The independent resource on global security

Lessons from the post-cold war transformation of East Central Europe’s arms industry

Arms production was the backbone of the Soviet-type command economy systems in East Central Europe (ECE). With the collapse of the Eastern bloc, arms makers faced a drastic disruption in their economic, political and social environment. During the bumpy adjustment and integration into West European institutions and world markets that unfolded, many ECE arms producers went bankrupt and the bulk of the companies that have survived continue to struggle. Their experiences, documented in a new SIPRI monograph, provide valuable lessons for arms industries in other parts of the world, including Ukraine.


Lost opportunities for the arms industry

The study of arms production always reveals important aspects of the nature of economic and political systems. For example, while the official rhetoric in the early 1990s in Vladimir Mečiar’s Slovakia was markedly nationalistic and anti-NATO, weapon factories had already been prepared to produce NATO-compatible equipment. Ever since the regime changes, Poland has followed a radically liberal economic policy, but it has preserved and actively promoted its defence industry under state ownership. The radical end of Hungary’s principally laissez-faire defence industrial policy demonstrates the current government’s intention to recreate a highly centralized, ideologically driven economy and society.

The fundamental changes of the post-cold war period were an important lost opportunity. In the early 1990s the high-end of the weapon industry in ECE countries—Bulgaria, the Czech Republic, Hungary, Poland, Romania and Slovakia—had the potential to turn into a major engine of a new, high-tech, knowledge-based economy, and the other, less-developed arms-producing branches could have provided additional human and material resources for this transformation. But in the absence of a consistent state policy, the defence sector collapsed, causing significant economic and social losses.

Adjusting to the shock of the new

The experience of the past 25 years in East Central Europe shows that those countries that were able to cope best were the ones that managed to tailor domestic arms production to the country’s security needs, instead of developing the entire sector, and implement a balanced mix of selected defence industrial promotion and laissez-faire policies. Regardless of whether a state opted for promoting or for abandoning its weapons industry, it had to implement a consistent policy to deal with the consequences of that decision. For instance, it needed to address the problem of freed assets, workforce, technology and industrial premises—otherwise it had to struggle with major economic burdens and security hazards for decades.

The different trajectories of ECE countries have also shown that promotion of the arms industry is an inadequate tool for crisis management: while it can contribute to economic growth once a growth path is established, it can also slow and distort developments during the period of crisis.

At the company level it was confirmed again that human capital is the most important economic development asset. Companies that preserved and developed their core workforce, made use of accumulated know-how, continued R&D, implemented a long-term development strategy and were able to secure some form of state backing and external links had the best chances to face the new challenges and become successful.


The shape of the new arms industry

As a result of the dramatic changes of the past quarter century, a significantly reduced, more efficient and flexible arms-producing sector emerged in ECE that is more integrated within national economies and international production and trade networks. The size, nature and place of the sector in the economic and political system have all fundamentally changed.

A typical successful arms manufacturer firm of the Warsaw Pact era was Slovakia’s ZTS Martin, a heavy weaponry producer, able to turn out 250–300 tanks per year as well as a wide range of other military and civil items.  It employed tens of thousands of employees, ran its own R&D institute and foreign trade company, and provided hot water, heating, infrastructure and numerous cultural and social services to the town. In contrast, today’s successful firms include Bulgarian engineering company Electron Progress, a privatized former state company, owned by an emerging domestic capital group, which specializes in military and civil electronics and communications system integration and production. The company employs fewer than 200 people, carries out its own R&D, and supplies products to the national defence ministry as well as some North Atlantic Treaty Organization (NATO) and civil institutional markets.

While defence industrial players in ECE have sought to integrate into NATO-related markets and production circles as they did in the Warsaw Pact, ECE producers are at the margin of the highly uneven and hierarchical world arms market and even the most successful companies typically occupy second- or third-tier supplier’s positions in global arms-production chains. The principal markets of ECE arms companies are emerging countries, principally in Africa and Asia, where they are in fierce competition with each other, Soviet successor countries and China.


Potential lessons for and from Ukraine

While Ukraine is not the subject of my book, some of its conclusions can help explain the current crisis affecting Ukraine. Arms production was the backbone of the former Soviet economy, absorbing a significant share of its resources and leaving its marks on the economic and social system. After the dissolution of the Soviet Union, independent Ukraine inherited a significant segment of the Soviet military industrial base and faced simultaneously a radical alteration of its external environment, a regime change (like the ECE countries) and a post-break-up transition (like the former Czechoslovakia).

Ukraine’s efforts to solve these problems were very similar to those of its Central European counterparts. In the early 1990s there were some feeble efforts to convert the sector to civilian production, but they were rapidly abandoned. Arms exports, based on the products of some well-developed branches (e.g. aviation, ship building and missile technology), as well as traditional weapons, were intensely promoted. Ukraine also had to fight hard to enter world arms markets, and managed to secure positions in some Asian and African countries and in Russia.

Entry to grey and black arms markets was far less difficult, while the disciplining impact of the European Union (EU) and NATO (which played a major role in ECE) was weak. Hopes of tighter military cooperation with NATO, the United States and the EU have faded.

The arms industry was used for revenue generation, but it was hardly restructured and very little of the income was reinvested in the sector. The consequences of the absence of a consistent defence industrial policy are clearly visible today. Ukraine faces a major political and economic crisis and external aggression with poorly equipped armed forces and an arms industry that would need enormous financial inputs for its sheer maintenance, let alone a potential modernization or a radical conversion.

In addition, Russia’s dependence on Ukrainian weapons and parts for its own arms industry, arms exports and military capabilities is likely one of the motives of the current Russian aggression against the country, making future prospects even gloomier.


Lessons for the future

An analysis of ECE weapon-producing industries also highlights major shifts in the world’s arms industrial production and structures. It shows how country-based, large-scale industrial giants have turned into global networks for R&D, production and system integration. It also reveals the accelerated pace of changes, the permanent, mutual catching-up dynamic between civilian and military-related production, and the increasing role that emerging countries play in the field. Finally, it highlights the entry and growing importance of purely financial actors that seriously modify the sector and might represent important security hazards.

Similar to the situation of the early 1990s, the current crisis of the global economy might represent an opportunity for weapon-producing firms to accomplish radical structural changes. Future development prospects for most of these companies are limited; they could switch to such new fields as energy or environmental protection.