How the new Ukrainian Defense Procurement Agency prevents GUR from spending money on scammers
Every day you can find information about the supply of new military equipment and weapons to Ukraine in the media. However, there is little information on the Internet about the process of negotiating deals, financial issues, and, most importantly, the challenges of supplying weapons to a country at war. Few people know that up to a certain point Kiev did not have main government arms importer, but instead there were multiple importers who worked in the interests of individual Ukrainian structures and enterprises. For example, in Ukraine there is such an organization as Spetstechnoexport.
It is a state-owned company whose main activity is the export and import of weapons on the global market. Spetstechnoexport was a subsidiary of Ukrspetsexport, another Ukrainian state-owned company. Ukrspetsexport plays a key role in the export and import of military products and services, as well as dual-use products. At the same time, Ukrspetsexport was globally part of the state Defense concern Ukroboronprom (currently renamed into a structure called the Ukrainian Defense Industry).
At one point, Spetstechnoexport was the first company in Ukraine to obtain a license to import military equipment made in the US into the country. Following the outbreak of the war in 2022, the government removed Spetstechnoexport, along with Ukrspetsexport, and the foreign trade company "Progress", from the state-owned concern Ukroboronprom, and transferred them under the management of the Ministry of Defense during the duration of martial law.
In August 2022 Ukrainian MoD provided a chance to Spetstechnoexport to assist the Main Intelligence Directorate (GUR). That is, the company is currently purchasing weapons and equipment for the country's military intelligence. At the same time, on August 3rd, 2022, Defense Minister Alexei Reznikov relieved Yevgeny Larin of his position as director of Spetstechnoexport and appointed Alexander Kalinchuk in his place. However, on August 23rd, Alexey Zaika became the acting director, and he did not last very long in this position too, being replaced by former SBU (Security Service of Ukraine) officer Alexei Petrov on January 6th, 2023 as the new director of Spetstechnoexport.
The media reported that Defense Ministry leadership was unhappy with the current process of importing critical weapons. According to reports, the total amount of accounts receivable from suppliers (paid weapons that have not yet been received) which had worked with Spetstechnoexport reached UAH 14 billion.
It is important to note that Ukrspetsexport and Spetshteknoexport are export companies. They were originally intended to sell Ukrainian Defense products on the global market. This is precisely the reason for the procurement errors that occurred at the start of the Russian invasion.
Specifically, for the importation of weapons Ministry of Defense of Ukraine created Defense Procurement Agency in June 2022. This new unit is dedicated solely to the purchase of weapons and ammunition. Another new agency that has been established at the same time is the State Operator for Non-Lethal Acquisition (DOT). DOT is responsible for the provision of food, uniforms and fuel for the troops.
Despite the importance and significance of the Ukrainian arms procurement theme, there is limited information about the Defense Procurement Agency. According to a former head of DPA Vladimir Pikuzo, his organization engages in "complex operations" where it needs to purchase weapons from a non-friendly country or acquire permits that would not be granted to the MoD officially. According to reports from Ukrainian media outlets, it is understood that:
– during the DPA work, the amount of time spent considering commercial proposals has been halved;
– the Agency's management is entitled to spend the entirety of the budget allocated by the Ministry of Defense of Ukraine for arm purchases, which at the beginning of 2023 totaled at least UAH 355 billion;
– there are 150 permanent employees in the Agency;
– the agency receives up to 2.75% of the value of each arms import contract;
– during the operating year (2022-2023), the Agency supplied weapons to the Armed Forces worth approximately UAH 12 billion in total;
– in terms of direct purchases, the Agency ranks third, behind Ukrspetsexport and the Ukrainian MoD.
Along with this, the agency has already been involved in several scandals. According to the Ukrainska Pravda newspaper, in May 2023 the agency had outstanding contracts worth UAH 131 million. Additionally, the Censor.Net outlet reported that Picuzo had ignored requests from the public anti-corruption groups and refused to create a supervisory board for an state agency with a multi-billion-dollar valuation.
