At this year’s Ukraine Recovery Conference in Rome, all eyes were on the country’s fast-growing defense-technology sector. With Kyiv now in its fourth year of war with Russia, Ukraine’s home-grown firms urgently need fresh capital – public, private, and blended – to offset gaps in allied arms deliveries and anchor Ukraine’s long-term recovery.
Longstanding prohibitions in multilateral institutions, and in bilateral lending programs, on financing defense now warrant urgent re-examination because so many technologies straddle military and civilian markets.
Ukraine’s traditional economic pillars are “Hands, Brains and Grains” – manufacturing capacity, IT talent, and agricultural abundance. The postwar era will add three new industries: “Drones” (defense technology), “Rocks” (critical minerals) and “Movies” (the creative sector). Drones are the most urgent, because defense-tech innovations are outpacing the capital available to scale it.
Ukrainian engineers have become world leaders in drone warfare, AI tools, and cyber-security systems. In 2023, Kyiv launched the Brave1 platform – a digital marketplace connecting developers, manufacturers, investors, and Ukraine’s armed forces to fast-track battlefield-ready technologies. Brave1 hosts over 1,500 “dual-use” companies developing gyroscope-stabilized guidance modules, AI-enabled target recognition, secure communication networks, portable batteries, and fiber-optic-tethered drones immune to GPS jamming. What they lack is capital.
Western development-finance rulebooks have an outdated approach to the defense sector. The OECD’s Development Assistance Committee excludes military equipment or services from official development assistance. Both the World Bank’s International Finance Corporation and the US’s International Development Finance Corporation reject projects whose main output is “weapons and munitions.” The latter is up for reauthorization later this year and this issue should be looked at in Congress.
The US ambassador to NATO recently said, “Ukraine is entitled to defend themselves,” but it must have the means to do so. Ukraine’s defense ministry can finance only a third of the industry’s potential output, leaving thousands of viable firms scrambling for working capital and foreign partners. Supporting Ukrainian defense manufacturers would relieve pressure on overstretched Western arsenals and put Kyiv’s defense on a more sustainable footing, while lowering costs and shortening delivery times. It would also strengthen the wider allied defense supply chain – benefiting Israel, Taiwan, the Baltic states, Europe, Canada, and Japan as well as Ukraine.
Some partners are starting to adapt. Denmark is financing Ukrainian-made weapons with $157 million in a program run by EIFO, Denmark’s export and investment fund. Canada, home to 1.3 million citizens of Ukrainian descent, has already contributed $140 million to the fund. Meanwhile, nineteen EU governments asked the European Investment Bank to permit defense industry financing, and the bank has since agreed to loosen rules for dual-use projects. Brussels also signed €2.3 billion in new guarantee and grant agreements under the Ukraine Investment Framework, expected to catalyze up to €10 billion in private investment—including in “strategic and dual-use industries.”
Several steps would lock in that momentum. First, the OECD should loosen its blanket prohibition so development finance institutions can invest in at least dual-use technology that powers today’s battlefield and tomorrow’s civilian market. Second, Washington should direct the Development Finance Corporation’s board to remove or loosen the “no-defense” clause in its Environmental & Social Policy.
Third, allied governments must give their own development finance institutions similar latitude. Ottawa should instruct FinDev Canada’s Board to revise its Exclusion List and co-finance defense-tech producers, while the Hague could direct FMO’s Board to support Ukrainian defense accelerators. The Boards of Stockholm’s Swedfund, d Helsinki’s Finnfund, and the European Investment Bank should follow suit.
Commercial upside abounds. Even under fire, Ukrainian defense-tech start-ups attracted more than $20 million in foreign venture funding in the first half of 2025, and Kyiv has ordered over one million drones for this year. Governmental development finance institutions exist precisely to take risks traditional investors will not; once they provide an early equity stake or political-risk cover, private capital follows.
Updating development finance rules is a return to first principles. After World War II, the Marshall Plan financed European steel mills and shipyards because rebuilding Europe’s industrial base was essential to peace and defense against a possible Soviet invasion of Western Europe. Unlocking official support for Ukraine’s defense sector follows the same logic. The US and its Western allies gain a resilient supply chain that counters China’s support for Russia, and private investors gain a foothold in what may become Europe’s most dynamic tech market once the shooting stops.
The window for action is narrow. Winter will soon stretch supply lines again, and the Pentagon’s stockpile concerns may foreshadow similar crunches. Upcoming board meetings of Western development finance institutions offer a timely chance to create a “Ukraine Defense Exception” and allow development finance to invest in dual-use innovators now. Ukraine will get the capital it needs, allies will conserve their arsenals, and the democratic world will move one step closer to a durable peace.
