Abridged

At the end of this last March at the National Institute for strategic research the round-table discussion was held on the "European and Euroatlantic integration of Ukraine: problems of military technical cooperation". The representatives of all interested organizations, as well as representatives of the Administration of President, Cabinet of Ministers of Ukraine, National Council for Security and Defense, ministries of industrial policy, defense, foreign affairs, economy and Eurointegration, overseas experts and diplomats, and journalists were invited.

The speakers included H. Perepelytsia, Deputy Director, Head of the Department of Military Policy of the National Institute for Strategic Research; V. Badrak, Director of the Center of Army, Conversion and Disarmament Studies; O. Yizhak, senior researcher of the Dnipropetrovsk Branch of the National Institute for Strategic Research; L. Poliakov, Director of military programs of the O. Razumkov Ukrainian Center for Economic and Political Research; James Green, Director of the NATO communication office in Ukraine; V. Hrechaninov, President of Atlantic Council of Ukraine; Lee Gable, Section Head, Department of Cooperation at the Embassy of the U. S. A. in Ukraine; M. Mitrakhovich, Deputy Chief of Armaments of the Defense Ministry of Ukraine; S. Vydaiko, Head of the Research Information and Analytical Center "Kvant-Inform"; A. Pavlenko, Chief Expert, Department of Military Policy of the National Institute for Strategic Research; V. Kozub, Director of the Department of Economy, Defense and Security of the Ministry of Economy and Eurointegration of Ukraine.

Opening the meeting, the chairman, the First Deputy Director of the National Institute for Strategic Research O. Vlasiuk said: "Everybody knows that Ukraine has considerable achievements in military production. However, today we want to consider our military and technical cooperation as one of the basic and even key trends of integration into NATO and the European Union.

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Realizing political decision of our state administration about consequent integration of Ukraine into NATO and the European Union, we have to tackle such difficult tasks, as transition of the Armed Forces over to the NATO standards.

It would be good if our meeting were more businesslike. We have to realize one of the key tasks of the special purpose plan "Ukraine--NATO, 2004", which foresees an exchange of experience with NATO members on planning of the development of armaments and military technique, their purchases and maintenance.

H. Perepelytsia was the first to address the meeting.

H. PEREPELYTSIA: Some time has elapsed since the National Council for Security and Defense took a political decision on Ukraine's strategy in relation to NATO. The Plan of Actions 2003 has been implemented. The Plan 2004 has been adopted; it sets as an object the cooperation with NATO. Quite often we discuss the political criteria of NATO membership, find many ways to popularize the Alliance, and form public opinion. However, there is a very thorny problem beyond these activities, i. e. military technical or defense industrial constituent of Euroatlantic integration of Ukraine. All experts and department heads of top public institutions here understand the difficulty of this issue.

Ukraine had an experience of military industrial cooperation with the countries of the West. As known, the first project, related to our troop carrier An-7X, which unfortunately proved impracticable, dealt a blow to Ukrainian producers of military products. The mighty source of optimism in relation to possibilities of military industrial cooperation with NATO ran low.

Other strategic direction which Ukraine developed with the countries of the West includes an attempt to keep military industrial cooperation with the countries of Central Europe, which have already become the members of NATO. In fact, we had common military industrial (Soviet) base, we produced identical standards of armaments. In this direction some success is attained. However, there were many miscalculations. Our neighbors, countries of Central Europe made their mind to join NATO and, certainly, subordinated interests of their military industrial cooperation to military-political interests of Alliance. It impeded proper cooperation with the Ukrainian producers. Consequently, this direction also became a dead end, making us pessimistic about the possible future development of military industrial cooperation with the countries of NATO?

It is worth mentioning that Russian way is not very optimistic, too. Though there is a very good foundation for cooperation development, as this was combined military industrial complex, as you knew. And Ukrainian strategy in the MIC development consisted in maintaining maximum former communications in this sphere. We had certain freedom of actions, remaining an unallied state, and the political factor was not such negative, as, say, in relation to the countries of the West. The complications of military industrial cooperation with Russia were caused by slumping economy, insufficient budgeting of

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defense industry. Both in Russia and in Ukraine they were triggered by scanty budget for development and purchase of armaments. They depended on competition on the international market. However, today we have to realize that deciding to become NATO member we find ourselves in quite different political situation. Naturally, it will influence the development of military industrial cooperation. Therefore it is worth considering in what sense such two-vector policy of cooperation with European Union and NATO is productive, to what extent we can develop cooperation with Russia, being NATO-oriented.

