Dragoman Digest

Ukraine’s counter-drone expertise draws Gulf buyers

Kyiv is leveraging years of battlefield improvisation to chase arms export contracts worth billions

The war against Iran has exposed a costly gap in Western and Gulf air defences. The UAE was targeted by 689 drones in the conflict’s first three days. The Pentagon spent an estimated US$5.7 billion on interceptors in the first four days alone. Gulf states had invested heavily in ballistic missile defence but lacked affordable options for low-flying drones, resorting to Patriot missiles costing around US$4 million apiece against Shaheds worth a fraction of that. By contrast, Ukraine has faced similar Russian drone campaigns for four years and built affordable alternatives out of necessity, including electronic jamming, truck-mounted guns, and interceptor drones costing under US$10,000 each. It has shot down 88 percent of long-range drones launched against it since the start of 2024.

Ukrainian President Volodymyr Zelenskyy has moved to convert this expertise into export contracts. He dispatched three expert teams to Qatar, the UAE, and Saudi Arabia, as well as a US military base in Jordan, to demonstrate counter-drone methods. Senior Qatari officials separately toured Ukrainian defence manufacturers, while Saudi Arabia is negotiating to buy Ukrainian signal jammers. In return for this assistance, Zelenskyy has said he wants both funding and technology. He had pursued a deal with Washington worth US$35-50 billion, though US interest remains uncertain. German defence company Rheinmetall also reported surging Gulf demand for bullet-based air defence systems and ammunition.

Capitalising on this momentum will not be straightforward. Ukrainian officers say they need all available equipment for their own war. The broader conflict also risks diverting US munitions and strategic attention from Ukraine. Higher oil prices and sanctions relief – Washington issued a 30-day waiver allowing purchases of Russian oil stranded at sea – also bolster Russia’s war economy. For a country whose defence industry was built around legacy Soviet platforms, the Iran war nonetheless offers Ukraine a rare chance to reposition as a specialist in the low-cost, asymmetric warfare that conventional military powers have neglected.

South Korea’s record stock rally confronts structural headwinds

Historic gains over the last six months rest on narrow tech foundations and an incomplete reform agenda

South Korea’s Kospi index has delivered the strongest returns of any major bourse worldwide, rising 115 percent since President Lee Jae Myung took office last June. Lee has pushed through sweeping governance reforms targeting the chaebol (family-owned) conglomerates whose complex ownership structures long suppressed valuations. New laws expand directors’ fiduciary duties to all shareholders and overhaul dividend taxes to encourage payouts. The measures have helped lift Lee’s approval ratings to 63 percent as the country’s 14 million retail investors celebrate gains. However, the rally’s base is narrow. Samsung Electronics and SK Hynix, both beneficiaries of the global AI boom and acute shortage of memory chips, account for 40 percent of the Kospi’s market capitalisation.

That concentration was exposed when the war in Iran triggered the Kospi’s worst single-day fall on record. South Korea’s semiconductor industry depends on Middle Eastern gas and raw materials such as bromine, whilst the country as a whole imports 98 percent of its fossil fuels. The index has since recovered 10 percent from its low but remains volatile, undermining efforts to close the longstanding ‘Korea discount’. Beyond energy, structural weaknesses remain. Inheritance tax rates among the OECD’s highest continue to incentivise controlling shareholders to suppress company valuations. Korea also remains excluded from index provider MSCI’s developed-market basket, a reclassification that would unlock significant institutional inflows.

The gap between market performance and the real economy adds further pressure. GDP shrank in the fourth quarter of 2025, and household debt sits among the world’s highest – a problem Lee has called a “ticking bomb”. Without equity gains producing a broader wealth effect, even members of Lee’s own party worry that his focus on the stock market could prove counterproductive. The administration has signalled it will press ahead with measures to cool the property market and crack down on market manipulation. But Korean capital continues flowing offshore into US equities, weakening the won and highlighting the difficulty of sustaining domestic momentum against the backdrop of major global turbulence.

