With the situation in the Ukraine, Iraq, Syria and elsewhere, we believe that declining military sales in Eastern Europe and NATO will be reversed and a new, long-term market will be established. At the same time Montenegro was invited into NATO as a strategic border country on the Adriatic.
We continue to see opportunities for western security companies to operate with talented and well trained workers from this region, while serving the world and with quick access and lower business costs through Eastern European offices, including software, personnel and new services needed in Western Europe.
Investment opportunities in Defense and Security Sector
- The acquisition of companies with special permissions in the defence and security business;
- Investment in new companies with consistent profit , guaranteed by the state. (i.e, production, sell back and other possibilities);
- Providing turnover capital for operational purposes of companies;
- Investment in new technology businesses in the Defense & security sector, for specific clients (either state or corporate private sector);
- Importing western technology and equipment into SEE countries, as well as participating in public tenders in the defence and security sector;
- Exporting locally produced equipment and technologies abroad.
Market overview:
In the short- and medium-term, companies that managed to adjust successfully to the economic and political changes have the following opportunities:
- Participation in upgrading and modernizing the existing arsenal of their national armed forces, in order to meet NATO standards;
- Development of hybrid systems, which utilize both former WTO and NATO standards that can be sold both in Western and Eastern markets;
- Achievement of NATO supplier status.
In general, successful small arms and light weapons producers in the region seek all these opportunities and employ a combination of strategies. In most cases, they actively seek foreign partnerships with established actors in the defence sector. International cooperation became a primary means of acquiring new resources, technology transfers, and markets. At the same time, the precondition for international partnership is often the status of a recognized domestic supplier. Companies that succeed in progressing in any of these directions have the potential to survive, even in countries where the defence industry is in generally poor shape. Successful companies, whether they supply domestic or international markets, have good opportunities for expanding their activities and increasing output. Under current economic and social conditions however, it is likely that they will respect local and international arms trade regulations. They are eager to remain actors on the international market, or, if they are predominantly national suppliers, it is likely that their activity will be strictly controlled by their respective national agencies.
NATO membership, or the possibility of becoming an Alliance member, had a major impact on defence industrial development in each country of the region. Its impact was something of a double-edged sword. On the one hand, it created new opportunities and provided new resources for an industry that was passing through an extremely deep crisis and had rather limited prospects. Increased defence budgets, procurement opportunities, and modernization projects opened up new resources and space for manœuvre. Since the military-related sector played a crucial role in the region’s integration into the new international order, it gained a novel, unexpected source of legitimation and managed to secure its position in the new economic, social, and political system. On the other hand, NATO, and membership in other new international institutions, had a positive impact on national legislation and the reform of the military establishment. These international institutions pushed for strengthened state control over production and the arms trade and for the more efficient implementation of international laws and regulations. They also emphasized the need for more accountability and transparency in defence-related affairs and the importance of ensuring public control over military-related issues. Countries in the region that are most advanced in their new international integration process undoubtedly show more strictness in implementing their own legislation and respecting international requirements than at the beginning of the 1990s. Their independent media is also much more sensitive to these issues than the controlled media of the past. Integration might thus provide a positive example for other countries in Eastern Europe to follow.
Countries
By 2000, the Bulgarian defence industry output had fallen to approximately USD 100 million per annum, around 10% of its record production levels reached in 1984–85. The industry employs around 30,000 workers, but this figure is expected to fall. Of the almost 60 Bulgarian companies engaged in defence-related activities, about 30 constitute the core of the sector. Five of these-Arcus JSC, Arsenal JSC, NITI JSC, VMZ, and Samel-90-are important small arms producers, with a combined employment of around 12,000 staff (Dimitrov, 2002; CSD and Saferworld, 2004). Bulgaria’s arms exports represent around 1.5 to 2% of total exports, and in 2001, arms exports rose to more than USD 200 million, thanks to the identification of new markets in India, Pakistan, and China. Figures for 2002 indicate that small arms exports were around USD 30 million. Small arms account for about 30% of the Bulgarian defence industry output, with ammunition representing nearly 30% of the small arms output. Yet only 10% of the industry’s existing productive capacities are used at present. The mostly dual-purpose facilities have much larger idle capacities for military-related production lines than for civilian ones. The national armed forces buy approximately USD 8–10 million in military equipment per year and the rest is exported. Although the defence budget has been increased to 2.9% of the GDP, most of it is absorbed in personnel and maintenance costs.