Of course, such political limitations will entail serious difficulties in relationships of Ukrainian producers of armaments with Russian counterpart. And we have to become aware of it. On the other hand, we have no experience whatsoever how to establish military industrial ties with Western countries. Many books have been published on the prospects of military industrial complex in Russia. It is mostly the western product; these studies maintain that the RF cannot go on the same high military technical level and will have to resort to new partners. Will we interest it in this sense? Hardly. Russia needs investments in the field and going high-tech. One can see that Russians are testing the ground with western defense business concerns now. However, the latter are much consolidated. They own a TNCs network, have concerted programs and adhere to optimum balance between own resources and share participation in production and purchase of armaments. It is a hard task to join this bunch of interests. Even for Russia! Besides the western NATO members are rather unwilling to admit the outsiders.

Ukraine estimates its chances looking over its shoulder at Russia. And here's the fallacy of our strategy, to my mind. Now, we've come here to discuss an absolutely new issue. It is the matter of a new strategy of military industrial and technical cooperation of Ukraine with the countries of the West as a constituent of our Euroatlantic course. It is a hang-the-expense approach constituent which can seriously complicate the development of our military industrial complex. We have more questions, than answers now.

No doubt, our plan of actions intended to achieve compatibility of our and NATO standards of armaments and defense technology is quite natural: if we acquire membership in NATO, we should meet political and military requirements of Alliance. In this regard two tasks appear in military technical branch.

First goes the possibility to contribute to collective defense. What weapon will we use? Second, does it meet the standards of NATO? It is clear, that if the basic standards of armaments are incompatible, the collective defense becomes ineffective.

On the other hand, it is not a matter of our contribution only, our ability to contribute to collective defense, but also to meet the requests of any model of national armed forces. It means that we should balance armaments among the types of armed forces.

Consequently, in the first place, our armed forces must have complete nomenclature of armaments. Secondly, when we join the NATO, the question arises about the division of labor. What segment of Ukrainian industry will contribute to collective defense? Which weaponry? And

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which of them will provide for the principle of balanced weaponry for the national armed forces? We will have to decide, what model of armaments suits Ukraine. If it depends on domestic production, the military industrial complex must produce the whole nomenclature of armaments and it must have a huge budget.

The second model (use by underdeveloped or developing economies) means the purchase of armaments. Sure, it does not need the developed MIC, as well as investments into military production. In this case it needs enormous budget. If we choose such model, the question remains whose armament are we to buy-the United States, Russia or other countries? Presently it is topical for Czech Republic and Poland, which try to hold tenders and come to an optimum conclusion.

The third model. It is a mixed principle. We have a powerful military industrial complex and we need to keep it. However, we cannot keep all segments of this complex at present despite the concept adopted by our government in 2002.

In the upshot, I should say that I favor the mixed principle. But in this case what will we produce ourselves and what should we order elsewhere and who these producers will be? On the basis of the current situation in Ukraine, Russia was our priority orientation in the programs of armaments. But will it become a reliable supplier of armaments, if we become a member of NATO?

It is a very important political issue as well. Presumably, if Ukraine becomes a NATO member, this mixed model should combine domestic production, purchase of armaments, and cooperation with other countries. Is it workable? What are the means of its realization?

That is why I underline that there are more questions, than answers. However, there is a positive basis in it: we are not the first ones to travel this way. Say, our closest neighbors Poland, Czech Republic, and Hungary are already under way. Their experience may be partially negative, but it needs to be studied. I think our colleagues from NATO and member - countries will help us to find answers and share their experience.

V. Badrak: In the context of advancement of Ukraine to NATO and treading a path of Euroatlantic integration in the field of military technical cooperation one can bring out three major problems:

1. Forming of internal market.

2. Allowing for Russian factor.

3. Tackling the problem of post-soviet management in this sphere.

Going into details we should recognize that developing the internal market, on the one hand, and increase of defense budget, on the other, demands equal possibilities for the private capital. That will make the defense complex more flexible.

Problem of the Russian factor. It is the most difficult at the time, and the weightiest. Look at arrival to Ukraine of businesses indirectly involved into defense matters. For example, some contracts are credited by Russian Vneshtorgbank, which has been very active here for several years already. The Russkiy Strakhovoi Tsentr insures or reinsures certain contracts. We can already see a situation, when Russian business is about to control the Ukrainian defense complex. This is extremely dangerous. And if we take into account the

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prospect of acquisition of some strategic enterprises by Russians...

