Ukraine’s defense sector has undergone a significant transformation in response to the ongoing war with Russia. The sector has seen a surge in innovation and production, driven by the urgent need to equip Ukraine’s military with advanced technologies.

This article explores the latest developments, successes and opportunities for investors in Ukraine’s defense sector, with a focus on military technology.

Recent developments in military technology

Driven by need, Ukraine’s military technology sector has been at the forefront of innovation, particularly in areas such as drones, electronic warfare and cybersecurity. One notable development is a Ukrainian manufacturer’s investment in a unique anti-drone technology incorporating artificial intelligence. This technology is intended to enhance the country’s defense capabilities against aerial threats. Ukraine has also made strides in producing unmanned aerial vehicles (UAVs), with the potential to manufacture up to 3 million UAVs per year.

Additionally, Ukrainians are currently exploring legislative mechanisms to permit the export of weapons manufactured in Ukraine. This would open up new markets and opportunities for its defense industry while keeping production at home rather than have Ukrainian companies locate production facilities abroad, such as the Ukraine-based Skyeton, a leading manufacturer of UAS (Unmanned Aerial Systems), which recently opened a new UAS manufacturing facility in Slovakia under the brand Tropozond s.r.o., in an effort to expand into the international market.

Successes in the defense sector

The Ukrainian defense sector has achieved several notable successes. The Brave1 initiative—a government entity focused on accelerating the development and delivery of defense equipment—has facilitated numerous innovations. For example, as at early 2024, 473 developments have received BRV1 status, indicating they have passed military expertise evaluations.

Several Ukrainian startups have emerged as leaders in the military tech sector, attracting significant investment and attention. For example, Piranha-Tech has developed advanced electronic warfare systems, while Skiftech has created tactical simulators using laser technology. These and other companies testify to the innovative spirit and technical achievement of Ukrainian entrepreneurs.

Opportunities for investors

Foreign investors can currently find numerous opportunities in the Ukrainian defense sector. The ongoing conflict has cast a harsh light on the pressing need for advanced military technologies, attracting significant interest from international companies. For example, during President Volodymyr Zelenskyy’s July 2024 visit to Washington, DC, for the 75th NATO Summit, he met with top managers from various US arms manufacturers, including BAE Systems, Day & Zimmermann, Boeing, Sierra Nevada Corporation, RTX, Lockheed Martin, General Dynamics, D&M Holding, AeroVironment and Amentum.

Recognizing the potential for growth and innovation, foreign investors are increasingly investing in Ukrainian military tech projects. The Ukrainian government has also been proactive in creating a conducive environment for foreign investments, including efforts to localize arms production, as noted above, and to engage in joint ventures with international partners.

German company Rheinmetall established a joint venture with Ukraine’s state-owned Ukrainian Defense Industry JSC (UDI, formerly Ukroboronprom). The result, Rheinmetall Ukrainian Defense Industry LLC, will operate in the fields of service and maintenance as well as assembly, production and development of military vehicles. US defense giants also have plans to collaborate with Ukrainian companies. Northrop Grumman recently signed an agreement with UDI, Ukraine’s state-owned arms conglomerate, to create production of NATO-standard medium-caliber munitions. In addition, Boeing and Ukraine’s Antonov Company signed a memorandum of understanding to collaborate on unmanned systems, including training, logistics and maintenance of drones.

Growing interest in startups

A key trend in the Ukrainian venture capital market is the increasing number of early-stage investments in the growing number of startups. Notably, venture capital firms from Central and Eastern Europe and neighboring countries have been more open to financing startups with teams located in Ukraine, recognizing the potential for high returns and the strategic importance of supporting Ukraine’s defense capabilities.

Several high-profile investments have been made in Ukrainian military tech startups. For instance, the Ukrainian Freedom Fund (UFF) and D3 Venture Capital Firm have committed around US$50 million to support Ukrainian defense tech startups. This funding aims to accelerate the development of cutting-edge technologies that can enhance Ukraine’s defense capabilities.

Additionally, the launch of the MITS (Might) accelerator in Kyiv, a collaboration between Ukrainian and US partners, marks a significant milestone for the sector. MITS provides startups with US$200,000 in investment, combining direct financial support with unique expertise and mentorship from industry leaders. The accelerator’s program is designed to help startups scale up and bring their innovative defense technologies to market quickly.

In a significant development for the Ukrainian defense tech sector, the Green Flag Ventures Capital Fund, led by American entrepreneur Justin Ziff and his partner Deborah Fairlamb, has announced an investment in Karadag Technologies. Karadag, a Ukrainian developer of anti-UAV and electronic warfare systems, addresses the critical threat posed by unmanned aerial systems (UAS), developing advanced products that detect, track, jam and neutralize enemy drones. One of Karadag’s notable products, the Obriy drone detector, can notify users of a drone’s approach from between 2.5 to 4 kilometers away.

Government support for innovation and production

The Ukrainian government has been instrumental in supporting innovation and production in the defense sector. Prime Minister Denys Shmyhal has emphasized the importance of innovation as a driver of economic growth and national security. The government is working on its Strategy for Innovative Development of Ukraine until 2030, which aims to create a robust innovation ecosystem, support research institutions and foster technology companies.

Moreover, the Ukrainian Startup Fund, overseen by the Ministry of Digital Transformation, has become the country’s largest angel investor, supporting over 350 startups. The fund has pivoted towards defense tech projects, recognizing the critical role of innovation in strengthening Ukraine’s defense capabilities.

Efforts to remove bureaucratic obstacles and create a competitive market are also underway, ensuring that talented individuals and companies can contribute to the country’s defense capabilities. Additionally, international partnerships like the collaboration with the UK to develop new technologies further bolster Ukraine’s innovation landscape.

It’s clear that Ukraine’s defense sector is rapidly evolving, driven by the need for advanced military technologies and supported by significant government initiatives. The sector’s successes and the growing interest from foreign investors highlight its potential for further growth and innovation. The influx of venture capital and the establishment of accelerators like MITS highlight the vibrant and dynamic nature of Ukraine’s military tech sector. Despite challenges, Ukrainian startups continue to innovate and attract significant investment, contributing to the country’s defense capabilities and offering promising opportunities for investors. As Ukraine’s defense sector evolves, the collaboration between local and international partners will be crucial in driving further growth and innovation.