The above facts did not prevent the Cabinet of Ministers from passing a resolution making the Defense Procurement Agency the sole purchaser of weapons. As a result, all exporters, from Ukrspexport to Spetsnoexport, had to go through this agency.
At the same time in early January 2024, amidst the fight against corrupt officials, Pikuzo lost his position. He was replaced by Maryna Bezrukova, a former director of supply for energy company Ukrenergo who implemented a transparent procurement and distribution system in her previous workplace.
Thus, an interesting situation has emerged in the field of procurement in Ukraine. According to the decision of the government, the Defense Procurement Agency has been designated as the sole buyer for the Ministry of Defense, but other companies continue to work in this area. For example, Spetstechnoexport continued to import weapons and ammunition from foreign countries as an exclusive supplier of GUR.
For this reason, the old problem of importers still remains - they continue to sign contracts with unreliable suppliers, carelessly sending taxpayer money to outright fraudsters. According to our data, the company that has the biggest number of “unreliable contacts” is Spetstechnoexport. Therefore, in order to fix the "losses" and solve all the other problems, the Defense Procurement Agency has started to interfere in the affairs of other importers.
The fight against stupidity or corruption has led to the fact that currently ALL contracts of state military suppliers (Spetstechnoexport, Ukrspetsexport, Progress and others) began to pass through the Agency. DPA specialists are now conducting a comprehensive check of the supplier and assessing possible risks. Lyudmila Chepinoga, Head of the Control Department, is responsible for such inspections.
It is worth noting that, in the past, Chepinoga worked as head of the currency department of the National Bank of Ukraine. She then moved to the private sector, working as director of currency for Ukrgasbank and later as a member of its board. Coincidentally, at present, almost the entire senior management of Ukrgasbank, who worked between 2014 and 2019, are under investigation for fraudulent transactions. However, it is not yet known for certain whether Chepinoga was involved in these schemes and whether she cooperated with the authorities during the investigation.
Over the past few months, the employees of her department have analyzed several dozen offers from other Ukrainian importers. Meanwhile, Chepinoga's subordinates treat the Spetstechnoexport with special reverence, which seems to be trying to specifically send Ukrainian money to various scammers.
In December 2023, Spetstechnoexport attempted to buy RG4 hand grenades from Romanian company Orbit EU. During the inspection, it was found that the main activity of the company was the wholesale of regular goods. There were also problems with financial activities: the company, with a registered capital of EUR 40, had a debt of 200,000 EUR.
The Agency also has suspicions about another potential supplier of Spetstechnoexport - Defense Trade Slovakia. This Slovak company can assist the Ukrainian importer with the purchase of Iglas-S MANPADS, although, according to DPA, Defense Trade Slovakia is a legitimate organization that has not engaged in any suspicious activities. The auditing organization, however, has concerns regarding the parent company of Defense Trade – the Czechoslovak Group. This international arms conglomerate owes Ukraine 3 billion hryvnias (approximately 80 million USD). Unsurprisingly, this new potential deal has come under scrutiny, and now Agency is attempting to recover funds paid to the Czechoslovak Group on the previous deals.
In addition, Defense Trade Slovakia's documents do not provide detailed information on the Igla-S MANPADS, and the company has not provided Ukrainian specialists with access to launchers to check their technical condition.
As part of its oversight function, the Defense Procurement Agency has also checked companies such as Ukrspetexport and Progress, which have been noted for making deals with suspicious foreign companies. However, this has happened less frequently.
According to an anonymous source at the Agency, it has already developed a process for dealing with problematic foreign suppliers. In a short period of time, employees of the Agency can contact authorities and law enforcement agencies in the country where the exporting company is based to complain about any issues.
All of the above provides hope that in the near future, Ukraine will be able to establish an effective Defense procurement system that will be free from corruption. We hope that in the future, we will not need to read news the top manager of the Agency, who kept millions of stolen hryvnia in the basement of a country house.