I remember, a few years ago one top official said that, for example, "Khartron" is an enterprise which will never become Russian. Today Russians already run "Khartron".

Such enterprises, as "Morae", "Topaz", "Iskra", and Artem Holding (Russian experts testify to it) are on the waiting list. They make competitive products and can fall under control of Russian business.

In relation to the post-soviet management in this sphere, to our opinion, the failure of the An-70 airplane on the European market is a result of fiasco of Ukrainian management at negotiations with the western partners. Placing an order for 60-70 airplanes (a fantastic number!) bespoke of the desire to get a considerable share of the order. This is one of problem situations, when the Ukrainian post-soviet management appeared very clumsy in its negotiations with the West.

Another example. It is about surprise of some western partners concerning those episodes when Ukrainian enterprises are represented by a director general and chief designer. Together with the considerable interference of state it results in the inflexibility of our "defense branch".

To our mind, the role of the state in this business is to put enterprises on the list of government contractual defense work and grant or refuse to grant a license for foreign economic activity. In order to successfully work with the West in a defense sphere, Ukraine must show, that is a market economy. Western communication networks may be the first step. If it is so, we will be able to demonstrate our market prospects for the west. We will remember that at first Poland transformed into the recipient of the western countries, and only then it broke through to the market of armaments.

O. Yizhak: The military technical cooperation can be regarded as a mean of approaching the membership in NATO and the EU. However, these basic European institutes have different priorities in relation to the military industrial integration.

I will try and show that, regardless of ultimate goal of development of military industrial integration of Ukraine with the west (be it approaching to NATO or adaptation to the EU economy), the basic mechanisms remain as follows:

* increase of investment constituent of the defense spending;

* introduction of offset legislation;

* attraction of Ukraine to new spheres of cooperation, such as anti-missile defense and space projects; and

* creation of safe environment for military industrial integration.

Everybody knows that interests of top western defense companies, especially the U. S. A., played an important role in promotion of the idea of NATO expansion. These interests form a very influential NGO - the USA Committee on NATO.

This Committee goes for the national markets of armaments of candidate countries. The market capacity of European countries in basic categories of military products is determined by the maximal quotas of armaments set by the Agreement on conventional armed forces in Europe. If it is true and we take mean prices for the

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typical models of armaments, the trading volume of new markets for western armaments in the first wave countries can be to the tune of $63bn, for the countries of the second wave-$58bn, for Ukraine-$75bn. That is Ukraine all by itself can represent the whole wave of NATO expansion. These data are not directly significant. However, the mere estimations allow us to conclude that if the factor of new markets of armaments influenced the decisions about two previous waves of expansion, it will impact on the process of our joining NATO.

Such dependence is seen in the example of such new members of Alliance, as Poland, Czechia, and Hungary. According to the NATO plans of military and technological retooling of these countries they will spend about $700m yearly on armament and equipment. It is expected, that seven countries of the second wave will spend about the same. Consequently, the real volume of additional funds at the East European market of armaments is a far cry from the top estimations.

It is important, that additional funds targeted at defense production necessary for the NATO membership rivet commercial interest not only of the western arms producers. In the case of international supplies of the military end products the so called offset (compensatory) measures are a common practice. Sellers of arms, fulfilling external defense orders, as a rule, have to invest into the economy of customer countries. For example, the legislation of Poland stipulates that every defense order to the foreign producer for a sum over ?5m is to be followed by equivalent back investments. Half of these funds must go to directly to the Polish defense sector. The legislation of Czechia demands compensation on the level of 150% of the contract. There are similar norms in other European countries.

Thus, the purchase of western armaments can be used simultaneously both as a mechanism of approaching of our membership in NATO and as a mechanism of the forced external investing. Funds may come from two sources:

* external credits;

* investment constituent of defense spending of Ukraine.

The contract for delivery of 48 F-16 fighters to Poland was the last decade newsmaker at the European market of armaments. Against contract, this country will get a lax U. S. credit for the size of the contract-$3.5bn (the U. S. never used the practice since the Cold War). In addition, the supplier (Lockheed Martin) is to provide an offset package worth $12.55bn. Taking into account the offset multipliers, the actual volume of investments will make $7.75bn from which 67% makes the American purchase of Polish goods and services, 19.6%-investments, and 13.4%-know-how transfer.