Reform of the military sector was consequently handled with extreme caution. In general, privatization was enacted somewhat hesitantly in all industries, but defence industry privatization was considered a particularly risky economic and political issue. Between 1993 and 1997, a moratorium was in place on defence industry privatization in Bulgaria. Subsequently, Ivan Kostov’s reform-minded government, which had taken office in 1997, issued a special decree on the restructuring and privatization of the defence industry in March 1998. Within five years, the bulk of Bulgarian defence firms had been privatized through MBOs. In 2002, two of the 25 core defence industrial companies were bankrupt and had ceased production; another 18 had been privatized, which meant that the percentage of shares in private hands now exceeded those owned by the state. Four companies (Arsenal, Dunarit, Trema, and VMZ, all in small arms production) remained state-owned, under Ministry of Economy supervision. The fifth one, Terem, which specializes in military repair, is under Ministry of Defense supervision. Nonetheless, these four companies account for a significant share of Bulgaria’s defence industrial output, export, and employment. Current government plans envision the privatization of these enterprises through a gradual process of decentralization and the subsequent sale of decentralized, individual units. The state is expected to retain a 34% share and a right of veto if the new owners propose a change of profile. The radical changes in ownership structure did not fundamentally improve the state of the ailing Bulgarian defence industry. Since the new owners-an assortment of managers, employees, trade partners, and local banks-were usually unable to invest heavily and push for radical company restructuring, the majority of the enterprises continued, and indeed continue, to suffer from a lack of orders and capital. They are often unable to pay their overhead costs and frequently their employees’ salaries. Finding new markets is another crucial problem for Bulgarian defence-related companies. In the 1990s, domestic military-related demand decreased considerably and traditional export markets were lost. Throughout the 1990s, in a bid to save the industry and provide the country with indispensable hard currency earnings, Bulgaria pursued a hazardous arms export policy. The country sold large amounts of weapons-principally cheap small arms that ranged from handguns and assault rifles to anti-tank mines and ammunition-to conflict areas. Destinations included the former Yugoslavia and several African, Asian, and Latin American countries. Hard currency earnings might have relieved some budgetary tensions, but the industry’s problems were evidently not solved. A chronic absence of the means to address the fundamental problems of the sector at the end contributed to their aggravation. In the period immediately before and after Bulgaria’s accession to NATO and other important international institutions, the government made major efforts to strengthen control over weapons-related issues and specifically over arms exports. The results are quite promising. Apart from occasional infringements the country by and large managed to regulate the export of weapons. This radical change of policy, from permissiveness to rigor, came as a surprise to most of the companies. Many company managers considered their companies abandoned by their supervising authorities. This feeling was reinforced by the fact that the Ministry of Economic Affairs, the institution in charge of the sector, was reorganized and staff were concentrated at the arms trade department, rather than the production department, as had been the case previously. The change of government policy signalled a new and often insurmountable obstacle for many companies. Transactions in the grey and black markets became considerably more risky than in the past. Most defence-related companies had to come to terms with the idea that, in order to survive, they had to find new sources of revenue, primarily by increasing their civilian production, finding subcontracting work, or exploiting opportunities for cooperation. Small arms and light weapons production. The state of small arms and light weapons production mirrors the general state of the Bulgarian defence industry. One successful, privately owned company, Arcus (small arms, Lyaskovets), has managed to survive the challenging 1990s to secure its position both in the domestic and international markets. Arsenal (small arms, ammunition, Kazanlak) and VMZ (light weapons, ammunition, Sopot), the two largest companies and successors to Bulgaria’s former heavy industrial giants, are doing their best to cope with the new environment but are facing many difficulties. Arsenal appears to have more dynamism and initiative than VMZ. The former has long exported products to India-Bulgaria’s biggest client-and recently announced it will equip the new Iraqi army with small arms and light weapons. In contrast, VMZ benefits largely from continuous state help. In 2000, the company experienced net losses of 20 million euros (CSD and Saferworld, 2004). While the 2002 sale of the company’s ball bearings firm to the Swedish SKF brought major resources to the enterprise, it remains to be seen whether management can capitalize on this opportunity.17 Other companies, such as Dunarit (ammunition and explosives, Russe), NITI (small arms and ammunition, Kazanlak), Montaz i Mechanika (recently operating under the name of Mechanics and Assembly Co, fuses and hand grenades, Sevlievo) continue to struggle, attempting to broaden their civilian production. Pima (ammunition and small arm parts, Montana) is in the process of liquidation; Arcus has purchased a number of its premises.
