NATO Expansion: Jackpot for US Companies?

Tomas Valasek is a research analyst at the Center for Defense Information in Washington, D.C. He covers a range of security issues, including NATO expansion, conflicts on the European continent, the US military presence in Europe, peacekeeping operations and military modernisation in central and eastern Europe.

When the US Senate voted on 30 April 2024 to admit three new members to NATO (Poland, Hungary and Czech Republic), supporters of the measure in Washington breathed a sigh of relief. Of the sixteen legislatures of allied states whose approval was required for NATO expansion, the US Senate had had the most reservations. The final vote, albeit decisive (80 to 19), came only after four days of heated discussion and intense behind-the-scenes lobbying.

Most Americans barely took notice of the vote. Less than one-tenth of respondents in a February 1998 opinion poll said they had heard “a great deal” about the NATO expansion plans. With little or no pressure from constituents, the relative influence of various interest groups on the lawmakers’ decision rose. Besides the ethnic bodies, such as the Polish-American Congress and the Hungarian-American Coalition, some of the most active supporters of expansion were America’s arms makers.

Their involvement was hardly surprising: with newfound freedom from the Soviet Union and a relative prosperity, the NATO aspirants in central and eastern Europe also discovered a taste for Western weapons. Arms purchases were viewed as a guarantee of independence against possible Russian expansionism and also as an entry ticket into NATO. Central European countries floated the possibility of buying hundreds of Western airplanes worth billions of dollars, prompting headline-writers in the Economist, Business Week and the New York Times to dub Central Europe the “arms bazaar”. The talk caused alarm in Russia itself, which, besides losing traditional markets for its weapons, was also appalled at the increasing militarisation of countries on its western border.

Defence executives involved in pro-expansion efforts represented companies that stood to gain financially from bringing the three former Warsaw Pact countries into NATO’s fold. Arms companies sent representatives to organisations lobbying for the enlargement and bankrolled symposiums and meetings in Washington, D.C., touting the benefits of expanding the alliance. The pro-expansion side prevailed when in April 1998 the US Senate became the fifth NATO legislature to give its approval to expansion. Greece followed suit shortly afterwards, with Turkey and the Netherlands concluding the ratification process at the end of 1998. NATO formally expanded at a ceremony in Missouri in the United States on 12 March 1999—only twelve days, incidentally, before launching air strikes on Yugoslavia.

Over a year has passed since the Senate vote removed the largest obstacle to NATO expansion, but the talk of an arms bazaar has largely dissipated. Actual sales so far have fallen well below the arms makers’ enthusiastic predictions. But earlier optimism may yet be fulfilled: sluggish economies that until now ruled out substantial defence-spending increases in central and eastern Europe continue to improve. Poland and the Czech Republic have taken the first formal steps towards selecting a future supplier of new fighter aircraft.

If and when the new allies’ militaries are modernised, it will inevitably prompt concern in Russia. Moscow may ask why a supposedly defensive alliance with a newly acquired humanitarian agenda is arming its border with Russia. Does NATO, which refers to Moscow as a “partner”, fear Russian attack? Or is the build-up a precursor to the launch of an attack of its own? Could NATO be planning to intervene in Russia on behalf of some allegedly oppressed minority? Following NATO’s air war against Yugoslavia, Russia’s relations with the alliance have been reduced to peacekeeping co-operation in Bosnia and Kosovo. Tensions between NATO and its former nemesis have made the military modernisation of central and eastern Europe a politically sensitive issue.

The Market

On the surface, central and eastern Europe presented a dream market for arms manufacturers. Neglect and the collapse of Warsaw Pact co-operation left the successors’ militaries woefully unprepared in some areas. Czech Air Force Commander, Lieutenant General Ladislav Klima, highlighted some typical problems:

The air force was underfunded and more than 50 per cent of the aircraft were unusable. Many aircraft were grounded because the service had no money to finance the training flights, and the fighter fleet, mainly comprising old Mig-21 MFs and Mig-23s, was rapidly ageing.¹

The Czechs estimate that without new purchases, their air force will lack supersonic fighter aircraft by 2003 and bombers by 2007. In addition to replacing retired weapons, new members need to adjust existing equipment in order to be able to participate fully in NATO’s operations. This requires installing new electronic suites in aircraft to prevent misidentification, upgrading communication and air-traffic control equipment, adding better fire-control and night-vision devices to tanks, etc.