Contract money flowing in bypass volumes of defense spending agreed upon by Poland and NATO, which is to make 1.95% GDP. The investment constituent of defense spending of Poland makes 14.6%. The major sum is intended for internal investments. During 2003-2008 Polish defense industry will be budgeted to the tune of $900m.

The Polish contract Lockheed Martin is unique for its realization: purchase of defense products for a favorable external credit off defense budget. Although it is natural, taking into account the reasons of

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the first wave of expansion, it may be maintained for the repeated tender for aviation equipment for Czechia and countries of the second wave of NATO expansion. Unlike candidate countries in relation to Ukraine such scheme won't work.

During NATO decision making on the second wave of expansion the balance of political, military and military industrial interests changed. Political interests dominated over military industrial ones. It was reflected in the reappraisal of military modernization. If during the first wave the purchase of armaments was a top priority, during the second one the questions of creation of military units fit for new NATO missions and modernization of military infrastructure became most important.

Under such conditions the purchase of new combat airplanes by candidate countries lost its priority in the process of NATO's decision about invitation issues. For example, in the course of development of the military reform programs by the second-wave countries NATO passed strictures on Slovakia for buying 18 new multi-purpose fighters of western production (Slovakia was the only important purchaser among seven countries). The Alliance considered it a diversion of resources from priority spheres and development of forces, which already abound in NATO. As a result of such criticism the decision was made to prolong the life of modernized airplanes of soviet production.

Thus, for Ukraine the increase of investment constituent of defense expense item is the basic mechanism of attraction of western industrial lobby to bring NATO membership nearer. This mechanism requires effective offset legislation. The increase of investment constituent of our defense spending creates another considerable factor of influence on the process of approaching NATO membership through the development of military infrastructure of Ukraine which is attractive now for the integrated military structures of Alliance.

Unlike NATO, the EU does not place emphasis on military economy during decision making on expansion. However, it is for the time being only. When the agenda will include the EU membership of Ukraine the EDEM development will be in the final stage.

The EDEM development (though not obligatory for all members) under single European Agency for Armaments is foreseen by the draft EU Constitutional Agreement. Two last EU summits decided to back this process regardless of the fate of Constitutional agreement.

There are already basic mechanisms of the European market of defense products and its coordinating structures. The main one is the Framework agreement on restructuring of European defense industry and OCCAR.

The Framework agreement signed in 2000 is a binding international agreement which puts together most European countries are producers of defense products, namely Great Britain, Spain, Italy, Germany, France, and Sweden. This agreement is not the EU mechanism, but its appearance is the most far-sighted plan of common European armaments market development through the safety of deliveries, design of intergovernmental export procedures, and mutual protection of classified information, coordinated military research and harmonization of military needs. However, it is a framework agreement and the real progress will depend on concrete realization of

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procedures and mechanisms in the said directions.

The OCCAR is the major coordinator and manager of intergovernmental programs of armaments and military equipment in Europe. It was created in 1995 on the basis of French-German initiatives. Great Britain and Italy followed. Recently Belgium has joined them. Negotiations with Spain are under way. Among others, Sweden and Netherlands are taking interest in it. The OCCAR has its own preferences; nevertheless there are mechanisms of cooperation with other countries as well. Today the OCCAR's terms of reference cover implementation of 14 common European projects. They include space systems, airplanes (including the new transport A400M), ships, anti-aircraft systems and systems for the army. It is planned that the OCCAR will become an integral part of the future European agency of armaments.

In the context of cooperation with the EU, unlike NATO, the increase of arms trading with the west is second to the expansion of internal Ukrainian market of defense products. The EU expansion is the process of market integration in the first place. The greater is the internal market, the more attractive it is for the EU. If the common European market of defense products becomes an integral part of the EU, this rule will cover the sphere of defense products as well.

The military industrial cooperation within the framework of EU can be termed juste retour. This principle envisages that the share of orders for the defense enterprises of certain country in common projects is to equal the share of purchases of joint defense products by the government of this country.

According to the juste retour, the integration is impossible, when countries are divided into suppliers and buyers and taxpayers of one country finance creation of jobs in another, getting no return investments. In this case there should be one-time offset supplies only.

