – some of the money goes to arms companies abroad.
This is happening because Western investors cannot invest large sums within our jurisdiction. We do not have a predictable legal framework, the law on intellectual property protection is outdated, the World Bank's assessment of the investment climate is low, and there is no stock market," Ihor Fedirko, executive director of the Ukrainian Council of Arms Manufacturers, told Oboronka.
Two major innovations are expected to partly improve the investment climate in the defence sector in 2026. The first is permission to sell some of the weapons produced abroad. The second is that Defence City will start operating – a special regime for weapons manufacturers that provides a number of benefits.
"Since the announcement of the resumption of arms exports from Ukraine, the number of enquiries to our investment club alone has tripled. Private investors see that the market is no longer closed and that they will be able to sell their products abroad, albeit with regulations," Fedirko stressed.
The main intrigue is how effective these two complex reforms will be. How exactly they will work is known only in very broad strokes. The process of drafting secondary legislation on exports and Defence City has been going on for months and will drag on until the beginning of January.
All the associations surveyed by Oboronka in one way or another complain about the low level of communication between the authorities and weapons manufacturers during the development of these new market rules.
We have seen what happens when the state does not communicate with the defence market while drafting regulatory documents in the example of Resolution No. 1200, when the state almost broke the military equipment market by burdening manufacturers with unrealistic requirements. These provisions had to be postponed at the last moment until the end of martial law.
Due to the closed nature of the discussion, arms manufacturers find it difficult to assess how productive and effective the opening of exports and the introduction of Defence City will be. So all that remains is to watch and hope that this will help weapons companies reach a new benchmark in 2026.
Overall, it looks as though the defence sector is becoming more mature: companies are mastering expensive technologies, investing more, bringing in experienced Western partners and building much more complex production and R&D chains than two years ago.
At the same time, this kind of "complex" growth requires greater meticulousness in working with market rules. Every incorrectly worded provision in a law or regulation can cost months of development.
Author: Bohdan Miroshnychenko
Translation: Anastasiia Yankina and Tetiana Buchkovska
Editing: Susan McDonald