The Gold Mine of The Defense Complex. How To Direct European Billions to Ukraine

Last week, the European Union adopted what seems to be a truly breakthrough strategy for the modernization of its own defense sector. The announced focus of attention presents the financing mechanisms. It is worth noting that the key place is given to investments in general and, in particular, to the investment opportunities of the private sector of the economy. Thus, attention was paid to both manufacturers and those who wish and have the opportunity to invest in the defense industry. It is necessary to emphasize the fact that the European Union unambiguously points to the financial instruments of the "ReArm Europe" initiative. The financing mechanisms are targeted (high-quality, in the defense industry) loans and investments.

According to European officials, both mechanisms are aimed at mobilizing private capital by accelerating savings. In general, it should be noted that the "ReArm Europe" initiative, introduced by EU Commission President Ursula von der Leyen aims to mobilize up to 800 billion euros for the expansion and modernization of European defense capabilities.

It is worth saying that now Ukraine can find in the current situation an extremely unique opportunity for the successful development of its economy. Paradoxically, but based on the understanding of the factors (including problematic ones) who have now come together in Ukraine, it would be possible not only to solve the problem of financing the defense industry of our country, but also to make a fairly good economic breakthrough on the basis of this segment. It is worth noting the fact that after all the difficulties that our country faced during the full-scale invasion, we may have a great opportunity to turn the problems that exist in our country into great opportunities for our country.

Just think about this issue for yourself, Ukraine has leading technologies in the defense industry, high-quality trained specialists in important areas for the defense of our country, production capabilities and a testing base that no one can compete with. However, it is also necessary to remember that on the other hand, Europe has financial resources that political leaders can use to develop our defense industry. If we see the potential, we can set a task to combine these two aspects.

Here are a few things written to thoroughly understand the role the aerospace/defense segment plays in the country's economy. For example, in the United States of America, the ratio of companies' value to profits (before deducting expenses), according to the latest data, is 17.24, which indicates a tangible investment attractiveness of the sector. That is, from this information we can conclude that the Aerospace/Defense segment is more attractive for investment than most other sectors of the economy, and competes with retail, real estate, and other leading industries.

How to finance

With the availability of funds for the purchase of weapons by the state, the Ukrainian defense industry does not have enough working capital to fulfill state orders on time or in the full amount required of it. In addition, it is worth noting the fact that banks, in turn, are in no hurry to increase lending to the defense sector and, frankly speaking, do not seek to perform a function that is not inherent to them. After all, in fact, in this context we are talking about financing startups, which is not the functionality of banking institutions and will undermine liquidity. Instead, it is necessary to emphasize the fact that this is a matter that investors should deal with.

On the other hand, for example, having a guarantee from the state for the purchase of weapons, an enterprise, not having the funds to purchase components, cannot begin production. Thus, it is precisely as a result of such trends that our Ukrainian weapons manufacturers do not use most of the means of production. In addition, it is necessary to emphasize the fact that there is no state order at all for the production and use of domestic remote sensing satellites and carriers for various purposes. And this need for high-quality and effective weapons to protect our Motherland in the socio-economic and political situation in which it currently finds itself is extremely important and necessary given the recent events related to the problems of high-quality and uninterrupted satellite intelligence that have occurred recently.

It should also be said that the change of leadership in the structures that are engaged in the procurement and ordering of various types of weapons does not solve the problem, but on the contrary, only adds to the already difficult situation that has developed in our country some artificial and unnecessary worries for political leaders and the population. In addition, it is worth adding that the change of leadership in the structures that are engaged in the procurement also creates such negative phenomena as nervousness and chaos. Thus, we know all the reasons why this situation arose. A logical question arises: Why is the problem not being solved?

If we look at the problem more broadly, we schematically see two main ways to develop and improve the situation in terms of armaments for our domestic Ukrainian weapons manufacturers.

The first way to solve the situation that is developing in the defense complex of our country is to create successful cases: a good solution to the problem that we are trying to solve is to provide funds to all links in the chain. Thus, we will provide the necessary financial resources to all links in our defense industry, starting from those members who place state orders and ending with those manufacturers who need them most. So, we can say that in this way our state treasury will be able to provide the necessary funds from the budget to those manufacturers who f need them most. It is worth saying that this is also about providing working capital to all producers, regardless of the form of ownership (as an option, nationalization can be introduced). It must be said that this is a very effective and good approach to solving problems! (However, everything looks so cheesy at first glance.) The fact is that such an approach to solving the problem will give results but will undermine the country's economy now and in the future.

