Internal audits shed light on Ukraine's secret weapons spending

Zelenskyy said that domestically made weapons will become the bedrock of Ukraine's future security.

Kyiv, Ukraine: Ukraine has built a defense industry stamping out thousands of artillery shells, armored vehicles and drones in a dizzying array of models and capabilities. It is broadly seen as a key success in fighting the Russian invasion.

But as billions of dollars flow from the Ukrainian military to domestic arms makers, with funding assistance from European donors, much of the spending is shrouded in wartime secrecy. That worries analysts and activists who say Ukraine has made little progress in reining in a long history of corruption in military procurement.

One focus of concern for government auditors reviewing military spending is Ukraine's repeated awarding, without explanation, of contracts to companies that made higher bids than their competitors. Internal government audits reviewed by The New York Times show dozens of such contracts signed over a period of a little over a year, as well as cases of late or incomplete deliveries and prepayments for weaponry that never arrived.

The awarding of contracts to higher bidders does not by itself indicate corruption or avoidable overspending. But the audits illustrate a challenge for Ukraine as it pivots away from reliance on donations of ammunition and weaponry from allies, given fickle backing from the Trump administration and limited European military ability. It is turning instead to domestic production and international arms markets, including in deals partly financed by European countries under several programs.

Ukraine is now self-sufficient for nearly 60 per cent of its armaments, President Volodymyr Zelenskyy of Ukraine said last month. The country's factories turn out lethal drones, ground robots and a panoply of conventional howitzers, armored vehicles and other weapons. Ukraine has also adapted cheap consumer drones for missions, saving vast sums of money.

Domestically made weapons will become the bedrock of Ukraine's future security, Zelenskyy said, including as a deterrent to keep the peace once the fighting ends. Former officials and analysts say that executing this strategy, however, requires overcoming the long history of corruption in Ukrainian military procurement.

Government auditors who examined purchases made by Ukraine's Defense Procurement Agency from early 2024 until this March did not level accusations of theft or embezzlement, though they did refer some contracts to law enforcement agencies for evaluation.

But their 465-page review found that dozens of contracts for artillery shells, drones and other weaponry were not awarded to the lowest bidder. The difference between the low bids and the contracts actually awarded by the procurement agency totaled at least 5.4 billion hryvnia ($129 million), the audits showed.

"They overpay for unknown reasons and without justification," said Tamerlan Vahabov, a former adviser to the agency, a branch of the Defense Ministry. Amid the turmoil of the war, he said, "there is a lack of political will to do it the right way."

Sometimes, lower bids are passed over with plausible explanations, said Olena Tregub, executive director of the Independent Anti-Corruption Commission, a Ukrainian nongovernmental group. "That justification can be true, or it can be corruption," she said.

In a statement, the procurement agency's director, Arsen Zhumadilov, said lower bids were sometimes rejected because they "may not meet the required standards of quality, delivery timelines, payment terms or other essential criteria."

The agency has recently overhauled its contracting practices to ensure fairness, he said. He has said it began phasing out contracts with middleman companies, which received a markup on sales, last year.

After Russia's full-scale invasion in 2022, Ukraine's army received weaponry and ammunition from two streams. Western countries donated military equipment in kind, such as Abrams tanks and M777 howitzers. Separately, the Defense Ministry purchased weaponry from Ukraine's once robust domestic industry and on international arms markets.

The government created the procurement agency as an independent branch of the Defense Ministry in 2023, after Ukrainian news media reported on a flurry of questionable spending, including huge overpayments for eggs for soldiers' rations and for winter coats. Those revelations prompted the resignation of a defense minister, Oleksii Reznikov.

Problems emerged in the new agency, too. Two directors were fired over accusations of ineffective management.

Most of the procurement agency's roughly $10 billion budget this year is funded by Ukrainian tax revenues, though it has begun to receive European subsidies. Under a program pioneered by Denmark, European countries have pledged more than $1.6 billion for Ukraine to buy arms from its own industry.

Ukraine purchases weapons from previously idled Soviet legacy armaments factories, which once produced intercontinental ballistic missiles, tanks, jets and other hardware, as well as from hundreds of Ukrainian defense technology startups.

Until at least last year, a large majority of purchases were brokered through arms dealers, most of whom received a markup of 3% on sales, a separate audit of purchases until July of last year found. The procurement agency involved such middlemen in 83% of its contracts, rather than buying directly from suppliers, according to that audit.

Arms dealers gained a foothold in Ukraine's defense procurement system early after Russia's invasion. Within about two months, Ukraine had exhausted its reserves of artillery ammunition, an extraordinary vulnerability that was kept secret at the time. In desperation, it pleaded with arms dealers who had previously exported weapons to buy some back.

The dealers, called special exporting companies, had for years sold Ukrainian weapons to war-torn African and Middle Eastern nations. In 2022, they turned to importing from these nations, and then expanded their role to brokering deals for the Defense Procurement Agency with Ukrainian manufacturers.

Ukraine is in the midst of a wartime experiment in buying arms not from several large, established defense contractors but a chaotic swirl of more than 2,000 weapons suppliers, most of them defense technology startups, and others tiny basement workshops.

Some of these companies have delivered spectacular successes. A fleet of drone speedboats has sunk about a third of Russia's once vaunted Black Sea Fleet.

But of the 35 types of surface or submarine drones made by 26 companies in Ukraine, only three models have actually sunk Russian ships, according to Oleksandr Kamyshin, an adviser to the president on the defense industry.

The audits tracked multiple contracts that led to late or incomplete deliveries, and instances when prepayments were made but companies failed to deliver weapons. They identified contracts signed with companies without an effort to first verify that the winners actually had manufacturing sites, such as suitable basement workshops.

The defense procurement agency is experimenting with new models for procurement. It created an online marketplace allowing army commanders to buy drone weapons directly from suppliers, with one or two clicks, cutting out the military bureaucracy. Zhumadilov called it "a game changer in military supply."