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Future of the Ukrainian Defense Industry - Market Attractiveness, Competitive Landscape and Forecasts to 2018

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Product Synopsis This report is the result of SDI’s extensive market and company research covering the Ukrainian defense industry, and provides detailed analysis of both historic and forecast defense industry values including key growth stimulators, analysis of the leading companies in the industry, and key news. Introduction and Landscape Why was the report written? The Future of the Ukrainian Defense Industry – Market Attractiveness, Competitive Landscape and Forecasts to 2018 offers the reader an insight into the market opportunities and entry strategies adopted by foreign original equipment manufacturers (OEMs) to gain market share in the Ukrainian defense industry. What is the current market landscape and what is changing? Ukraine, Europe’s second-largest country, is anticipated to invest US$22.7 billion to strengthen its armed forces during the forecast period. The country’s total defense expenditure, which recorded a CAGR of 4.26% during the review period, is expected to record a CAGR of 20% over the forecast period. This expected increase is primarily the result of the country’s security and defense forces transformation strategy adopted by Ukraine in 2013. The first phase of the defense transformation extends upto 2017 and the second phase upto 2023. Other factors contributing to the increase in defense expenditure are growing tension between Ukraine and Russia, the modernization of existing weapon systems, and participation in international peacekeeping missions. Also, as a percentage of GDP, Ukraine’s defense expenditure is expected to increase from 1.05% in 2013 to 2.4% by 2018, in accordance with the country’s security and defense transformation strategy. The country’s homeland security expenditure is projected to record a CAGR of 8.11% over the forecast period, a consequence of an increase in organized crime and maritime security threats. What are the key drivers behind recent market changes? Conflict with Russia, military modernization,

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									Future of the Ukrainian Defense Industry-
   Market Opportunities, Competitive
    Landscape and Forecasts to 2018
Future of the Ukrainian Defense Industry-Market Opportunities, Competitive Landscape and Forecasts to 2018


 TABLE OF CONTENTS

 1.   Introduction ......................................................................................................................... 10
   1.1. What is this Report About? ..........................................................................................................10
   1.2. Definitions .....................................................................................................................................10
   1.3. Summary Methodology.................................................................................................................12
   1.4. SDI Terrorism Index ......................................................................................................................14
   1.5. About Strategic Defence Intelligence ..........................................................................................14
 2.   Executive Summary ............................................................................................................ 15
 3.   Market Attractiveness and Emerging Opportunities ........................................................ 17
   3.1. Defense Market Size Historical and Forecast..............................................................................18
       3.1.1. Ukrainian defense expenditure expected to record a CAGR of 20% during the forecast period ............. 18
       3.1.2. Reform and development program, strained relationship with Russia, acquisition of new military
       hardware systems, and peacekeeping missions expected to drive Ukrainian defense expenditure.................... 20
       3.1.3. Defense expenditure expected to be 2.4% of GDP by 2018 .................................................................... 22
   3.2. Analysis of Defense Budget Allocation .......................................................................................24
       3.2.1. Capital expenditure allocation of overall defense budget expected to witness an increase during the
       forecast period ...................................................................................................................................................... 24
       3.2.2. The Ukrainian Air Force accounts for the majority of the country’s defense expenditure ........................ 26
       3.2.3. Ukrainian Army expenditure expected to register a CAGR of 11.69% during the forecast period........... 28
       3.2.4. Ukrainian Navy allocation of overall defense budget expected to increase ............................................. 30
       3.2.5. Ukraine expected to invest US$1.6 billion in its Air Force over the forecast period ................................. 32
       3.2.6. Direct subordination units (DSU) expenditure projected to record a CAGR of 9.42% over the forecast
       period .................................................................................................................................................................. 34
       3.2.7. Per capita defense expenditure expected to increase over the forecast period ...................................... 36
   3.3. Homeland Security Market Size and Forecast ............................................................................38
       3.3.1. Homeland security expenditure expected to record a CAGR of 8.11% during the forecast period ......... 38
       3.3.2. Organized crime, maritime security threats, and ethnic tensions expected to encourage investment in
       the procurement of homeland security equipment ................................................................................................ 40
       3.3.3. Ukraine considered at ‘some risk’ of terrorist attack ................................................................................. 42
   3.4. Benchmarking with Key Global Markets .....................................................................................44
       3.4.1. During the forecast period, Ukraine is expected to continue to exercise limited influence in the
       international arms market...................................................................................................................................... 44
       3.4.2. Ukrainian military expenditure is limited compared to world’s leading defense spenders ....................... 46
       3.4.3. In comparison with the world’s leading defense spenders, Ukrainian defense expenditure, as a
       percentage of GDP, is moderate .......................................................................................................................... 47
       3.4.4. According to the SDI Terrorism Index, Ukraine faces some risk of terrorist threat .................................. 48
       3.4.5. During the review period, Ukraine was the world’s ninth-largest arms exporter ...................................... 51




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Future of the Ukrainian Defense Industry-Market Opportunities, Competitive Landscape and Forecasts to 2018

