Defense Industry with Excess Capacity: Why Ukraine’s Defense Sector Ends 2025 with Idle Production Lines
Ukraine’s defense industrial sector is approaching the end of 2025 with indicators that, at first glance, look like a historic success. Scaled-up production, technological breakthroughs, localization of critical components, and expanded international cooperation have become reality despite constant enemy strikes. At the same time, behind these achievements lies a systemic problem that is increasingly voiced by the industry itself a shortage of contracts and underutilized production capacity.
Time for Action analyzed the year-end Facebook post shared by the head of the Ukrainian Council of Arms Manufacturers, Ihor Fedirko, along with the figures and facts he presented. They show that Ukraine’s defense industry is developing faster than the state procurement system can keep up, and this gap has become the central challenge of the year.
According to Fedirko, in 2025 Ukraine managed to maintain the high production pace set in 2024. The Ministry of Defense contracted 4.5 million FPV drones, with total spending on unmanned systems exceeding 110 billion hryvnias. A long-range segment also took shape, moving over the year from an experimental phase to serial production. By industry estimates, the capacity of this segment alone could reach the equivalent of 35 billion US dollars in 2026.
At the same time, counter-drone solutions expanded interceptors, electronic warfare systems, sensors, communications, and integration into overall protection networks. In missile development, the sector maintained the eightfold growth trend recorded the previous year. The production of ammunition and artillery systems also increased, particularly in the mortar range and calibers of 152 and 155 millimeters.
One of the most important shifts of the year was the localization of the component base. Ukrainian manufacturers are increasingly able to meet their own needs in electronics, circuit boards, communications, optics, power systems, structural components, and mechanics. According to data cited in Fedirko’s post, one of the largest engine manufacturers already reports more than 100,000 units of its own production per month. This indicates that the industry is no longer critically dependent on imports in its most vulnerable areas.
However, this is precisely where the main paradox of 2025 becomes evident. According to the Ukrainian Council of Arms Manufacturers, the total production capacity of Ukraine’s defense industry in 2025 was estimated at around 35 billion US dollars, while actual state procurement by the end of the year amounted to only 12–12.5 billion dollars. In other words, around 60% of production capacity remains unused, despite the full-scale war.
This is not a matter of lacking products or industrial capability, but of limited budgetary capacity and the absence of predictable serial contracting across a broad range of items. Even multi-year agreements under the “Weapons of Victory” program, where the Ministry of Defense signed contracts with 12 Ukrainian manufacturers worth nearly 130 billion hryvnias, have not yet solved the problem of systematic industry-wide utilization.
This is why controlled exports moved to the forefront in 2025. According to a survey by the Ukrainian Council of Arms Manufacturers, 94.4% of companies support opening controlled exports as a tool to preserve production. At the same time, both the industry and the state acknowledge that the first real export contracts are unlikely before the second half of 2026. Until then, a significant share of enterprises continues to operate in a waiting mode.
Another positive development of the year was practical international cooperation. Where cooperation had previously been limited to memorandums and declarations, in 2025 it moved into an implementation phase. Around 25 foreign defense companies are at various stages of production localization in Ukraine, including Poland’s PGZ, Belgium’s KNDS, France’s Thales, and the US-based D&M Holding.
In parallel, a model for scaling Ukrainian solutions abroad is being implemented. In the United Kingdom, preparations are underway for serial production of a Ukrainian interceptor system; in Denmark, joint production lines are being launched; and in Norway and the Netherlands, agreements have been signed to develop unmanned systems with pilot production planned for 2026. Investment has also played a significant role notably, Baykar invested 100 million US dollars in three projects in Ukraine.
Funding for the sector increased in 2025, but according to manufacturers themselves, it still does not match the scale of the industry. The development budget for the defense industry grew from 39.6 billion hryvnias in 2024 to 84.5 billion hryvnias in 2025, and through the so-called Danish model Ukraine received over 1 billion euros from the European Union, along with tens of millions from Canada, Norway, Sweden, and Denmark. Even so, these resources do not close the gap between capacity and procurement.
Against this backdrop, the government announced the launch of a special legal regime to support defense enterprises, set to take effect on January 5, 2026. The concept предусматриває tax incentives and special conditions for manufacturers in exchange for expanding capacity, modernizing production, and investing in research and development. However, the key question remains unanswered whether this regime will provide predictable and sufficient contracting, without which the industry will continue to operate below its full potential.
The results of 2025, as outlined in Ihor Fedirko’s post, show that Ukraine’s defense industry has moved beyond emergency survival and become a full-fledged industrial sector. At the same time, it faces a new risk the loss of time. If managerial and financial decisions fail to catch up with production growth, the country may miss a unique window of opportunity created by the war. And then the question will no longer be whether Ukraine is capable of producing, but whether the state managed to use that capability in time.
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