The second way to effectively solve the problem of insufficiently rapid development of the domestic defense industry is to analyze this very chain. Actually, by analyzing all the components of the chain, it is important for us to see the problem that does not allow us to move correctly and efficiently in the given direction, and in this problem that has arisen in our country due to the socio-political situation and full-scale invasion, to find a new unique opportunity and add a market link that is not present in the process of weapons production. Thus, our task is to turn a not very successful and promising situation into a promising and good one for our country. It is worth noting that this chain should be super-profitable by all market indicators. It is worth emphasizing the fact that an institutional investor with venture capital can become such a link. In other words, a venture investment fund acts as an umbrella for a scattered fragmented business that lacks working capital, and as a financial lever for the public sector that lacks neither liquidity nor working capital. It is necessary to note the factor that the economy does not work without capital and entrepreneurship, because these are the important factors responsible for interest and profit. Using the circumstances, we can make this industry not only self-sufficient and profitable but also capitalized. In addition, it can also be noted that we can make this industry also create added value both in the form of operating income and capitalization growth. It should me mentioned that this would compensate for the natural lost capital, which is a consequence of the destruction of weapons.

How to finance

In the modern world, it is equally important to understand both the technology (and have the means) of production and the technology of financing. It is worth emphasizing the fact that practice shows that Ukraine, which has and uses the technologies for the production of all modern types of weapons, artificially leaves itself with the problem of market financing. In the defense industry, this issue has not been given enough attention because this issue has always been considered secondary. The situation has developed in this way. Since the state acts as a customer, accordingly, it is always responsible for the issue of financing. While practice shows the existence of a feedback loop, it is worth noting that the financial sector usually acts as a strong engine of the economy, taking on a larger share of the cost of the product. In addition, it should also be said that as a response of society to the challenges of war and the inertia of state institutions, the phenomenon of volunteerism and financing through charitable foundations and private accounts of volunteers has developed. However, it is worth emphasizing the fact that, from the point of view of a potential investor, especially a foreign one, such infrastructure cannot be considered an object for investment. That is, we can say that the financial sector was simply not given the opportunity to enter the profitable sector of the economy and be successful there. But today, along with the problematic situation that has arisen in the socio-economic sector of our country due to the large-scale military invasion of our country, we have a unique chance for Ukraine to see good opportunities suitable for us and take advantage of them.

In addition, it should be said that if we evaluate the components of the country's potential economic success that we currently have, we must determine the following.

First, speaking on this topic, it must be said that the paradigm of conducting military operations is undergoing dynamic and sometimes total changes. These changes have begun, they are, are ongoing and will continue in the future. In this aspect, Ukraine is generally out of competition. In addition, it is worth emphasizing the fact that the base for testing new military systems in our country is so advanced and has developed so much in real combat conditions that it is beyond competition. It is also necessary to emphasize the fact that weapons have already been tested, and experience has been accumulated in real combat conditions. For our country, this is exactly the advantage that almost all players in this market do not have. It is definitely necessary to note the fact that our state has powerful (yes, they are really powerful and promising) capabilities for conducting research on the latest weapons in real military situations, with real soldiers and equipment, that is, our country has the opportunity to conduct research on the latest military weapons on real live objects and in real combat conditions. We must capitalize this advantage that we have now into financial resources and invest in the development of the Ukrainian economy and the defense complex of our country. Thus, capitalizing on this opportunity means that funds for the Ukrainian economy and defense can already arrive now without the need to wait and hope for receiving cash receipts only sometime in the distant future. It is worth emphasizing the fact that capitalization can give our country and us the opportunity to feel confident in the socio-political situation that is developing thanks to the receipt of significant financial resources.

Secondly, we have a signal from the European Union about the readiness to rebuild the defense sector at the expense of private investment. In addition, the political leaders of the European Union also talk about maximum support for private investment in the development of the defense capability of the European Union. Thus, it is worth emphasizing the fact that the European Union is giving a signal to all private investors, talking about really considerable funds that will ensure this readiness to provide our defense industry with significant investments. It is also important to note that even without this decisive and necessary step from the European Union, there is a considerable demand for investments in the defense production sector from institutional investors. The political leaders of the European Union have developed such a demand for investments in the defense production sector because this is a very profitable business.

Thirdly, speaking about ways to solve the problem for Ukrainian arms manufacturers, it is worth noting that Ukraine has production capacities, unique developments and technologies, and human capital. However, it is necessary to emphasize the fact that production capacities in our country are currently unstructured, fragmented (non-corporatized), and the profit center is not fixed. In part, this state of affairs can be justified by the circumstances of place and time, that is, by the socio-economic situation in our country that developed after the full-scale invasion of the territory of our state. However, the question arises whether there are good reasons to refuse investment funds? Answering this question, it must be said that there are no reasonable reasons not to use investment funds. However, it is worth understanding the fact that it will be difficult for a foreign investor to explain in which specific projects he is investing.