   3.5. Market Opportunities: Key Trends and Drivers ..........................................................................52
      3.5.1. Maritime defense equipment expected to experience increased demand in the forecast period ............ 52
      3.5.2. Market opportunities for air defense systems expected to increase ........................................................ 52
      3.5.3. Border security and critical infrastructure protection equipment will experience increased demand ....... 52
      3.5.4. Demand for aircraft and helicopters to rise in the forecast period ............................................................ 53
      3.5.5. Digital communication systems present attractive opportunities .............................................................. 53
 4.   Defense Procurement Market Dynamics ........................................................................... 54
   4.1. Import Market Dynamics ...............................................................................................................55
      4.1.1. A relatively small defense budget limits Ukraine’s defense imports ......................................................... 55
   4.2. Export Market Dynamics ..............................................................................................................56
      4.2.1. Ukrainian arms exports increased during 2008–2012 .............................................................................. 56
      4.2.2. The Ukrainian defense industry has a diverse consumer base................................................................ 57
      4.2.3. The majority of Ukrainian defense exports consist of armored vehicles and ships.................................. 58
 5.   Industry Dynamics .............................................................................................................. 59
   5.1. Five Forces Analysis.....................................................................................................................59
      5.1.1. Bargaining power of supplier: low to high ................................................................................................. 60
      5.1.2. Bargaining power of buyer: low ................................................................................................................ 60
      5.1.3. Barrier to entry: high ................................................................................................................................. 60
      5.1.4. Intensity of rivalry: low to high .................................................................................................................. 60
      5.1.5. Threat of substitution: high ....................................................................................................................... 61
 6.   Market Entry Strategy ......................................................................................................... 62
   6.1. Market Regulation .........................................................................................................................62
      6.1.1. Ukraine follows prohibitive defense industry FDI policy ........................................................................... 62
   6.2. Market Entry Route .......................................................................................................................62
      6.2.1. Joint development of defense goods provides investors with a market entry opportunity ....................... 62
      6.2.2. Foreign investors can enter the industry through direct sales .................................................................. 62
   6.3. Key Challenges .............................................................................................................................63
      6.3.1. Small defense budget offers equipment manufacturers limited investment potential .............................. 63
      6.3.2. Lack of necessary infrastructure impedes growth of domestic defense industry ..................................... 63
      6.3.3. Corruption and a lack of transparency discourages investors from entering the market ......................... 64
 7.   Competitive Landscape and Strategic Insights ................................................................ 65
   7.1. Competitive Landscape Overview ...............................................................................................65
   7.2. Key Public Sector Companies......................................................................................................67
      7.2.1. Antonov ASTC: overview .......................................................................................................................... 67
      7.2.2. Antonov ASTC: products and services ..................................................................................................... 67
      7.2.3. Antonov ASTC: recent announcements and strategic initiatives.............................................................. 68
      7.2.4. Antonov ASTC: alliances .......................................................................................................................... 69




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Future of the Ukrainian Defense Industry-Market Opportunities, Competitive Landscape and Forecasts to 2018
      7.2.5. Antonov ASTC: recent contract wins ........................................................................................................ 69
      7.2.6. RPC Fort: overview ................................................................................................................................... 70
      7.2.7. RPC Fort: products and services .............................................................................................................. 70
      7.2.8. RPC Fort: alliances ................................................................................................................................... 71
      7.2.9. RPC Fort: recent contract wins ................................................................................................................. 71
      7.2.10. KMDB: overview ....................................................................................................................................... 72
      7.2.11. KMDB: products and services .................................................................................................................. 72
      7.2.12. KMDB: recent announcements and strategic initiatives ........................................................................... 72
      7.2.13. KMDB: recent contract wins ..................................................................................................................... 73
      7.2.14. Malyshev Plant: overview ......................................................................................................................... 74
      7.2.15. Malyshev Plant: products and services .................................................................................................... 74
      7.2.16. Malyshev Plant: recent announcements and strategic initiatives ............................................................. 74
      7.2.17. Malyshev Plant: recent contract wins ....................................................................................................... 75
      7.2.18. AvtoKrAZ Holding Company: overview .................................................................................................... 76
      7.2.19. AvtoKrAZ Holding Company: products and services ............................................................................... 76
      7.2.20. AvtoKrAZ Holding Company: recent announcements and strategic initiatives ........................................ 76
      7.2.21. AvtoKrAZ Holding Company: recent contract wins .................................................................................. 77
      7.2.22. Motor Sich: overview ................................................................................................................................ 78
      7.2.23. Motor Sich: products and services ........................................................................................................... 78
      7.2.24. Motor Sich: recent announcements and strategic initiatives .................................................................... 79
      7.2.25. Motor Sich: alliances ................................................................................................................................. 80
      7.2.26. Motor Sich: recent contract wins .............................................................................................................. 80
      7.2.27. Aviant State Enterprise Kyiv Aviation Plant: overview .............................................................................. 81
      7.2.28. Aviant State Enterprise Kyiv Aviation Plant: products and services ......................................................... 81
      7.2.29. Aviant State Enterprise Kyiv Aviation Plant: recent announcements and strategic initiatives ................. 81
      7.2.30. Aviant State Enterprise Kyiv Aviation Plant: alliances .............................................................................. 81
      7.2.31. Aviant State Enterprise Kyiv Aviation Plant: recent contract wins ............................................................ 82
 8.   Business Environment and Country Risk ......................................................................... 83
   8.1. Demographics & Social Statistics................................................................................................83
      8.1.1. Total Rural Population .............................................................................................................................. 83
      8.1.2. Total Urban Population ............................................................................................................................. 84
      8.1.3. Number of Households ............................................................................................................................. 85
   8.2. Economic Performance ................................................................................................................86
      8.2.1. GDP Per Capita ........................................................................................................................................ 86
      8.2.2. GDP, Current Prices (US$ Billion) ............................................................................................................ 87
      8.2.3. Exports of goods and services, current prices (US$ billion) ..................................................................... 88
      8.2.4. Imports of goods and services, current prices (US$ billion) ..................................................................... 89
      8.2.5. Gross National Disposable Income .......................................................................................................... 90




