In Ukraine, a scandal related to the findings of the State Audit Service, which audited leading Ukrainian arms manufacturers, continues. The key question that arose as a result of this audit: are companies that arm and clothe the Ukrainian army entitled to profits?
Gunsmiths call the likely worst consequence of a conflict with the state the complete paralysis of the domestic defense industry, which must continuously work for the front. The legendary design bureaus “Luch” and “Yuzhnoye”, the state-owned “Yuzhmash” and the notorious private “Ukrainian Armored Vehicles” appeal to the Cabinet of Ministers with demands to resolve their conflict with the State Audit Service. The position of this body, in their opinion, threatens the survival of the entire defense-industrial complex.
In turn, auditors claim that they act exclusively according to the letter of the law - and this clinch has been going on for several months. And the government, which could literally solve this issue in one fell swoop, is still thinking about how to approach the problem. The Cabinet of Ministers even received a corresponding directive from parliament, which, in essence, gave instructions to put an end to the conflict.
Moreover, the Cabinet of Ministers will solve the problem that it itself created back in March 2022. Now they are trying to write it off as a simple mistake, which was caused by difficult circumstances, but the “Commander in Chief” has documents at its disposal that call such a simplified explanation into question.
What are we talking about?
Last March, when the country found itself in the realities of a full-scale conflict, the highest levels of government had to literally resolve a number of urgent issues “on the fly.” One of them is material support for the Armed Forces to repel aggression. The situation at that time dictated that this process be simplified and accelerated as much as possible. And on March 20, 2022, the Cabinet of Ministers issued Resolution No. 335, which granted the right to public and private companies to import ammunition and weapons for the needs of the Ukrainian Defense Forces.
In relatively calm times, the process of purchasing goods and services for defense needs was regulated by Resolution No. 309 of March 17, 2021 “On approval of the Procedure for the formation and adjustment of the expected cost of goods, works and services for defense purposes, the purchase of which is carried out through a non-competitive procedure.” After the adoption of 335, it automatically ceased to apply. In fact, this created a regulatory gap that they are still trying to “correct.” If Resolution No. 309 clearly provided that the price of goods, works and services for defense purposes included profit, then from Resolution No. 335 the definition of profit evaporated. All that remains are “taxes and fees, general production, administrative, operational and other expenses of the contractor associated with the manufacture of goods, performance of work and provision of services.” But defense industry enterprises continued to make profits, and, as they claim, invested them in further weapons production.
Such a discrepancy between what was written in the resolution and the real state of affairs surfaced during the financial audit of the Ministry of Defense for 2022, which was ordered by the then head of the department, Alexey Reznikov. The State Audit Service, which conducted the audit, recorded that suppliers to the Ministry of Defense continued to receive profits that were no longer provided for by the decree adopted at the beginning of the full-scale invasion. Accordingly, if all this profit is considered illegal, it automatically goes into the category of state losses, which somehow must be returned to the state. The amount of losses is estimated at about UAH 2.5 billion. Army suppliers, of course, do not want to do this; they accuse the State Audit Service of literally working for the enemy: they hold loud press conferences and appeal to the government to intervene in the situation.
The Cabinet of Ministers in this story took the position of “neither yours, nor ours.” On the one hand, in July 2023, he finally canceled the notorious Resolution No. 335 and adopted a new one - No. 736, in which profit already appears as part of the price for defense goods. But it began to take effect only in July of this year, and a year and four months before that the previous resolution was in force, according to which the suppliers, according to the auditors’ verdict, actually violated the law. Moreover, the State Bureau of Investigation is already conducting criminal proceedings against a number of such enterprises. Thus, in response to a request from the “Commander-in-Chief,” the State Bureau of Investigation confirmed that a pre-trial investigation is underway regarding possible unlawful actions of officials of the Ministry of Defense and the largest private player in the domestic arms market – Ukrainian Armored Vehicles LLC. We are talking about the conclusion and implementation of government contracts in the period 2022-2023.
