Russia’s invasion of Ukraine has forced Central and Eastern European states to look at their own defensive weaknesses, and encouraged them to raise their defence spending and replace the last of their Warsaw Pact weaponry – something that is now even more pressing given sanctions on Russia.
Up until now many CEE countries have neglected defence spending. According to think-tank SIPRI, in 2020 defence expenditure represented 4.4% of Polish government expenditure, more than 5% in all three Baltic states, but only 3.5% in Slovakia, 3.1% in Hungary and just 2.8% in Czechia. Some countries – notably Poland – are now planning big increases in defence expenditure to take account of the new strategic environment.
Much of this spending will go on Western weaponry but Central and Eastern Europe’s arms industry should also benefit from this shift of defence up the list of political priorities.
The region boasted a huge arms industry when it was part of the Warsaw Pact but much of this has collapsed over the past three decades. Now some countries – particularly Poland and Hungary – are attempting to build new state-owned defenced champions.
Poland is largely going it alone, on the basis that its own spending will be big enough to provide a market for its defence firms. Hungary is using offset deals with Western manufacturers to build up its defence industry, notably in an ambitious tie-up with Rheinmetall of Germany.
The question remains, however, whether these kinds of state intervention will create viable sectors that will satisfy domestic defence needs and be successful internationally.
Other countries – the Czech Republic being the prime example here – have privatised most of their defence sector, and are having some success in niche export markets. Some are being snapped up by global defence companies: Last year the UK's BAE Systems agreed to acquire a majority stake in Bohemia Interactive Simulations, a global software developer of simulation training solutions for military organisations.
According to data from the European Network Against Arms Trade (ENAAT), Czechia is the tenth highest EU exporter of arms, with arms export and export licences worth €5.4bn between 2008 and 2020. This puts it in second place among the Central and Southern European member states, behind only Bulgaria on €6.5bn, whose exports are mainly old or remodelled Warsaw Pact kit. Polish exports were €3.3bn, while Romania recorded €1.8bn in exports.
Much of these exports, particularly of old or remodelled Warsaw Pact kit, go to developing countries, principally in Africa and Asia, which often raises the risk of sales to sanctioned or morally dubious buyers, an issue looked at in our final section below.
Below bneIntelliNews’ reporters give a quick assessment of what is left of their countries’ defence industries, and pick out some of the firms that are worth keeping an eye on.
Like most of Poland’s industries, the arms sector went through massive restructuring after 1989, although due to its strategic importance it was clear from the start that the state would retain a decisive role. Still, the conversion to a market economy and the collapse of the Warsaw Pact proved disastrous.
In the early 1990s, the value of all sales of the Polish arms industry dropped 70% versus that of 1989 after the Warsaw Pact countries gave up on purchases. Exports also diminished fast – from covering over 52% of demand in 1990 to a mere 6% in 1997, with the remainder being met by domestic purchases by the Polish Ministry of Defence.
The 1990s were therefore marked by reductions in employment, switching to non-military production, and liquidation of those companies that were considered non-strategic.
In 1998-2013 a new phase of changes began that consolidated the industry under the oversight of the Polish state so as to “meet the needs for state security in the defence sector and enabling the participation of Polish [arms] companies … in the European and global arms trade market,” a government strategy said in 2007.
That incrementally led to the Polish arms industry becoming what it is today. Polska Grupa Zbrojeniowa (PGZ) is a holding company of more than 50 companies, with stakes in another 32. PGZ companies form five divisions specialising in arms for land forces, the air force, and the navy, as well as electronics, IT and cyber technology, and weapons and ammunition.
PGZ financial results are classified and are released to the public with a delay. The most recent report is for 2020. The company’s sales grew 2% to PLN5.95bn (€1.3bn) and there also was a net profit of PLN191mn, which stood in contrast to a net loss of nearly PLN1.3bn in 2019 (the company said it was mostly due to write-offs, not actual business operations).
That said, exports are not PGZ’s strength, with sales abroad dropping 7% to just over €360mn – arguably an improvement after a drop of 20% in 2019.