In the late 1980s, the defence industry included more than 100 companies, employed nearly 200,000 workers, and was among the principal growth industries and exporters. From the onset of the political changes, the sector suffered major setbacks. Output has fallen to approximately 10% of the 1989 records. The dramatic decrease in production led to a serious employment problem. In 2001, the industry officially employed 80,000 people, though the large majority was practically unemployed, rarely going to work or performing any productive activities. To resolve this situation, and despite the protests of workers and trade unions, the aim of Romanian decision-makers was to cut the workforce to about 18,500 by 2004. Most of the laid-off workers already receive compensation from state sources. At present Ministry of Defence orders only absorb five% of the industry’s output. Arms exports suffered similarly large losses. Prior to 1989, Romania exported weapons worth some USD 500–800 million per year; in 2000 and 2002, however, annual exports stood at roughly USD 30 million and USD 40 million, respectively. Most arms sales take place through Romtehnika, a state-owned specialized arms export company In 2000, the government agreed to yet another major institutional reorganization in the defence industry, without, however, altering the predominant structure of state ownership. The most important defence-related companies were transferred from Ministry of Defence supervision to the Ministry of Industry and Resources. This move is expected to improve the sector’s performance by separating state sellers and buyers. The core defence-related companies were reorganized under the umbrella of Romarm, a state-owned company that functions like a holding. The majority of firms that were not placed under Romarm were transferred to the privatization agency and, in principle, can be privatized and even exit the defence sector. Similar to Czech defence industrial policy, Romania’s policy emphasized the development of the aviation sector, which absorbs a large proportion of defence expenditure. In this sector the government was most active in promoting the creation of joint ventures (JVs) or cooperation agreements with Western companies. In the field of small arms and light weapons production, the few foreign cooperation deals or JVs concern principally civilian production. Another major direction for Romania’s present defence industrial policy is export promotion. To compensate for the low level of domestic demand and to re-launch lucrative arms exports, state agencies selected a wide range of products with good prospects and export potential in order to promote them. Artillery and infantry weapons and ammunition are among the selected items. In the run-up to NATO membership, the Romanian government approved 25 projects to upgrade and modernize the national armed forces. These projects are financed by credits, granted by the government, and managed by Romtehnika, the country’s most important arms trade company. Due to the elevated costs of modernization programmes and the fall of exports, there is a serious imbalance in Romania’s arms trade-with imports of USD 200–300 million per year versus exports of around USD 40 million-that is likely to cause budgetary tensions. At present, an offset policy is under consideration that would conceivably help domestic producers to benefit from these large-scale investments.
In 1991 Croatian defence industries comprised approximately 7% of the former Yugoslav defence industrial base, mostly in the field of heavy weapons and naval systems production. When war broke out, many engineers, workers, and constructors, employed by the Yugoslav defence industry in other parts of the former federation, returned home, taking with them blueprints and know-how. The industry also benefited from the fact that an important military-related R&D; institute, Ruder Boskovic, was situated in Zagreb. This was to become the base of independent Croatia’s defence industry. Companies with a purely civilian profile switched to military-related production and new small-scale companies emerged to cater to the hastily organized Croatian national defence forces. By 1992, 62 defence-related firms had contracts with the Ministry of Defence, among them eight small arms producers.