It is important to emphasize the fact that if you offer a foreign investor participation in a charitable fund, other similar structure that does not provide dividends, is not capitalized, etc., then it will be difficult to count on long-term and reliable partnerships. In addition, speaking about this situation, it is worth noting that a foreign investor does not seek to interfere in the actions, in the operational activities of production, making direct investments.

It must also be said that all that interests such a foreign investor is his profit per unit of invested capital. In this sense, a foreign investor wants but unfortunately does not understand in which projects of our state he should invest his money. In addition, despite any demand for defense production products, a foreign investor must understand the economics of the issue. Thus, it is important to understand that a hidden, fragmented business in the segment of the defense structure of our country does not and will not give a signal to the investor about investing funds. And vice versa, if we talk about a business structured and corporatized according to rules understandable to a foreign investor, then such a business will always be liquid and there will always be demand for it. So, it must be said that in this way there will be a good demand not only for the product, but also for participation in capital investment.

The main danger of this case is that state bodies can take over this initiative and, of course, destroy it. Therefore, it is very important to have such participation of the state, which will not be interventionist, but will in every way contribute to the private investment business and the development of public-private partnership.

If we describe the strategy in simple words, then we must ensure the movement of funds and the structuring (corporatization) of public investment objects. It must be said that it is important to ensure such a system that the investor does not engage in direct investments (which is a bit difficult in Ukraine now, given the socio-economic situation), especially if it is a foreign investor, and instead this foreign investor mainly invests in financial instruments of the Aerospace/Defense sector of Ukraine. In addition, it must be said that the next vital thing that is important and decisive is to ensure that funds from the investor (including foreign ones) move freely to investment objects in Ukraine and can just as easily make the journey in the opposite direction.

It is worth emphasizing the fact that today the obstacles to this are, on the one hand, not a coherent but a dispersed and randomly structured system of producers and production of the Defense sector of our country. On the other hand, a major obstacle to the free movement of funds in investment objects in Ukraine is the ban on capital withdrawal by representatives of the National Bank of Ukraine (NBU) and, traditionally, the meaningless struggle of the National Securities and Stock Market Commission of Ukraine (NSSMCU) with non-existent problems and phantom challenges. That is, representatives of the National Securities and Stock Market Commission of Ukraine (NSSMCU) and the National Bank of Ukraine are engaged in a fierce struggle with the consequences instead of finding out and eliminating the causes of the problems that prevent us from moving forward successfully and quickly.

The first ban applies to everyone. It is worth noting the fact that before the creation of such a ban there were no complaints or questions about the expediency of its implementation. The fact is that at one time such a ban was justified by the circumstances and was the right decision. Instead, when solving the issue of financing the defense segment of the economy, we must make flexible and effective decisions that solve this problem without harming other interests and segments of our country. It should be noted that it is possible to do this because there is a legal way, you only need the will to make an appropriate decision. Therefore, if the favourable ecosystem that has been created around this issue does not solve the problem of attracting capital for the defense complex of our country, then this issue must be solved quite purposefully, taking into account all the important nuances that are relevant to this issue. Thus, the solutions to this issue must be specifically developed and aimed at successfully and quickly finding a solution to this specific problem for the Aerospace/Defense segment.

An illustrative example: shares of Rheinmetall AG, a German automobile and weapons manufacturer, rose tenfold during the war in Ukraine. It must be said that this is a direct correlation of the growth of capitalization relative to the company's profits. It is worth emphasizing the fact that this is possible solely due to the fact that Rheinmetall's business is securitized and connected to financial markets. And when the amount of profit before interest, taxes and depreciation increases, in such a situation the company's shares soar on the super-profitable market. Of course, when a company's shares rise, we can talk about receiving large and significant cash flows. It seems that these are the cash flows we are looking for our defense industry of our country.

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Taking into account the circumstances, we can schematically describe a step-by-step plan, and we must proceed to its implementation right now.

1. Creation of a venture investment Aerospace/Defense fund (funds), the purpose of which is to invest in the defense industry.
2. Ensuring the attraction of foreign capital for the defense industry of the host country. Resolution (normative) of the issue of freedom of movement of capital on an ad hoc basis, that is, focusing on resolving a specific issue regarding investments in the Ukrainian Aerospace/Defense segment.
3. Structuring a network of defense contracting companies around the investment sector to obtain financing.
4. Corporatization of those who want to earn guaranteed funds (instead of earning large sums of money) but grow exponentially.
5. Ensuring the need.

We note that we do not claim that this step-by-step plan is a magic wand that solves the problem immediately. However, it is worth noting that this plan immediately creates the grounds and practical opportunities to move on to a systemic solution to the financing problem. If we do not start solving this problem presented to us now, it will never be solved. After all, it is worth remembering that a long journey of a thousand kilometers always begins with the first step.