Poland’s main arms exports in 2020 were armoured combat vehicles, large-calibre artillery systems, attack helicopters and man-portable air-defence system, known as MANPADS. That said, Poland exported a total of just 23 armoured combat vehicles, 22 artillery systems, 11 helicopters and 80 MANPADS.
The radical right-wing Polish government has announced a massive increase in the defence budget to 3% of GDP next year, but much of this will be spent on more than doubling the size of the army to 300,000 troops – the third-largest in Nato – and buying US-made equipment. Nevertheless, this should also mean higher orders for domestic arms manufacturers.
CZECH REPUBLIC and SLOVAKIA
Czechoslovakia used to be a world leader in arms production and exports, mainly thanks to its heavy industrial tradition (in the period 1971-1988 it ranked seventh in the world in industrial production).
During the Cold War Czechoslovakia was the second-largest weapons producer among Warsaw Pact countries. Exports of arms to other Warsaw Pact members represented 75% of arms exports, while the country was also a major exporter to Third World countries of small arms, machine guns, armoured vehicles, tanks and jet aircraft trainers.
However, after 1989 the arms industry lost the Soviet market and underwent privatisation. At the same time, the new democratic government pursued a policy of reducing the size of the arms industry and ceasing exports to problematic countries.
According to data provided by International Prague Radio, in 1988 arms production in Czechoslovakia amounted to CZK12.3bn (€477mn), while four years later it equalled CZK2.4bn.
In Czechia, some arms companies were privatised and others reoriented. Some of these struggled to be competitive compared with foreign manufacturers, yet today the industry can be considered successful, with more than 90% of production export-oriented, and a shift towards higher value-added equipment.
In 2019, Czech defence industry firms exported goods and services worth €619.29mn, which is around 1% of military-related exports from the EU.
“However, it is not very gratifying that a number of repressive states or states involved in regional conflicts, such as Saudi Arabia, Algeria or the United Arab Emirates, were again among the largest recipients,” reported the 2021 Agenda for Foreign Policy produced by the Czech think-tank AMO.
The Czech arms products that are high in demand are small arms and light weapons, as well as special kinds of production such as training equipment for future pilots, notably the sub-sonic L-159 airplane.
The top companies include:
Czechoslovak Group (CSG), a holding company whose total sales reached €1bn in 2020. CSG includes some of the vital Czech defence companies such as Excalibur Army, Tatra Trucks, Tatra Defence Vehicle and Retia.
The Armed Forces of Ukraine have awarded the Czech company Excalibur Army a contract for the supply of 26 DANA M2 self-propelled howitzers, valued at more than $40mn.
Ceska Zbrojovka Group, which is one of the world’s leading manufacturers of firearms and tactical accessories for military and law enforcement, personal defence, hunting, sport shooting and other commercial use. In May 2021, CZG acquired a 100% stake in storied US pistol manufacturer Colt Holding Company.
Aero Vodochody is a Czech manufacturer of light combat and training aircraft and is the largest aviation manufacturer in Czechia and one of the oldest aerospace companies worldwide. In October 2021, Hungarian-owned HSC Aerojet took a majority stake in the company. Kristof Szalay-Bobrovniczky has an 80% stake in HSC Aerojet and Czech arms company Omnipol owns the remaining 20%.
After the break-up in 1993, Slovakia went through a difficult restructuring process when it lost most of its capacity. Based on figures provided by Global Security, about 16% of Slovakia's industrial workforce was employed in the arms industry and unemployment in the region increased to 15% in 1992, twice the rate of the rest of the country.
After the dissolution of the Soviet Union, the country managed to reorientate itself and attract foreign and domestic investors. It developed supply relationships with major aerospace and defence systems integrators. The country currently exports to Western Europe and North America, but its primary clients remain domestic and regional customers.
The large defence companies of strategic importance were not privatised until 1999, when the Act on strategic companies was approved.
Currently, Slovakia has a large defence industry, focusing mainly on the design, development and manufacture of ammunition and artillery systems, armoured combat and transport vehicles, short- and long-range radar and navigation systems, and mine-clearing equipment, but few aerospace firms.
