The Danish Model

Denmark, which has little defense production of its own, has pioneered a unique approach to funding Ukraine’s war effort. Rather than loaning Ukraine money to purchase European hardware, Denmark issues loans and grants directly to Ukrainian firms to produce equipment within Ukraine. Using this model, Denmark has become Ukraine’s largest sponsor by percentage of GDP, and for their part, the Ukrainians couldn’t be happier. In January, then Ukrainian Prime Minister Denys Shmyhal (currently Ukraine’s defense minister) told the Rada he hopes to see $1 billion raised by the Danish Model by the end of this year. The initiative has led to a massive expansion of Ukraine’s defense industrial capacity, which the Ukrainians are planning to reach $35 billion in 2025. If they hit their target, Ukraine will challenge the UK, France, Germany, and Italy as the top defense producer in Europe.

Denmark benefits from this arrangement in two major ways. First, as a net contributor to the EU, it has been allowed to organize collective EU expenditures under the Danish Model, but count them towards its own spending target for NATO’s 5% of GDP defense goal. In addition to allowing the Danes to avoid spending their own money, this allows them to sidestep large investments in domestic military manufacturing, eliminating the risk of building a military-industrial complex from scratch when that complex may become superfluous if the war ends. Second, Danish firms have been incentivized to create joint Danish-Ukrainian ventures in Ukraine, with the government subsidizing up to 70% of startup costs. These joint ventures rely on Danish management, creating high paying corporate jobs, while the burden of construction and manual labor leverage low Ukrainian labor costs. Labor in Ukraine is as little as 1/10th the cost of Danish labor. These joint ventures don’t just go one way, as certain Ukrainian companies have been allowed to accept partial Danish ownership in exchange for establishing offices and production lines within Denmark. This is both an extension and inversion of the Danish model, as Ukrainian firms take on the debt, which is issued by the EU, and in turn invest in infrastructure within Denmark, rather than placing a purchasing order. This minimizes Danish risk.

Under this alternative model, Ukrainian firms have spun up production lines for drones and repair facilitates for air defense radars. The largest deal of this kind so far comes from Fire Point, the Ukrainian drone manufacturer currently embroiled in a corruption scandal, which plans to make rocket fuel for missiles on Danish soil. Denmark isn’t the only country to work under this framework. Rheinmetall has established repair facilities for their armored vehicles in Ukraine, and has attempted to open an artillery shell plant there, though this initiative has made little progress since being announced in 2024. Saab, KNDS, Colt CZ, and FFG have announced similar projects. Turkey’s Baykar has thus far been the only firm to establish a major defense production plant on Ukrainian territory, but the $100 million facility was largely destroyed by a Russian strike in August, before it could come online.

The wisdom of opening a large defense plant in a country under constant attack from a vast suite of Russian standoff munitions is questionable, which may explain why plans to do so face extensive delays. But it’s still useful to interrogate why European defense contractors are so enthusiastic about pouring money into Ukraine. The conceptual basis for all of the Danish Model, according to the Danes, is turning Ukraine into the “arsenal of Europe.” After a Ukrainian victory or stalemate, European defense companies and joint EU-Ukraine defense ventures would relocate their production to Ukraine, taking advantage of rock-bottom labor costs and stringent regulations imposed on the Ukrainian government and economy by the IMF and World Bank as loan conditions. These conditions were designed to benefit the EU. In this universe, Ukraine would become the center of European weapon production, and perhaps manufacturing in general. High labor costs and social benefits in the EU proper limit profit margins, even in the distorted world of defense. Ukraine, with its government and economy under the thumb of institutions like the IMF, could be made to import millions of migrant laborers from countries like India, keeping labor costs low while compensating for the demographic crisis caused by the war. Think tanks like EasyBusiness have already outlined the number of workers needed and the regulatory process for importing them. European conglomerates and majority European-owned joint ventures would reap the rewards.

Dirty Tricks

In the meantime, Ukraine is a military-industrial wild west. Firms like Fire Point, which only a few years ago was a casting agency for TV production, have secured billions in defense contracts. The bidding process for government contracts – typically backed by European cash – is opaque and rife with corruption. Production rates are shrouded in secrecy, and facilities are constructed in secret locations. Dozens of major Ukrainian defense contracts have been awarded to companies that place the highest bids, implying corruption. Payments are made for weapons that are never delivered. Huge overpayments are common. International arms dealers are awarded billion dollar contracts they have no ability to fill. Several European defense companies have been caught up in corruption scandals related to supplying arms to Ukraine. Denmark has supplied hundreds of millions of dollars to Fire Point, which now stands accused of falsifying its production rates of drones and the beleaguered FP-1 “Flamingo” cruise missile. The firm received nearly 10% of Ukraine’s domestic defense procurement budget in 2024. Danish Defense Minister Troels Lund Poulsen has publicly defended the partnership. Similar corruption scandals have mired Polish firm PHU Lechmar – the beneficiary of a highly suspect €553 million artillery shell contract from the Ukrainian Border Guard – and the Czech STV Group, which resold Turkish shells to Ukraine at massively inflated prices. In 2022, Ukrainian arms dealer Lviv Arsenal conspired with Ukrainian MoD officials to embezzle $40 million through a fraudulent deal for mortar shells. The Ukrainian government money, a 97% upfront payment – the standard ceiling for such deals is 50% – moved from Lviv Arsenal through a series of shell companies in Slovakia and Croatia before disappearing. The mortar shells, marked up nearly 100% over the market rate, were never delivered. In August, an $11 million scheme involving Ukrainian parliament members, regional government officials, the Ukrainian National Guard, and an unspecified domestic drone manufacturer was uncovered by the National Anti-Corruption Bureau.

This form of petty corruption is of little benefit to European defense conglomerates with market caps approaching $100 billion, but an environment in which such corruption is tolerated is one where more ambiguous forms of graft and bribery can thrive. Even in the tightly regulated EU, corruption is rampant. Millions of euros in bribes paid in exchange for billions worth of deals by distinguished European defense contractors like Airbus, BAE Systems, Dassault, ThyssenKrupp, and even Rheinmetall have been uncovered in recent years. In the global arms industry, corruption is the norm rather than an aberration. Each of these defense contractors is directly involved in procurement deals with Ukraine. These companies have operated for decades in an era of relative peace in Europe, and the war presents in a once in a generation opportunity. By forming joint ventures with Ukrainian firms, they can hit the ground running with the requisite Ukrainian connections to secure favorable contracts from the Ukrainian government, which acts a central hub into which unprecedented sums of public money are flowing from Europe, then back out again. While corruption may be commonplace in the EU proper, it’s the core reality undergirding the entire Ukrainian project. Far from the watchful eyes of European regulators, the EU military-industrial complex is having a field day.