Taiwan attempts to build a drone export industry from scratch

Increases in drone production and export sales highlight Taiwan’s renewed focus on sovereign capability and asymmetric warfare

Russia’s invasion of Ukraine in 2022 was a formative event for Taiwan’s fledgling drone industry. The central role played by drones in Ukraine’s steadfast resistance against its larger and more powerful neighbour underscored the potential utility of drones in any cross-strait contingency. The Ukraine conflict also highlighted the significant gap between Taiwan’s nascent drone capabilities and those of China. Many of the drones produced by Ukraine continue to rely on Chinese components. Taiwan has since sought to fill a niche in the market by developing entirely sovereign ‘non-red’ drone supply chains. In 2025, Taiwan registered a more than 35-fold yearly increase in drone exports, shipping 123,000 units. Eastern Europe has emerged as Taiwan’s biggest export market, with Taiwanese firms such as Kunway Technology supplying drones being used on Ukraine’s frontline. From the start of this year, government procurements and subsidies have only been made available to firms sourcing from non-Chinese companies for core parts. By 2027, these restrictions will be extended to include passive components such as rare-earth magnets and optical lenses.

Taiwan’s largely sovereign supply chain is a clear point of distinction from Ukrainian and other Western competitors which still overwhelmingly depend on Chinese parts. Local drone manufacturers also hope that Taiwan’s established presence as a high-tech manufacturing powerhouse will provide the know-how and expertise to rapidly scale production. Firms, such as Thunder Tiger, are equally seeking to cater to export markets by localising production in the US and Eastern Europe. Yet, having to source materials locally, such as rare-earth elements of which China accounted for over 90 percent of global processing in 2025, remains an expensive challenge. Despite being a cheaper alternative to drones made in neighbouring Japan and South Korea, Taiwanese drones are still twice as expensive as China’s. Taiwan also lacks domestic producers of flight-control, positioning, and communication chips specifically designed for drones, as well as some necessary software. Local politics is also proving problematic. The opposition KMT has repeatedly blocked President Lai Ching-te’s special defence budget, which earmarks significant funding for drone procurement. Overcoming these obstacles will be essential to Taiwan’s efforts to build a truly globally competitive drone industry.

Germany contemplates public-private bid to overcome Chinese rare-earth dependency

German industry is seeking to emulate Japan’s model for reducing Chinese rare earth dependency

Germany is exploring launching a local version of existing Japanese efforts to create more reliable supply chains for critical minerals and rare earths. The April 2025 trade war between China and the US exposed Germany’s acute reliance on Chinese supplies of rare earths. China controls around 90 percent of global rare-earth processing, and 92 percent of the permanent magnets imported by German industry originate from China. Beijing’s export controls disrupted German supply for nearly three months before imports normalised in July, with industry warning of imminent production shutdowns across automotive, electronics, and defence firms. Germany’s experience, replicated across most of Europe, demonstrates that meeting the 2030 targets outlined in the EU’s Critical Raw Materials Act will be a tall order. Key targets include a 65 percent cap on strategic raw materials being imported from any single third country. Europe’s efforts at reducing dependence on Chinese supply markedly trail behind the US, with the Trump Administration having deployed billions in funding to create stockpiles and develop vertically integrated mine-to-magnet supply chains.

Germany’s efforts to date are specifically looking at replicating the Japan Organisation for Metals and Energy Security (Jogmec). After being targeted with Chinese export controls on rare earths in 2010, Tokyo expanded the agency’s role, channelling equity, loans, and guarantees through Japan’s extensive and unique network of trading houses and into mining projects abroad. Jogmec has helped Japan reduce its China import dependency for rare earths from around 90 percent to 60 percent today. So far, Germany’s efforts are being led by its automotive and defence industry organisations, the VDA and BDSV. These organisations and their members are exploring investing several hundred million euros to fund a Jogmec-style trading house, with Berlin potentially taking a minority stake. This new body would leverage combined purchases to negotiate more favourable prices and expand stockpiles of import-dependent metals. It would complement existing initiatives, including the €1 billion critical raw materials fund set up by the German development bank, KfW. Regardless of the final shape of German efforts, there is evidently an emerging consensus in both Europe and the US that a much more interventionist role will be needed to mitigate vulnerability to Chinese export controls.