The main prize on the central and eastern European market was, without doubt, fighter jets. Poland said it would need about one hundred new aircraft, with Hungary and the Czech Republic adding thirty more possible orders each. Lockheed Martin, maker of the F-16 jet, estimated that “long-term business opportunities in central and eastern Europe represent several billion dollars in sales”. After the Clinton administration lifted the ban on sales of high-tech equipment to future NATO members in 1995, both Lockheed Martin and Boeing (maker of the F/A-18 fighter) moved to open offices in Central Europe. In 1997 Lockheed Martin dispatched a team of company employees to search for business opportunities in the region. ²

In order to improve their standing with the local governments vis-à-vis their competitors, the various aircraft companies invested heavily in the new NATO members’ industries. A Boeing-led consortium bought a roughly 40 per cent stake in the Czech Republic’s dominant aircraft maker Aero Vodochody, which could make parts of the F/A-18 fighter in the future. British Aerospace, part of a consortium offering the JAS-39 fighter, signed a contract with a Polish factory to make parts for a British Hawk fighter. In Hungary, Boeing launched an investment fund which, the company promised, would bring the country as much as $150 million in investment.

The US government also stepped in to support the defence corporations, instructing its officials to market American aircraft to potential buyers in Central Europe. Wary of losing ground to European competitors (and thus losing thousands of jobs in their voting districts), members of the House of Representatives called on President Clinton to “support any possible sale of high-performance US fighter aircraft to these nations”, seemingly oblivious to the strict export criteria guiding such sales. The government’s eagerness produced a curious situation in 1997 when an overzealous US Air Force officer posted in Prague sent the Czech government a letter on US embassy notepaper praising one American fighter, the F‑16, over another, the F/A-18. When Czech sources leaked the letter to the press, Senator Christopher Bond from Missouri, where the F/A-18 is made, called for a Senate investigation.

But even as the contractors and government officials rushed to the market, other voices urged caution. A 1997 report by the US Commerce Department stated that “[Czech military] rearmament is expected to be a long-term undertaking, with big-ticket acquisitions not beginning for the next several years”. The former chairman of NATO’s Military Committee, General Klaus Naumann, warned defence industry representatives: “Don’t regard this as a big bonanza for your ‘state-of-the-art’ aircraft. Be reasonable and wait for the opportunity around the year 2004, 2005.”³ His words were to come true.

Expand Globally or Lose

In a recent ranking of world defence companies, the Lockheed Martin Corporation claimed first place for the sixth year in a row.⁴ Its lead, however, shrank compared to previous years. Moreover, in 1999 the US House of Representatives cut off procurement funds for Lockheed Martin’s next-generation F-22 fighter, throwing the entire programme into jeopardy. Some analysts are now openly talking about the possibility of Lockheed Martin being forced out of the fighter-jet business. Lockheed Martin’s story—from top spot to possible exit from the field—illustrates the increasing dependence of US weapon manufacturers on foreign markets.

After the demise of the Warsaw Pact, US defence spending steadily declined, until the trend was reversed in 1999. With less money spent on the military, the US government, until then the principle customer for companies such as Lockheed Martin or McDonnell Douglas (now Boeing), also began buying fewer aircraft. The companies, used to a virtually unlimited flow of orders from the US Navy and Air Force, soon felt the financial squeeze. Lockheed Martin’s 1998 Annual Report noted that

the US aerospace and defense industry has experienced years of declining budgets for research, development, test and evaluation, and procurement. After 14 years of continuous declines in the US defense budget, expenditures (after adjusting for inflation) are at their lowest point since before World War II.

The companies’ answer to falling domestic orders was to seek new customers abroad. Lockheed Martin’s president Vance Coffman boasted in 1997 that “five years ago, our sales only totalled about 5 per cent from the international scene. Today, they’re 18. I would expect, in the next few years, they’ll be in the 30 or 40 per cent range. So it’s growing like crazy”.⁵ Of the 162 F-16s ordered so far this year, only 30 will stay in the US. Greece has ordered 58, with Israel taking 50 and Egypt a further 24 aircraft. In addition, Portugal and New Zealand are buying F-16s from the US Air Force inventory—25 and 28, respectively. Without the F-22, and with its role in manufacturing the proposed Joint Strike Fighter still undecided, Lockheed Martin may find itself relying even more on international sales of its F-16 fighter to keep its aircraft production afloat.