The State Audit Service, which has been accused from all sides for the last few months of undermining defense capability, has given a simple argument: at the time of the inspection, the Ministry of Defense was guided only by government decree No. 335 in force at that time. And they explain for themselves the absence of the concept of “profit” in it by the fact that the state, for its part, supported domestic military-industrial complex enterprises during the crisis period and made 100% advance payments to them. They say that we should say “thank you” to the state for this, because in difficult times it did not leave them without work.
Decree of the “seven nannies”
Chairman of the Parliamentary Committee on National Security and Defense Alexander Zavitnevich, to whom all the information from the complainants converges, believes that the government in March last year did not intend to leave manufacturers without profit, and the term “profit” itself disappeared from the text of Resolution No. 335 by mistake.
But the reconstruction of the events of March last year, when the enemy stood at the gates of Kyiv, makes the possibility of a banal mistake impossible. Judge for yourself.
The “Commander in Chief” has obtained documents that make it possible to establish the entire chronology of decisions taken by the government in those days. And it is these documents that explain how the problem arose, which is not leaving the news feeds today.
First fact. The initiator and actual co-author of the scandalous resolution was the state concern “Ukroboronprom” and its then leader Yuriy Gusev.
In his address to Prime Minister Denis Shmygal, Gusev asks to consider as quickly as possible the draft resolution prepared by Ukroboronprom “Some issues of payment for products, goods and services to meet the needs of the security and defense sector in conditions of martial law,” which later became the basis for that same resolution No. 335.
And here is the project itself, which was attached to the letter and was subsequently accepted:
As you can see, we are not talking about any profit among the price components here. And this initiative came from none other than the strategic manufacturer of weapons and military equipment in Ukraine, which unites enterprises in strategic sectors of the defense industry.
Fact two. The draft resolution prepared by Ukrboronoprom was studied by the Ministry of Economy and was also not confused by anything in this document.
Fact three. Without any mention of profit, the project was submitted for final consideration by the Cabinet of Ministers and the Ministry of Defense, signed by then Minister Alexei Reznikov.
An accidental error or oversight that could occur in several structures at once due to truly emergency circumstances cannot be ruled out. But the probability of such a coincidence with such a “filter”, you see, is low. Despite the fact that the initiator of such a “unfavorable” resolution for army suppliers was the largest manufacturer of military equipment in Ukraine.
Decree for ruling
But no matter who is to blame, now the situation is not the most favorable for internal strife. The government claims that all the world's weapons production capacity is not enough for the needs of the Armed Forces of Ukraine. All parties must be interested in ensuring that the current unnecessary conflict is resolved. The only question is how and at whose expense. A month ago, the Verkhovna Rada significantly intervened in the process by adopting Resolution No. 10071, which allegedly cut the Gordian knot. That’s at least what the deputies who voted for him sincerely thought. The resolution obliges the Cabinet of Ministers to guarantee the executors of government contracts for defense procurement compensation for all economically justified expenses, as well as the amount of profit. But, in essence, the Rada threw a hot potato into the hands of the Cabinet of Ministers, to which it left the last word.
“If the Verkhovna Rada wants to put an end to it, then it is necessary to state in the body of the law what the profit should be, and in the final provisions it should be noted that the law applies to legal relations that arose from such and such a date,” explains the head of the State Audit Service Alla Basalaeva, - And now the Verkhovna Rada has instructed the Cabinet of Ministers to adopt another resolution that will guarantee something to suppliers. But somehow we still need to find a way out of this issue. We are only in favor of returning profits to producers, but I myself cannot print out a government decree and sign it.”
It is interesting that it was the State Audit Service that was most happy with the parliament’s decision, which interpreted it as recognition by the deputies that the auditors were right and the “crookedness” of the legal field in which the defense industry had been working for a year and a half. The parliamentarians pretended that they had done everything in their power, but the Cabinet of Ministers has been “working through” this issue for a month. The deadline by which all ministries must submit their proposals is November 4. Is no one in a hurry to prevent unexpected “mistakes” from popping up again?
