After decades of structural deprioritisation, defence financing has returned to the vanguard  of public finance. However, long-established approaches towards defence procurement and budgetary financing are no longer optimal in the context of modern warfare and the nature of new security risks. In Ukraine, we had no option but to adjust rapidly to the changing environment. While it is hoped that the full scale of this operational experience will never be required by other nations, several foundational lessons carry profound implications for peacetime defence planning.
Increasing defence expenditures as a share of gross domestic product without fundamentally restructuring the underlying allocation mechanisms will lead to higher deficits. But it will not necessarily help to improve security and enhance defence capabilities. Ukraine is a clear example of this. The type of equipment we were looking for early in the war is not part of our priority four years later. Put simply, big slow metal things don’t survive for long on a battlefield penetrated by sensor-driven drones hunting for them.
The rapid development of technology on the battlefield created the need for a quick adjustment of the financing approach. Advanced capabilities – including unmanned aerial vehicles, unmanned ground vehicles, electronic warfare suites and next generation air defence assets – are predominantly driven by an agile ecosystem of tech startups with very quick research and development cycles using the vast amount of data fed to them straight from the front line. This results in rapid changes in procurement needs, even within a single year, which a standard defence procurement approach cannot accommodate.
A paradigm shift
For defence financing to suit this new reality, a paradigm shift is needed: moving from allocating budget funds on a long-term basis to a small group of established contractors to a system that adopts venture financing practices, where funds follow the most competitive products in a decentralised market.
In Ukraine, these unorthodox financing models have been institutionalised to maximise the efficiency of public funding. Ukraine’s defence technology cluster, Brave1, illustrates the early-stage end of the spectrum. It provides grants to developers, helping technologies progress from development towards testing and production. The underlying financial logic is relatively simple. Rather than committing large amounts of public money to a technological winner selected in advance, smaller sums can be distributed across competing solutions. Testing generates information about which technologies merit further investment.
At the next stage, once a technology is battle-tested, the task becomes how to allocate limited budget resources across the range of available products. Rather than using standard centralised solutions, we rely on a decentralised approach to procurement decisions.
More than 200 Ukrainian producers list their products on the specialised marketplace where military units can pick those most suited to their current needs. Once the selection is done, standard government contracting takes place and the necessary products are delivered to the units.
A significant feature of the Ukrainian model is the separation of purchasing decisions from some of the administrative functions of procurement: the state retains control over budgets, contracting and payments, while military units can choose among approved products according to their operational requirements. In the first five months of 2026 alone, such a platform, DOT-Chain Defence, processed and delivered 485,000 UAVs and other items worth UAH31.4bn (€620m), illustrating the speed and scale at which this model can operate.
Advantages, opportunities and trade-offs
Centralised procurement offers obvious advantages: scale, bargaining power, standardisation and financial control. But it also has information costs, particularly when technologies change quickly. A front-line unit may discover within weeks that a specific drone variant has been rendered obsolete by a new enemy electronic countermeasure. Concurrently, a nimble competitor may have already engineered a software or hardware patch.
Under a conventional system, this information must travel through the institution before it can affect future purchasing decisions. Ukraine’s emerging model shortens that transmission mechanism. In economic terms, some capital-allocation authority moves closer to those with the most current information about the operational value of a product.
There are trade-offs. Decentralised purchasing can fragment demand and complicate standardisation. Central procurement remains indispensable for ammunition, major platforms and systems requiring interoperability. At the same time, a decentralised model provides the possibility of maintaining the technological edge by channelling public funds to the most advanced technologies in the shortest possible timeframe. While the centralised approach is well established over decades, implementing the decentralised one is both challenging and essential to maintain up-to-date defence capabilities.
The rapid pace of change on the battlefield creates significant challenges for countries further from the front line that still need to adapt to the new security reality in which investment in defence is no longer a choice. Simply acquiring more conventional military kit is not sufficient anymore, and investing in well-performing technologies to protect against the evolving threat of cheap unmanned systems is economically unsustainable. Utilising a $4m interceptor missile to neutralise a $30,000 loitering munition is a textbook case of negative fiscal asymmetry.
At the same time, the need for investment into new technologies creates vast opportunities. Since innovations are delivered much faster by new companies rather than incumbents, this could break the cycle of channelling increased defence budgets solely to national defence industries, which results in stocking up often outdated and not interoperable kit.
The mutualisation of procurement among allied nations would allow new technologies to be simultaneously available to multiple state buyers. Properly designed, this policy framework would foster new international cross-border manufacturing alliances and pioneer a new class of defence contracts. Instead of purchasing a rapidly depreciating physical asset, states would subscribe to a technology service, ensuring continuous
software patches, hardware iterations and on-demand delivery of the most current product generations.
Mutualisation of procurement and financing
The mutualisation of defence procurement should be matched by the mutualisation of defence financing. Currently, the burden of defence financing lies mostly with sovereign governments, which are bound by various degrees of fiscal constraints. At the same time – as history suggests – defence is rarely successful when it’s solely a sovereign matter. Joint financial engineering is essential to achieve the requisite economies of scale.
The European Union’s Security Action for Europe loan mechanism offers an instructive institutional precedent, but it must not be treated as an isolated, temporary measure. To tackle the obstacle of unanimous decision-making among countries with different fiscal priorities, a similar mechanism should be established by allied countries to mutualise the financing for coordinated procurements at the required scale. Structuring these mutual debt instruments will require deliberate capital-market development. In the case of Ukraine, both the EU’s joint issuance frameworks and mutual guarantees for international financial institution lending provide viable, scalable templates.
Changing attitudes to the use of proceeds of market-based defence financing will be crucial for success. Development of sustainable financing approaches over the last decade and changes in respective investment mandates made defence-related financing largely off-limits for both private investors and multilateral institutions. We have felt the result of such an approach in Ukraine already and this institutional stance must be re-evaluated in order to ensure the sufficient availability of funds at an acceptable cost.
It should be obvious that, in the absence of robust, technologically advanced defence capabilities, the structural stability required to achieve any sustainable development goals is entirely compromised. Security is not a competing priority to sustainability; it is a precondition for it. In the end it doesn’t matter how strong a country’s environmental, social and governance credentials are if it is being taken over by a country with non-existing ones.
Yuriy Butsa is government commissioner for public debt management, Ukraine.
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