The conservative government of Viktor Orban has accelerated efforts to overhaul the country’s ageing weaponry since taking office in 2010.
In 2017 a €10bn military development programme (Zrinyi 2026) was launched to modernise weaponry and replace Soviet-era equipment. Military spending rose from 1% of the GDP in 2017 to 1.45% in 2020 and is planned to meet the 2% target in 2023.
The scheme is part of a broader strategic goal of making the military a strategic industry.
The prelude to the military programme was the acquisition of the majority stakes in automotive parts manufacturer Raba, which also supplies combat vehicles.
The scheme includes a joint venture with Rheinmetall of Germany that intends to invest €600mn over the next few years. Rheinmetall is building two plants in Hungary, a state-of-the-art facility to produce Lynx infantry fighting vehicles in a joint venture that should start production from 2023, as well as an ammunition factory from 2023.
The German military group is taking partnership with local suppliers to a strategic level. It agreed with 4iG to acquire a 25% stake in the BSE-listed IT company and set up a joint venture to projects related to its production facilities in Hungary.
The cabinet has been actively seeking acquisition targets. A state-owned military company also used bought UK-Austrian-owned Hirtenberger company in 2019, which makes mortar weapons. The company will be moving its plant from Austria to Hungary by 2024. HSC Aerojet also acquired a majority stake in Czech trainer jet maker Aero Vodochody.
Lithuania’s exports of arms and ammunition, parts and accessories was $14.94mn during 2020, according to the United Nations COMTRADE database on international trade. Arms transfers cover the supply of military weapons through sales, aid, gifts and those made through manufacturing licences.
Major gun and arms makers from Lithuania are MB Lugeris, EON Industrial Services, NxWerks Precision, ZALA ARMS, MakSnipe-LT, M.A.M. Filmamas UAB, JSC Yukon Advanced. Lithuania’s only state arms manufacturer is ammunition company JSC Giraites Ginkuotes Gamykla (GGG), based near Kaunas.
The value of exports of arms and ammunition, parts and accessories thereof from Latvia totalled $375,000 in 2020. Sales have decreased by 79% in value terms compared to 2019.
Arms and their accessory exports amounted to 0.002% of total exports from Latvia in 2020, at $15.1bn.
Exports from Estonia of arms and ammunition, parts and accessories to Poland alone was $1.06mn during 2020, according to the United Nations COMTRADE database on international trade.
The Estonian Defence and Security Industry Innovation Cluster was first established in 2012. The new Defence Estonia Cluster was launched in 2019 and has currently 14 members. Defence Estonia Cluster is a network for international co-operation and export of arms and their accessories to enhance the co-operation between Estonian companies, R&D institutions and clients.
Bulgaria is the biggest arms producer among the eastern EU member states. Its defence industry was built up during the communist era, when it supplied its own armed forces and other eastern bloc and non-aligned countries.
Much of what is produced in Bulgaria (and elsewhere in the region) today is updated versions of those communist-era weapons, though there have been moves to introduce new products, notably the decision by state-owned VMZ Sopot to launch drone production under a technology transfer agreement with Israel’s Aeronautics.
In 2021, the then government adopted a programme for the development of Bulgaria’s defence capabilities until 2032. Among the steps set out in the document were to develop the Bulgarian Defence Technical Industrial Base (BDTIB), to reduce dependence on foreign suppliers.
Bulgaria currently has two active big arms producers – Arsenal and VMZ Sopot – as well as one company exporting weapons, Emco, owned by businessman Emilian Gebrev, and ammunition and industrial explosives maker Dunarit.
Arsenal, the country’s largest arms maker, produces combat weapons, including machine guns and ammunitions. Known as the Kalashnikov maker, it exports 80% of its production to Middle East, Southeast Asia, Africa and the US.
The company has been plagued by problems since the start of the pandemic. In 2020 it decided to lay off 2,000 of its 9,000 employees due to falling demand. Issues related to cross-border transport corridors have caused delays in the supply of tools, chemicals and other materials the company needs for its production, as well as in the delivery of its products, as it is completely export-oriented.