The OCCAR and other European coordinators of armaments fulfill juste retour requirements in its common programs about the service life of armaments. The same principle regulates admittance to the European defense market of external suppliers and is often conceived as protectionist (though the latter also takes place). Clearly, that if Ukraine spends no money on its own defense products, European countries will not do it even on condition of its membership in the EU and NATO.

The increase of investment share of defense spending is the basic mechanism of expansion of the internal market of our defense products. The European average is about 20%. In Ukraine it does not exceed a few percents. Therefore it is important not to step up defense spending, but to restructure them. For Ukraine (and for Poland) this index according to NATO is 1.95% of GDP. If defense investments make 20% of this sum, it will mean $200m a year. This could change the attitude of defense lobby of both the U. S. A. and Europe.

So, the increase of investment share of defense spending with simultaneous adoption of effective offset legislation is the absolutely necessary mechanism of integration of Ukraine into European military industrial business taking into account its membership both in NATO and the EU.

These are domestic mechanisms, i. e. they do not account for aggressive

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external markets. There is their advantage. They can create a new foreign-policy situation around Ukraine on their own. Though today, even on condition of its membership in NATO and the EU, it seems rather unlikely that Ukrainian products can change the climate of defense market. This pessimism is based on the strict scheme of equipment of European armies with basic types of arms. Naturally, there is no chance to force a European country to buy Ukrainian tanks instead of, say, German ones. However, we might share in the new deficit sectors of defense production in which the U. S. A. and European countries are present. The anti-missile defense programs being developed in the U. S. A. and NATO, and the EU space systems may open certain possibilities for Ukraine.

In case of the US anti-missile defense, as much as political declaration of on joining the strategic anti-missile defense system can improve climate for cooperation in this sphere. It is known that the U. S. A are interested in deployment of anti-missile defense infrastructure (flow lines, radar stations and interceptors) in other countries, especially those, that border on the Near East. In exchange for consent in relation to the deployment of infrastructure we could demand contracting our enterprises to develop the system. In the case of Ukraine, the U. S. A. is interested in industrial cooperation in the sphere of anti-missile defense even outside the infrastructural questions.

The space system development is becoming one of the EU priorities as well. The development of GPS Galileo deserves special attention. It will be launched in 2008; however there still remain problems concerning its development, including the matter of international participation and cooperation with the American GPS. Tackling of one group of problems can hamper tackling of another group.

Intending to attract financial and technical resources for the development of Galileo, the EU invited China and Russia to participate. On the other hand, the compatibility of "Galileo" and GPS may remove counteraction of the USA while limiting the participation of the said countries at the same time. Then the EU may face the deficit of technical resources which can be used by Ukraine.

All of it certifies that major promotion of defense products on the western market needs paramount decisions about participation of Ukraine in the new, politically important defense projects of the USA and EU. There is an inadequate approach to the defense products proposition in Asia, Africa, and Latin America.

The military industrial integration is connected with the critical production intended for national security and defense of the countries involved. So, it requires a safe environment. There might be fewer obstacles to participation of Ukraine in defense production within the framework of NATO and the EU, if the U. S. A. and European countries had Ukrainian guarantees in relation to protection of their copyrights, know-how and secrets.

Between Ukraine and NATO and between Ukraine and certain NATO members there are agreements about protection of information. But they deal with military operative activity in the first place. Meanwhile in NATO there are base agreements on cooperation in the military industrial sphere. The main of them are the NATO Agreement on mutual protection of the secret of defense inventions with applications

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for patents (1960), and NATO Agreement on defense technical information transfer (1970). These agreements set limits of cooperation within the EU for the countries-members of NATO.

The Framework agreement on restructuring of European defense industry is the basic document defining mechanisms of the safe functioning of future European market of defense products. The section on information protection is very detailed and requires no additional agreements.

Naturally, integration of Ukraine into European military industrial sphere will need specific agreements with NATO and the EU, which would cover Ukraine, at least partly.

These mechanisms do not settle the question of integrating Ukraine into European military industrial sphere. However they can change the situation in this domain and provide for more favorable terms for joining NATO and the EU.

The round table transcript was edited by Volodymyr Ivchenko.

The editors thank the Head of the sector of world economic and social strategies of the National Institute for Strategic Studies Yaroslava Bazyliuk and the Chief specialist of the department of military policy of the National Institute for Strategic Studies Liubov Teremova for their help.

The full transcript of the round table you may read in the Polityka i Chas Monthly.

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