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Future of the Ukrainian Defense Industry-Market Opportunities, Competitive Landscape and Forecasts to 2018
      8.2.6. Manufacturing Output (US$ billion) .......................................................................................................... 91
      8.2.7. Consumer Price Index .............................................................................................................................. 92
      8.2.8. Wholesale Price Index .............................................................................................................................. 93
      8.2.9. Local Currency Unit per US$ (period average) ........................................................................................ 94
      8.2.10. Local Currency Unit per EUR (period average) ........................................................................................ 95
      8.2.11. Lending Rate (%) ...................................................................................................................................... 96
      8.2.12. Deposit Rate (%) ...................................................................................................................................... 97
      8.2.13. Real Interest Rate (%) .............................................................................................................................. 98
      8.2.14. Market Capitalization of Listed Companies (US$ Billion) ......................................................................... 99
      8.2.15. Market Capitalization of Listed Companies (% of GDP) ......................................................................... 100
      8.2.16. Total Government Cash Surplus/ Deficit (LCU Billion) ........................................................................... 101
      8.2.17. Government Cash Surplus/ Deficit as % of GDP (LCU) ......................................................................... 102
      8.2.18. Goods Exports as % of GDP .................................................................................................................. 103
      8.2.19. Goods Imports as % of GDP .................................................................................................................. 104
      8.2.20. Goods Balance as % of GDP ................................................................................................................. 105
      8.2.21. Services Imports as % of GDP ............................................................................................................... 106
      8.2.22. Services Exports as % of GDP ............................................................................................................... 107
      8.2.23. Services Balance as % of GDP .............................................................................................................. 108
      8.2.24. Foreign Direct Investment, net (BoP, current US$ Billion) ..................................................................... 109
      8.2.25. Net Foreign Direct Investment as % of GDP .......................................................................................... 110
      8.2.27. International Reserves, including Gold (US$ Billion) .............................................................................. 111
      8.2.29. External Debt as % of GDP .................................................................................................................... 112
   8.3. Energy and Utilities .....................................................................................................................113
      8.3.1. Total Conventional Thermal Electricity Net Generation ......................................................................... 113
      8.3.2. Hydroelectricity Net Generation .............................................................................................................. 114
      8.3.3. Nuclear Electricity Net Generation ......................................................................................................... 115
      8.3.4. Total Conventional Thermal Electricity Installed Capacity ..................................................................... 116
      8.3.5. Total Electricity Exports (Billion Kilowatt Hours) ..................................................................................... 117
      8.3.6. Total Electricity Imports (Billion Kilowatt Hours) ..................................................................................... 118
      8.3.7. Proved Reserves of Natural Gas ............................................................................................................ 119
      8.3.8. Total Petroleum Consumption ................................................................................................................ 120
      8.3.9. Crude Oil Proved Reserves .................................................................................................................... 121
      8.3.10. Total Non-Hydro Renewable Electricity Net Generation (Billion Kilowatts) ............................................ 122
   8.4. Infrastructure Quality and Availability .......................................................................................123
      8.4.1. Roads, total network ............................................................................................................................... 123
      8.4.2. Rail lines (total route), total network ....................................................................................................... 124
      8.4.3. Air Transport (freight) .............................................................................................................................. 125
      8.4.4. Overall Construction ............................................................................................................................... 126




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Future of the Ukrainian Defense Industry-Market Opportunities, Competitive Landscape and Forecasts to 2018

   8.5. Minerals .......................................................................................................................................127
       8.5.1. Mining, Manufacturing, Utilities Output ................................................................................................... 127
   8.6. Technology ..................................................................................................................................128
       8.6.1. Research and Development Expenditure ............................................................................................... 128
       8.6.2. Patents granted ...................................................................................................................................... 129
   8.7. Telecommunication ....................................................................................................................130
       8.7.1. Telephone Lines ..................................................................................................................................... 130
       8.7.2. Telephone Lines Penetration Rate ......................................................................................................... 131
 9.   Appendix ............................................................................................................................ 132
   9.1. About SDI.....................................................................................................................................132
   9.2. Disclaimer ....................................................................................................................................132




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