Kyiv is preparing to redirect as much as €1 billion from its EU loan into a fund designed to integrate Ukraine's defence industry with its European counterparts, according to a confidential European Commission document seen by Euronews. The transfer would more than quadruple the resources of the Ukraine Support Instrument, currently set at €300 million, and forms part of a broader push by Brussels and the Ukrainian government to merge their military-industrial capabilities.
The funding would be drawn from the Ukraine Support Loan (USL), a €90 billion package that the EU has earmarked for 2026 and 2027 to help sustain Ukraine's war effort. With Kyiv's financing needs mounting, Brussels has already agreed to accelerate some disbursements to ease the country's budget strain. The proposed transfer, however, is specifically aimed at fostering joint ventures, licensing agreements, and co-procurement between Ukrainian and European manufacturers.
A strategic defence partnership takes shape
The move is part of the EU-Ukraine Strategic Defence Industrial Partnership, launched in July 2026 with the signing of a letter of intent. The Commission is now drafting a Defence Industrial Pact, for which it is seeking a mandate from member states. According to the document, the pact's central objectives are to speed up deliveries of defence products to Ukraine while simultaneously scaling up and integrating European and Ukrainian industrial capacities.
Beyond boosting the instrument, the pact aims to dismantle regulatory barriers that currently hinder cross-border cooperation. The Commission is exploring "overarching" agreements on drone and missile technologies, which would allow companies on both sides to share intellectual property and production know-how more freely. This is seen as critical for leveraging Ukraine's battlefield experience—particularly in unmanned systems and electronic warfare—with Europe's manufacturing scale.
The initiative also encourages member states to use unspent loans under the Security Action for Europe (SAFE) programme to fund joint projects with Ukrainian industry. While EU capitals cannot be compelled to participate, the Commission hopes that a "defence window" will emerge, lifting European defence production in 2027. This would allow Kyiv to purchase larger volumes from European manufacturers at lower prices, thanks to economies of scale.
In parallel, the document suggests that national governments should be encouraged to destock their arsenals as a way of maintaining a steady flow of supplies to Ukraine. This would complement direct purchases and help bridge gaps while new production lines come online. The approach echoes earlier calls from NATO allies to accelerate deliveries, particularly of munitions and air defence systems, as highlighted in recent reports about delays in Patriot missile shipments.
The Commission's proposal comes amid a broader European effort to bolster Ukraine's resilience. Earlier this year, the EU accelerated €45 billion in support to help Kyiv close its funding gap, and Brussels has also reopened €21.3 billion in defence loans that could benefit Ukraine. The new defence pact is intended to complement these financial instruments by creating a more structured industrial relationship.
For European manufacturers, the deal offers a chance to tap into Ukraine's rapid innovation cycle, particularly in drone technology. German and Ukrainian engineers have already been testing armed ground robots for frontline use, a sign of the kind of co-development that the pact aims to scale up. By embedding Ukrainian firms in European supply chains, the Commission hopes to reduce dependence on non-European sources for critical components.
The plan, however, faces hurdles. Some member states remain wary of committing funds to joint projects with Ukraine, citing concerns about intellectual property protection and the long-term stability of Ukrainian institutions. Others question whether the EU's procurement rules, designed for peacetime, can be adapted quickly enough to meet wartime demands. The Commission acknowledges these challenges but insists that the pact will include safeguards and clear implementation timelines.
If approved, the €1 billion transfer would mark a significant step in Europe's defence integration. It would also send a signal that the EU is prepared to invest in Ukraine's industrial base as a long-term partner, rather than treating it solely as a recipient of aid. As the war enters a new phase, with truce negotiations ongoing in some areas, the focus is shifting toward rebuilding and modernising Ukraine's defence sector in tandem with Europe's own capabilities.
The Commission is expected to present the Defence Industrial Pact to member states in the coming weeks, with a view to securing a mandate for negotiations. The outcome will be closely watched in capitals across the continent, from Warsaw to Berlin, as they weigh the strategic and economic implications of deeper defence cooperation with Kyiv.