This year, Arsenal stopped work in January, sending its workers in paid leave until February 11. The company decided to temporarily halt work due to rising prices of raw materials, high electricity price and the coronavirus pandemic.
State-owned VMZ Sopot is also producing weapons and ammunitions, including missiles, artillery ammunition, unguided aircraft rockets, anti-tank guided rockets and others. It signed a contract worth BGN100mn (€51.1mn) for exports to Egypt during an exhibition at the end of 2021. The company’s traditional partners are also in the Middle East and the former Soviet Union states.
Many of Bulgaria’s arms producers have been immersed in scandals in recent years.
Arsenal’s name was involved in possible theft of sensitive information in October 2021. The police have arrested two people from Lithuania and one from Russia on suspicion of stealing sensitive information and technology from Arsenal.
Two years earlier, the police arrested seven people and seized a significant amount of weapons suspected of being illegally smuggled from Arsenal. The operation, which was launched at the end of November 2018 in Sofia following the arrest of a local man, revealed a garage containing dozens of automatic rifles, handguns, machine guns, hundreds of gun barrels, as well as several launchers for rocket-propelled grenades and around 50,000 bullets.
Dunarit was at the heart of a years-long ownership battle after being acquired by Emko. Controversial businessman and politician Delyan Peevski is rumoured to have wanted to take control of Dunarit.
Meanwhile, Emko’s owner, the local businessman Emilian Gebrev, allegedly was poisoned with Novichok along with his son and the production manager of the Dunarit arms factory, Valentin Tahchiev. In 2020, Bulgaria’s prosecution charged three unnamed Russians for the attempted murder of Gebrev.
The reasons for Gebrev’s poisoning are not known. Among the rumours doing the rounds are that it was a “rehearsal” for Russian spy Sergei Skrpial’s poisoning, related to Emko’s bid to buy Dunarit, or intended to prevent exports of weapons to Ukraine.
Meanwhile, in April 2021, Bulgaria’s chief prosecutor Ivan Geshev said that four blasts in Bulgarian weapons factories were most likely executed by officers of the Russian military intelligence agency GRU.
The announcement came days after Czechia expelled 18 Russian diplomats, all alleged members of the Russian intelligence services, because of the Kremlin's suspected involvement in two arms warehouse explosions that resulted in two deaths.
The Czech investigation has suggested a connection to Bulgaria in one of the cases – the explosion at the Vrbetice depot, in the Zlin Region, in October 2014. At the time, the depot reportedly contained weapons that were to be sold to a Bulgarian arms dealer and supplied to Ukraine, to help it in its conflict with Russian-backed seperatist forces, the Czech News Agency reported.
Romania has been working to modernise its armed forces, having committed to spend at least the Nato-required 2% of GDP a year on defence. Several cooperation agreements have been signed with major Western defence companies that combine procurement with setting up production within Romania.
For example, in October 2020, Romanian state-owned aerospace company Romaero signed a memorandum of understanding (MoU) with US group Raytheon to co-operate in producing Patriot missile defence systems to be delivered to Romania. Romaero general manager Remus Vulpescu said at the time that the MoU was the “first stage of a partnership that can create many jobs in Romania and can give us a high level of understanding of state-of-the-art defensive military technologies.”
In August 2020, Italian company IVECO Defence Vehicles started building a truck assembly plant in Romania’s Dambovita County. Romania’s then prime minister Ludovic Orban said the investment was “part of the offset related to the contract to outfit the Romanian Army with vehicles produced by IVECO Defence”.
“In our view, the outfitting programme should generate investment within the offset policies, designed to increase production capabilities in Romania, ensure technological transfer, and develop new innovation, research and development capabilities,” Orban added.
Serbia’s arms industry was neglected in the years immediately after the Balkan wars but towards the end of the 2000s Belgrade started building it up again. Some observers have flagged up a recent military buildup in the former Yugoslavia as a regional arms race, and the Serbian army has indeed been equipped with new military hardware, both locally produced and from other countries. The government has ramped up military spending in recent years, in a show of strength against Kosovo and other neighbours. However, arms exports have also proved to be very lucrative for Serbia.
