Warily, US companies eye co-production deals in Ukraine

This story was updated at 5:35 p.m. Aug. 7.

FARNBOROUGH, UK—Several U.S. defense companies are considering joint production inside Ukraine, but questions remain about the safety of doing business in a war zone, the persistence of corruption, and the long-term business case. 

The Pentagon has been pushing American defense contractors to increase collaboration with their Ukrainian counterparts, but U.S. firms have been slower to ink deals than European companies.  

“I think our industry is really eager, but at the same time, [it] has to make sense from a business case, right? And financing is an issue too, how you can actually pay for this stuff,” a State Department official told Defense One on the sidelines of the Farnborough air show. 

The official pointed to last month’s announcement from Northrop Grumman that it will make ammunition inside Ukraine. (Northrop won’t have people on the ground, but will support operations from the U.S.) It’s the first public deal between a U.S. company and Ukraine to produce weapons inside the country, and “there are other companies that are looking at what they can do next.” 

But American companies have a lot to consider before they sign up for co-production in a war zone; no one wants their facilities blown up or employees getting hurt, the official said.  

Some Western companies also might be concerned about corruption in Ukraine’s defense industrial base. 

“Clearly, corruption is a concern,” the official said, but noted that Ukraine is making progress, and that Ukrainian officials have acknowledged the situation must improve for U.S. industry to confidently team up with the country. 

Companies are also trying to gauge what kind of local or regional markets might outlast the war, since it would take years to get a new production line up and running, the official said.  

“It has to be a business case for what they're trying to do, and so looking at maybe starting off with a maintenance, repair, and overhaul type stuff, spare parts production, so kind of starting a crawl-walk-run-type philosophy, before you actually get to the more advanced stuff,” the official said.  

Another sticking point for U.S. companies is whether they have political risk insurance—essentially, financial protection for their investment in Ukraine.

“U.S. companies or European companies, if they're going to make these investments in those countries, they’ve got to have confidence that political risk insurance is in place, and they get the financing, stuff like that,” the official said. 

But broadly, the U.S. government wants companies to do more with Ukraine. The official noted the United States has a “Ukraine deal team,” which is tasked with giving guidance on potential U.S-Ukraine agreements, to answer questions and concerns. 

“We're definitely open for dialogue,” the official said. “If we can leverage Ukrainian industry to help satisfy requirements, either it's repairing stuff that's donated from Western allies or to produce spare parts or whatnot, that's a win-win for both governments, and potentially a win-win for industry on both sides.”