When the war ended in Croatia, and particularly when the reform-oriented government of Stjepan Mesic replaced the Tudjman cabinet, the active promotion and protection of the defence industry came to an end. The defence budget was cut back significantly and the Ministry of Defence placed increased emphasis on regular production and quality. In the new, more liberal and market-oriented system, defence-related companies were no longer sheltered. Companies were expected to struggle for survival like their civilian counterparts. In a relatively narrow defence industrial base, only a handful of enterprises managed to make the transition, while many had to close down, switch entirely to civilian production or stagnate, due to a lack of orders, markets, and resources. In 2002, about 25 companies had the potential to produce for the military, with a total of 1,500 people in direct employment. Compared to 1993, the height of the war effort, defence industry output dropped to 15 per cent. Yet most of the productive capacities developed during the war still exist in the form of cold capacities. At present more than 53% of military-related companies are private, with state-owned banks, privatization funds, investment companies, and ministries owning the rest. Most arms exports are organized through the state-owned company, R.H. Allen, although several producers have their own export licences.
Small arms and light weapons production. Croatia’s small arms producers include: HS Product (small arms, Karlovac), Arka (artillery munitions, Karlovac), and Atir (rocket systems, Zagreb). As of 2002, the Elmech Razvoj ammunition producer company (Budinscina) had reportedly completed its conversion to civilian production. The most important survivor of Croatian small arms production is undoubtedly the HS Product company, an unexpected success story.
Military industry in Albania is 100% state owned and managed by MEJCO company under the MoD.
Main factories are:
MC Poliçan (munition)
The Mechanical Combine in Poliçan is a state enterprise, established in 1962 in order to accomplish the Albanian Armed Forces demands on armament. In the period 1962-1966 the production line of 7.62×39 mm ammunition (“Kalashnikov”) was set up, 82 mm mortar ammunition, offensive and defensive grenades, as well as anti-personnel mines. In the period 1970-1972 the anti-tank mine line was installed in the existing building, whereas the 180 mm firework line was placed in a new building. In the period 1977-1985 a deep reconstruction of the machinery and equipment coming from Switzerland and Austria was undertaken, to enable the manufacture of ammunition caliber 12.7×99 mm and 14.5×51 mm, as well as mortar ammunition with caliber 60, 107 and 120 mm. Currently the company produces ammunition of pistol type “Makarov” and “Parabellum” with caliber 19 mm. The company has great potential to produce for the civilians, especially iron and steel foundry products. Poliçan Combine has GOST quality system.
MP Gramsh (ammunition)
Mechanical Plant in Gramsh is a state enterprise. The project work began in 1962 while the Chinese license production began in 1962 with type rifle “Simonov” 7.62 mm caliber. In 1974 the production of automatic AK-47 was installed. MP Gramsh provides manufacturing services for defense industry with its high precision machines; repairing, heat treatment and enameling of surfaces. The Enterprise quality system is certified with GOST.
EMP Mjekës (explosives)
The Explosive Materials Plant in Mjekës is a state enterprise that has been producing explosives and propellants since 1962. In 1982 began the production of powerful explosives with “BOFORS” license in new and appropriate environments. There are a total of 6 plants located near Elbasan city, located about 50 km away from Tirana. Currently the company produces only dynamite and ammunition to meet the needs of the Albanian mining and exports successfully in Kosovo, as well.
The Enterprise is interested in cooperation with foreign companies in manufacturing and marketing their products, especially in dynamite, ammunition and propellants.
