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Defense industry: Moving east

The defense industry benefits from promising Polish and Ukrainian markets. Overall, a 2.3% growth is expected in CEE defense expenditure by 2020.

The defense industry in the Central and Eastern Europe region should remain secure, with a slight growth in expected expenditure from $17.5 billion in 2011 to $17.9 billion in 2020, a recent study conducted by Frost & Sullivan forecasts. The business research company attributes this growth to Polish procurement programs and Ukraine’s ambitious maritime plans.

Since joining the North Atlantic Treaty Organization, the Visegrád Four countries (Czech Republic, Hungary, Poland, and Slovakia) have been focusing on modernization and replacement of Soviet-era weapons and defense equipment to meet NATO interoperability criteria. The global economic downturn and limited defense expenditure have slowed this process.

Most ministries of defense (MoDs) in Europe are currently underfinanced. The majority of armed forces in the region suffer from consistent budget shortfalls and lack of foresight in procurement planning. Large proportions of equipment stocks are reaching the end of their operational life spans, but MoDs will be unable to finance all planned modernization programs.

In contrast to most CEE countries, therefore, the situation in Poland looks rather promising.

Already the main contributor to defense expenditure in the region, the country is expected to increase its share from 52.1% in 2011 to 55.4% in 2020. One of the key market drivers is the Polish government’s legal commitment to allocate 1.95% of the previous year’s gross domestic product to defense spend. Also, upcoming privatization of the defense industry in Poland will likely bolster growth.

Ukraine will also significantly contribute to the CEE defense industry, the study states. The country’s defense industry inherited a better-developed manufacturing base than many others in the region, as a legacy of the Soviet Union. Even though approximately 20% of the defense sector export is going to Russia, Ukrainian companies have been looking to collaborate with Western European suppliers.