Shrouded in Military Secrecy! Internal Audit Reveals Significant Overpayments for Weapons from Ukraine

Ukraine has built a defense industry that produces thousands of artillery shells, armored vehicles and drones in a dizzying variety of models and capabilities. This is considered a key success in the fight against the Russian invasion, writes The New York Times, quoted by Focus.

But as billions of dollars pour from the Ukrainian army to local weapons manufacturers, with financial assistance from European donors, much of the spending is shrouded in military secrecy. That worries analysts and activists who say Ukraine has made little progress in fighting long-standing corruption in military procurement.

One focus of concern for government auditors who scrutinize military spending is Kiev’s repeated awarding of contracts, without explanation, to companies that had bid higher than their competitors. Internal government audits reviewed by The New York Times show dozens of such contracts signed over a period of little more than a year, as well as instances of late or incomplete deliveries and advance payments for weapons that never arrived.

Awarding contracts to bidders with higher bids is not in itself an indicator of corruption or avoidable waste. But the audits highlight a challenge for Ukraine, which is moving away from its reliance on donations of ammunition and weapons from its allies, given shaky support from the Trump administration and Europe’s limited military capabilities. Instead, it is turning to domestic production and international arms markets, including deals partly financed by European countries under several programs.

Kiev is now self-sufficient in almost 60 percent of its armaments, Ukrainian President Volodymyr Zelensky said last month. The country’s factories produce lethal drones, ground robots and a range of conventional howitzers, armored vehicles and other weapons. Ukraine has also adapted cheap consumer drones for missions, saving huge amounts of money.

Domestic weapons will become the basis for Ukraine’s future security, Zelensky said, including as a deterrent to keep the peace after hostilities end. But former officials and analysts say that for this strategy to be realized, it is necessary to overcome long-standing corruption in Ukrainian military procurement.

State auditors who examined purchases made by Ukraine’s Defense Supply Agency from early 2024 to March of this year did not raise any charges of theft or abuse, although they referred some contracts to law enforcement agencies for evaluation.

But in their 465-page report, they found that dozens of contracts for artillery shells, drones and other weapons were not awarded to the lowest bidder. The difference between the low bids and the contracts actually awarded by the public procurement agency amounted to at least 5.4 billion hryvnias, or $129 million, the audit found.

"They pay too much for unknown reasons and without justification," said Tamerlan Vakhabov, a former adviser to the agency, which is a branch of the Defense Ministry. Amid the chaos of war, he said, "there is a lack of political will to act in the right way."

Sometimes lower bids are rejected with plausible explanations, said Olena Tregub, executive director of the Independent Anti-Corruption Commission, a Ukrainian non-governmental organization. "This justification may be true, or it may be corruption," she added.

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

The agency recently reviewed its contracting practices to ensure fairness, he said. He said that last year it began phasing out contracts with intermediary companies that received markups on sales.

Since Russia's full-scale invasion in 2022, the Ukrainian army has received weapons and ammunition from two sources. Western countries have donated military equipment in kind, such as Abrams tanks and M777 howitzers. In addition, the Ministry of Defense purchased weapons from the once strong Ukrainian industry and from international arms markets.

In 2023, the government created the Public Procurement Agency as an independent branch of the Defense Ministry after Ukrainian media reported a series of questionable expenditures, including huge overpayments for eggs for soldiers’ rations and for winter clothing. The revelations led to the resignation of Defense Minister Oleksiy Reznikov.

The new agency has also been plagued by problems. Two directors have been fired over allegations of mismanagement.

The bulk of the Public Procurement Agency’s budget, which is about $10 billion this year, is financed by Ukrainian tax revenues, although it has begun to receive European subsidies. Under a program launched by Denmark, European countries have pledged more than $1.6 billion to Ukraine to buy weapons from its own industry.

Ukraine buys weapons from previously defunct Soviet arms factories that once produced intercontinental ballistic missiles, tanks, aircraft and other equipment, as well as from hundreds of Ukrainian defense technology start-ups.

Until last year, most purchases were made through arms dealers, most of whom received a 3% markup on sales, a separate audit of purchases through July found. The audit found that the state procurement agency used such intermediaries in 83% of its contracts, rather than buying directly from suppliers.

Arms dealers became entrenched in Ukraine’s defense procurement system soon after the Russian invasion. Within about two months, Ukraine had exhausted its artillery ammunition stockpiles, a critical vulnerability that was kept secret at the time. In desperation, the country asked arms dealers who had previously exported weapons to buy some of them back.

The dealers, called special export companies, had been selling Ukrainian weapons to war-torn African and Middle Eastern countries for years. In 2022, they shifted their focus to importing from those countries, then expanded their role to brokering deals for the Defense Supply Agency with Ukrainian manufacturers.

Ukraine is in the midst of a military experiment in which weapons are purchased not from a few large, established defense suppliers but from a chaotic network of more than 2,000 arms suppliers, most of them defense technology startups and others – small workshops in basements.

Some of these companies have achieved impressive success. A flotilla of unmanned boats has sunk about a third of Russia’s once-famous Black Sea Fleet.

But of the 35 types of surface or underwater drones produced by 26 companies in Ukraine, only three models have sunk Russian ships, according to Oleksandr Kamyshin, the president’s adviser on defense industry.

The audits tracked numerous contracts that resulted in late or incomplete deliveries, as well as cases in which advance payments were made but the companies failed to deliver the weapons. They identified contracts awarded to companies without first trying to verify that the winning bidders actually had production facilities, such as suitable underground workshops.

The Defense Procurement Agency is experimenting with new procurement models. It has created an online marketplace that allows army commanders to buy drone weapons directly from suppliers with one or two clicks, cutting out military bureaucracy. Zhumadilov, the agency's director, called it a "game changer in military procurement".