Serbia’s Defense Ministry and the government plan to make the defense industry a driving force in the country’s industrial production and economic development, Serbian First Deputy Prime Minister and Defense Minister Aleksandar Vucic said while opening Partner 2013, the sixth international exhibition of arms and military equipment, in Belgrade 25 June 2013. “It is important that Serbian brains and scientists become even more engaged and that we improve the management, as I am confident that we will not only be competitive in the world markets, but also have a competitive advantage,” Vucic said. Vucic said that Serbia is proud that this year’s edition of the fair will mark 160 years of the domestic defense industry. Vucic said that EUR 160 million will be invested in Serbia’s defense industry in the next three years, adding that EUR 75 million will be invested this year only. Vucic said that Serbia will soon sign a contract with the European Defense Agency on the inclusion of its R & D and production capacity in the EU defense projects.
The International Defense Fair PARTNER 2013, held under the auspices of the Ministry of Defense of the Republic of Serbia, co-organization of the Yugoimport SDPR company and executive organization of Belgrade Fair, on June 24–28 satisfied all organizer’s expectations. Serbian military industry had shown very successfully a high technological level of its products and many products were sold to international buyers already on the first day. The business visit on the first two event days was also for the organizer unexpectedly good, more than 3,300 visitors, which confirms the Belgrade Defense Fair became the highest quality exhibition in this part of Europe. This year’s PARTNER will remain remembered by the promotion of the new combat vehicle Lazar 2, Nora Howitzer, the turbulent Sparrow Hawk aircraft, and many other products necessary for the army, but also the attendance of the Russian Aircraft Corporation RAC MIG, which featured the model of the future new Serbian jet aircraft MIG–29 M2. High standards of specific military products at the sixth PARTNER exhibition were shown by 92 manufacturing and trading companies, 16 of them the international ones.
Defense industry, in function of new technologies development under control of the security system, monitors and stimulates the development of new technologies from the civilian sector significant for the production of weapons and military equipment and is in possession of immense potential and vitality.
Defense industry of Serbia comprises companies producing and finalising weapons and military equipment, cooperative and service companies, scientific institutions, institutes and laboratories. The present corpus of the Defense industry consists of 11 specialised companies with approximately 11.000 employees. Furthermore, Defense industry includes 27 companies with individual, additional capacities for production in the field of metallurgy, metal processing, machine building, chemical industry, textile and leather and footwear industries, complementing the resources for production of weapons and military equipment.
The required capacities for production of weapons and military equipment, in accordance with the needs of the Serbian Armed Forces equipping, are defined within the Ministry of Defense and companies are not focused solely on complying with the domestic needs but also on exporting to world markets. A tendency of growth of exports is the result of a synergistic effect of restoring political relations with the traditional customer countries, but also the focus of the Serbian defense industry on offering high quality products. The presence of the defense industry in the world market encourages further economic development and world integrations through various forms of military, scientific, technical and economic cooperation, provide greater opportunity for product placement.
The existing “Defense industry of Serbia” group under the authority of the Ministry of Defense decidedly orientated on production in the Defense industry includes six companies with a tendency of expanding onto three more companies.
The Republic of Serbia, as a country enjoying the status of a respectable producer and exporter of conventional weapons and military equipment, has regulated its national control system for the export of arms, military equipment and dual-use goods in line with the rules and standards applied by the European Union and the Organization for Security and Cooperation in Europe (OSCE), the United Nations and other international documents.
The first national annual report on the implementation of foreign trade in controlled goods (for 2005 and 2006) was released at the end of 2007. According to the Annual Report for 2010, it issued a total of 500 licenses for the transfer of arms and military equipment. Of these, 348 were export licenses (757.88 million US$) and 152 import licenses (79.65 million US$). In the same period, the number of refused export licenses (due to lack of documentation) was 3 as opposed to 1 refused import license. As for dual-use goods, 86 licenses were issued in 2010 (79 for import and 7 for export).
All matters related to import/export licensing, transport, transit, possession and provision of services for foreign trade transfers, monitoring and control, prohibitions and penalties, as well as the powers to adopt by-laws, have been covered by the Law on the Foreign Trade in Arms, Military Equipment and Dual-Use Goods, which came into force on 31 March 2005. An essential quality and innovation of this Law is that it transferred from the military to civilian authorities the competences in this field.