Seen from the defence companies’ perspective, central and eastern European markets acquire an added significance. Far from being marginal, they represent part of an important campaign by the defence contractors to globalise, and thus guarantee their financial survival. Foreign sales now decide the future of entire plants and thousands of jobs. When Boeing lost the competition for new aircraft orders by Greece, the company announced it would have to lay off seven thousand workers from its F-15 plant in Missouri.

The Payoff

The first year of an expanded NATO showed that if there is substantial profit to be made in central and eastern Europe, it will have to be made later rather than sooner. Sales of equipment from the US defence department’s stocks, the so-called Foreign Military Sales, amount to only $6.5 million for the Czech Republic, Poland and Hungary combined. To central and eastern European countries as a whole, the Pentagon sold less than $15 million worth of equipment. Individual US arms firms have been more successful. In 1998, the State Department issued licences for $20 million worth of sales to Poland, $893,000 to Hungary and $275 million to the Czech Republic (see Table 1).

TABLE 1

With the exception of the Czech Republic, new NATO members generated less defence business with the US than the cost of one fighter jet that America hopes eventually to sell to its new allies. Most NATO members and some countries in the Far and Middle East as well as Latin America easily dwarf central and eastern Europe in spending on American weapons. The Czech Republic stands out among the three new countries in the value of its commercial orders from the United States: the new L-159 fighters made by Aero Vodochody use an American engine and a mostly American electronics suite.

So what happened to the predicted arms bonanza? Perhaps its time will still come. A Pentagon official interviewed for this article said that weapons were not at the top of the new members’ priorities—yet. “A couple of years ago, when [these countries] first opened up, there was a feeding frenzy among the defence contractors. But they got over there and realised that there was no money and no planning for what they need,” he said. So instead of immediate weapons purchases, the Pentagon began emphasising more elementary needs—training, command and control, communications and air-traffic control. All three new NATO members figure among the top ten recipients of funds from the “International Military Education and Training Programme”, America’s vehicle for educating military cadres abroad. They also received free installation of an expensive system of radar and computers to monitor and direct their air traffic, courtesy of the United States. “You must first train the people and prepare the infrastructure,” said the Pentagon official. “Otherwise the new weapons would just serve as unusable toys.”

Besides preparedness, the new allies must also cope with a shortage of money for expensive new weapons. Their defence budgets remain low ($701 million in Hungary, $3.4 billion in Poland, $1.3 billion in the Czech Republic), and most of the money allocated for defence is spent on maintaining existing forces rather than modernisation. Provided their economies perform well, the new allies will eventually be in a position to afford new weapons. Recognising this, all three conditioned their promises to increase their defence budgets on the growth of the gross national product (GNP). But after a stellar performance in the early 1990s, the economic boom in post-communist countries has slowed down. Most affected was the Czech Republic, whose GNP growth dropped from 6 per cent in 1995 to just 1 per cent in 1997. The downturn in the Czech economy prompted a resigned shrug from Defence Minister Vladimir Vetchy: “In our current situation we just can’t make a decision on the new fighter jets. It’s not that we don’t want them. But, let’s face it, we just can’t afford them.”⁶

Both financial constraints and lack of training can be overcome with time. But there are signs that one of the three allies is having second thoughts about the actual need for the most expensive of the expected arms purchases: fighter aircraft. Since announcing plans to join NATO in the early 1990s, Hungary has been courting US, French and Swedish plane makers for the best deal on the expected purchase of roughly thirty supersonic jets. Boeing, Lockheed Martin, Dassault (France) and a Saab/British Aerospace consortium have already invested millions in Hungary to offset the cost to Budapest of the future aircraft purchases, estimated at around $1 billion.

But the fighter procurement plans recently faltered. First, the government of Victor Orban announced in August 1998 that the purchase would be delayed until 2003. In November 1998, a study by an influential US consulting group, the Rand Corporation, suggested that helicopters, rather than fighter jets, would be more suitable for Hungary’s 93,000-square-kilometre territory. In March 1999, Defence Minister Janos Szabo officially stated his preference for helicopters. Finally, General Lajos Fodor, the man nominated for Hungary’s highest military post—Chief of Staff—joined the pro-helicopter camp. Under the current plan, Hungary’s ageing Mig-21s would be phased out and not replaced. The newer Mig-29s would be upgraded. General Fodor told Reuters that the country’s attack helicopter fleet would be expanded to between eighty and one hundred gunships.