Among the products released in recent years was the ALAS (Advanced Light Attack System) guided missile system developed by EdePro, a private company what operates under the direction of state-owned Yugoimport SDPR. This was followed up by the anti-tank missile RALAS. Another example is the Lazar armoured combat vehicles, the first of which, the Lazar 1, was launched in 2008.
A highlight in Croatia’s history of defence manufacturing was the invention of the first torpedo in the Adriatic port city of Rijeka. While Croatia has been importing defence equipment as it modernises its armed forces, it also has a number of companies active in the sector.
They include the Djuro Djakovic mechanical engineering group, which produces tanks (initially based on Russian T-72s), mine sweepers and other military vehicles. The government approved a restructuring package for the group in February, after state aid of HRK430.6mn (€57.4mn) for the company was approved by the European Commission.
Other defence companies in Croatia include HS Produkt, a firearms manufacturer that was founded in 1991, and whose best-known product is the HS2000 semi-automatic pistol. The following year, another high-profile local company, DOK-ING, which now manufactures electric vehicles (EVs), unmanned multi-purpose vehicles and robotic systems, was founded.
Sestan-Busch is a more niche company that produces head protection systems and other personal protective equipment. These companies are members of the Croatian Defence Industry Competitiveness cluster in Prelog, set up to support the development of the industry including through R&D and innovation.
Slovenia’s Ljubljana-based 365 Plus produces pistols, firearm ammunition, shooting accessories and tactical equipment. In terms of distribution, the company represents some of the best brands in their respective businesses on Slovenian and European market, such as Tetra Gun, Real Avid, Aimpoint, Steiner, Olight, Magpul, Steyr, GSG, DP.
AREX Defense, previously known as AREX, produces pistols, ammunition and handguns, Close to 50% of its manufactured products are for third-parties defence companies.
L.O.S Cerkno manufactures ammunition components as copper plated bullets, full metal jacket bullets as well as solid brass bullets. It is part of the Other Fabricated Metal Product Manufacturing Industry. L.O.S. Cerkno has 21 employees at this location and generates $4.59mn in sales.
Smaller countries in the region also have military factories. Bosnia exports weapons including to Egypt and Saudi Arabia. Meanwhile, the prime minister of the Bosnian Federation, Fadil Novalic, has announced that Turkish investors plan to invest in two military industry factories in the country.
ARMS EXPORT SCANDALS
Illegal arms sales to the wrong buyers have also been a running problem in the region, as arms traders sought to monetise leftover Warsaw Pact munitions or more modern kit.
In 2018, Romania and Bulgaria were among the EU members singled out in a European Parliament report urging governments to strengthen checks on arms exports. In the statement, MEPs said they were “shocked at the amount of EU-made weapons and ammunition found in the hands of Da’esh, in Syria and Iraq”, and called on EU members to “ensure that the export licences are not diverted to undesirable end-users”.
A 2021 report from Amnesty International said its arms experts had identified Serbian-manufactured weapons in videos posted by armed groups operating in the Sahel, among them a group affiliated to the Islamic State that has claimed responsibility for hundreds of civilian deaths. The same report showed sales of small arms and light weapons to Sahel governments by the Czech Republic, France and Slovakia since the outbreak of conflict in the region.
Serbia also appears to have sold weapons to both Armenia and Azerbaijan, sparking a scandal when the two countries went to war over Nagorno-Karabakh.
Czech heavy arms were also used by Azerbaijan in the 2020 conflict over Nagorno-Karabakh, despite the OSCE embargo. According to news reports, DANA howitzers were sold legally to Israel, but were then sold on to Azerbaijan.
Czech arms company Zeveta was also linked to illegal arms sales to Alexander Lukashenko’s regime in Belarus, a claim it denies. In mid-August, photos had appeared online of Czech-made flashbangs that were allegedly used against peaceful protesters.