Serbia is providing, on a regular basis and in time, all the information and replies to the questionnaires pertaining to arms export control, in line with the obligations towards the United Nations, OSCE and other relevant organizations.
Within the framework of export control, special attention is being devoted to the countries under the UN mandatory arms embargo in accordance with the relevant UNSC resolutions or politically binding OSCE and EU decisions relating to arms exports, or to countries sponsoring terrorism, posing a threat to peace, security and stability in the region, as well as to the countries having a poor record of human rights or those carrying out internal repressive measures. The relevant UNSC resolutions imposing an embargo on arms exports and the relevant OSCE decisions are fully complied with.
On 6 December 2006, the Republic of Serbia voted in favor of the UN General Assembly resolution 61/89 entitled “Towards an arms trade treaty: establishing common international standards for the import, export and transfer of conventional weapons” (ATT). This initiative is considered to be very important and practicable. Its purpose is to ensure effective prevention of further arms trade irregularities and uncontrolled possession of weapons by structures over which the state can exercise no influence or control. In this context, Serbia has continued to actively participate in preparing these negotiations and has hosted a wider regional seminar, in cooperation with the European Union and the UN Institute for Disarmament Research (UNIDIR), in April 2012.
Bosnia’s arms industry, which almost died in the decade after the country’s 1992-95 war, has become a rare bright spot for the country’s struggling economy with output and exports almost tripled in the past five years. Rebuilt factories, modernized machinery and a crackdown on corrupt managers have all helped turn it into a sector that now sells arms and ammunition to over 60 countries, including the United States, Saudi Arabia, Turkey and Switzerland.
Revenues for the 12 arms factories in the Bosniak-Croat Federation this year are set to top 100 million euros, triple their level of 2010. Military industry will certainly reach output of 105 million euros in 2015.
The growth in the arms sector contrasts with Bosnia’s slow progress in implementing needed economic reforms and a expected growth rate of 2.5% this year after 0.7% in 2014 following devastating floods.
Bosnia’s arms industry, inherited from its once-mighty Yugoslav predecessor, specializes in products such as small arms ammunition, blasting caps, pistols, grenades and mines.
Factories in the federation were operating at a loss and faced closure. Revenues in 2010 amounted to only 73 million marka, with export earnings of 40 million. By 2014, output in the sector, which employs 2,300 workers, reached 145 million marka and exports over 100 million marka.
Igman Konjic, a producer of ammunition for small arms, is targeting 90 million marka of exports this year, having almost closed several years ago.
Montenegro’s annual national report on the weapons trade said the country exported arms worth around 6.5 million euros over the last year, a 30-per-cent increase in value in comparison to previous years.
The Ministry of the Economy prepared the report, which BIRN has seen, last week. It contains information on each export licence issued, giving a description of the goods, the number of items involved and the total value.
The list of counties to which Montenegro sold weapons includes Albania, Yemen, Kazakhstan, Peru and Vietnam. “The highest income from sold weapons is from the United States, about 1.8 million euro,” the report noted.
Montenegro exported ammunition and fuses for munitions, aviation equipment for military use, rockets, other explosive devices and naval equipment.
When it comes to imports of military equipment, Montenegro bought arms worth about 4.5 million euro, mostly from Taiwan, the US, the Czech Republic and Bosnia and Herzegovina.
During the last year, companies from Montenegro also bought weapons from Italy and Ukraine, mostly ammunition and electronic equipment for military use.
The report said 31 companies are registered to trade in controlled goods in Montenegro. The largest importer and exporter is the Montenegro Defence Industry, MDI, a company 100-per-cent owned by the government. In 2012, local watchdogs accused the MDO of illegally exporting arms to Libya and Syria, but the company denied the claims.
EU representatives have told Montenegro to harmonize its legislation on the arms trade to match the EU Code of Conduct on Arms Export, which defines common rules on governing the exports of military technology and equipment.