The decision comes as a disappointment to companies waiting for the fighter-jet tender. The Saab/British Aerospace group with its JAS-39 “Gripen” jet, for example, spent millions marketing its plane in Hungary. In addition, the Swedish companies Electrolux and Ericsson (part of the Saab group) invested tens of millions of dollars in new plants in Hungary. In 1997, Swedish companies operating in Hungary under the fighter-jet offset agreement accounted for 5 per cent of Hungary’s industrial output. Russia, eager to boost sales of its Mig-29 fighter, even offered to trade them for Hungarian wheat.

The remaining two new NATO members, the Czech Republic and Poland, still maintain that they intend to buy fighter jets. The Czech Republic sent out a letter of interest seeking offers from potential sellers. Bids were due at the end of September; a decision is not expected until late this year. Poland has already collected bids from five companies for an initial batch of sixty aircraft worth around $1.5 billion. The Warsaw government plans to buy up to ninety aircraft eventually—when it finds the money.

A Look Back

In retrospect, it is clear that many ambitious arms purchase plans by the three new allies had a political, rather than military, motivation. Government officials in Poland, Hungary and the Czech Republic were fully aware that their countries’ resources were inadequate for large-scale, immediate modernisation plans. It came as no surprise when all three countries announced postponement of their planned fighter purchases shortly after being admitted to NATO. Whether the future holds more Central European business in store for US and European defence contractors remains to be seen.

Clearly, the “arms bazaar” rhetoric has helped generate support in Washington and elsewhere for the first wave of NATO expansion. In some instances, weapons contracts were being manipulated in order to win favours with one political group or another. A Polish plan to buy missiles for their Huzar attack helicopters may be the most glaring example. In 1997, Warsaw rescinded an earlier decision to award the contract to an Israeli company, Rafael, in favour of Boeing. The New York Times quoted the chairman of the Polish parliamentary committee overseeing the order as objecting, “Don’t you believe that the American Jewish community has just as large an influence over our entry into NATO as American politicians?”

The relative quiet in the central and eastern European arms bazaar has helped ease the concerns of Russia about a military build-up to its west. Moreover, following years of hiatus, Moscow’s defence industry relations are being re-established. Once it became clear that no new Western aircraft would be bought soon, Poland and Russia agreed on supplies of spare parts for Poland’s Mig-29 and Su-22 aircraft.⁷

The rapprochement between the industries, however, does little to alleviate political friction between Moscow and its former Warsaw Pact allies. Despite the rhetoric of partnership, both parties continue to judge their relations by their relative military strength, rather than by opportunities that co-operation might offer.

Russia’s relations with NATO as a whole reached new lows following the first round of expansion and the alliance’s air war against Yugoslavia. As testimony to the dangers that an all‑out conflict with Russia would pose, the alliance played down the issue of further expansion at its fiftieth anniversary summit in April 1999 in Washington, D.C. Ironically, the alliance may thus have brought about the very situation it expressly tried to avoid—a division of central and eastern Europe into NATO and non-NATO countries. The tensions between the West and Russia put pressure on non-aligned countries to chose sides. Some, such as Ukraine, openly discussed a re-establishment of the Soviet Union. Without an improvement in Russia–NATO relations, a military build-up in the new NATO countries would amount to pouring oil on the fires burning between Moscow and the West.

Endnotes

1. Interview with Jane’s Defence Weekly, 2 June 1999.

2. “Emerging Markets”, Lockheed Martin Today, no. 3 (1997).

3. “Top NATO General Sees No ‘Bonanza’ in Expansion”, Defense Week, 6 October 1998.

4. “Lockheed Martin Faces Challenge to No. 1 Spot”, Defense News, 26 July 1999.

5. Lockheed Martin Today, no. 3 (1997).

6. “Miliardy na nakup stihacek republika nyni proste nema” (The republic simply doesn’t have the billions needed for new fighter jets), Pravo, 11 August 1998.

7. “New Deal for Russia and Poland”, Jane’s Defence Weekly, 16 December 1998.