The following article is based on research conducted under the State Department’s Title VIII Fellowship, for the Black Sea Program at MEI. During summer 2024, the author traveled three times to Romania and interviewed policymakers in the Romanian strategic bureaucracy, including former ministers of defense, along with trade union representatives, private defense-sector entrepreneurs, managers responsible for defense-industry privatization and reform, and brokers.
 

History and structure of Romania’s defense-industrial sector

After the Cold War, the Romanian government chose to slim down its sizeable defense industry, but it essentially maintained its state-backed structure, personnel, and management, thus producing a thoroughly inefficient system.1 Today, Romania retains a proclivity to purchase Western, and particularly American, defense equipment; but it has often neglected any thorough assessments of life cycle costs or real force design considerations.2 Throughout the 2010s, this system generated several procurement disasters, including the 2016-2023 Corvette contract debacle.

Romanian policymakers believe they benefit from continuous US and European purchasing as insurance to preserve the North Atlantic Treaty Organization’s (NATO) Article 5 guarantee. A domestic producer, even if owned by a foreign firm, may be less attractive than a foreign producer, since the latter provides additional diplomatic benefits. This explains Romania’s overwhelming reliance on the American Foreign Military Sales (FMS) process, which gives Romania direct access to top-line equipment produced by the United States.

Until recently, Romania’s offset regulations did not apply to government-to-government contracts, meaning FMS purchases hollowed out the national defense-industrial base. Romania’s new offset law changes this, although political issues remain. To abide by offset regulations, a foreign company must recoup at least 80% of the value of the initial contract to the Romanian industry, either through direct investment in technology transfer or indirect investment in other areas. This 80% figure is not a dollar-for-dollar comparison. Instead, the Romanian Agency for Technological and Industrial Cooperation for Security and Defense (ARCTIS) will oversee offset requirements. ARCTIS will comprise up to 50 officials, with its executive being a secretary of state appointed by the prime minister with the economy minister’s advice, and the deputy head being an economy minister appointee. This preserves the same traditional levers of control over offset, reducing its benefits.

The current situation

As a general rule, state-owned industries tend to face three difficulties: poor management culture, limited industrial investment, and workforce decay. Managerial culture in the national defense firm ROMARM and other state-owned defense companies remain Sovietized and state dependent. There has been, meanwhile, almost no recapitalization of industrial processes, with sites employing machine tools from the Cold War or even the interwar period. Finally, Romania’s state-owned defense industry has a workforce on average in its 50s, meaning without serious workforce investment, it will disappear in the next 15 years.3

Despite the difficulties Romania’s state industry currently faces, there are several bright spots.4 The national defense industry still produces reasonable-quality small arms, particularly the AK family of weapons. It has expertise in refurbishing old armored vehicles5; and prior to 2022, it retained legacy stocks of Warsaw Pact-standard weapons, many of which have now been donated to Ukraine. The Romanian legacy workforce, while badly aging, maintains a defense-industrial culture and bench of expertise in areas with significant military-industrial history, like Cugir in central Romania, where the government plant now exists alongside a civilian-financed small arms factory.

The aerospace and naval sectors have fared better than land forces production. Romania has three major shipyards — Galati (owned by the Netherland’s Damen Group), Mangalia (joint Damen-government), and Constanta (private) — along with a number of smaller Danube yards. The aerospace industry is largely focused on maintenance and repair, but Romanian aerospace company Romaero’s superior managerial culture to that of ROMARM, alongside sustained maintenance contracts for NATO, have allowed the state aerospace sector to survive.6

Romania’s private industry is far more productive than its state-owned industry but operates at a fraction of the scale of the latter. Private industry’s struggles are indicative of the broader European element in Romanian and eastern flank defense industrial policy, which the US must consider if it is to craft a coherent approach to the region.

Private Romanian industry focuses on small arms, ammunition, and high-quality subcomponents like optics and sensors, along with refurbishment and repair. Romanian private industry has significant scaling potential, particularly through partnerships with major defense providers in the European Union. Rheinmetall has purchased a Romanian automotive company outright and is financing Romania’s first indigenous powder production facility, due to open in 2028.

Although the Romanian government has kept much of its support for Ukraine secret, there are signs of the level of its assistance to Kyiv in the defense market. In July 2024, Ukraine and Romania signed a security cooperation framework that formalizes Bucharest-Kyiv defense industrial relations, even if the precise character of that relationship remains classified. This goes alongside Rheinmetall investment and Romanian military base expansion.

Private industry receives a very limited slice of any offset framework and struggles to raise independent capital.7 Most retail and investment banks will not work with private defense companies. American and European investors have begun to look at opportunities in Central and Eastern Europe. However, Romanians typically lack the connections to Wall Street, Silicon Valley, and the City of London that would be required to accelerate this process. The result is that private entrepreneurs finance defense industrial ventures from their own savings. This method, however, still faces banking access issues. It is impossible to secure a loan, or even a bank account in most cases, for a defense company with a Romanian retail bank, necessitating a years-long preparation process.8                        

European financing theoretically would change this model. The EU’s new defense industrial strategy has set a target of 40% European production for defense articles by 2030, and it also instructs member states to spend half of their procurement budgets on EU products. Assuming the new Commission does not scrap this strategy, this will require additional financing to work. In turn, the EU’s €8 billion European Defence Fund may well be coupled with more cash if the second Ursula von der Leyen Commission includes a defense commissioner portfolio. However, European cash has only been forthcoming in limited amounts. Most notably, Rheinmetall’s new powder factory — a $434 million endeavor — has received only $51 million from Brussels. As a major defense and automotive producer with an aggressive market expansion strategy, Rheinmetall is capable of financing the difference independently. But smaller actors will struggle to leverage EU cash if it is provided in relatively paltry amounts.

Recommendations

The United States can play a constructive role in addressing the aforementioned weaknesses of and challenges faced by the Romanian defense-industrial sector. The interviews conducted by the author this summer can be distilled into the following sets of recommendations:

Offset and private industry

US offset analysis and agreements with Bucharest must explicitly include provisions for Romanian private industrial development. As the above analysis has made clear, Romanian private industry retains enormous potential but struggles with capital access and competition with the inefficient but politically supported state-owned industrial establishment. The only way to compel a cultural change in both the state acquisition process and Romanian politics more broadly is to condition any US military sales on access to private industrial partnerships. Romanian bureaucrats in the economy and defense ministries must understand that the ROMARM and broader state-owned model as currently constituted is not sustainable in the short or long run, and that the US will not tolerate unproductive, antiquated procurement and production practices in a crucial strategic partner.

This helps ensure that the US can gain market access to any EU-driven defense-industrial bloc. If co-production is conducted in Romania, these items can be made exempt from any EU-mandated minimum purchasing requirements, since they are, after all, European in origin. The result is that the US will retain extensive linkages with major European firms and some market leverage.

Industrial processes

The US should allocate specific funding for industrial process recapitalization in specific state-owned enterprises in Romania. By targeting the most efficient businesses, and the handful that actually produce items that are competitive on the open market, the US can demonstrate to Romanian policymakers that it will support state-owned industry if it is marketized. An ideal partner for the US in the Romanian defense industry — apart from Romaero — would be the Cugir small arms plant, which has produced Warsaw Pact and NATO-standard equipment for more than a decade.

Funding new equipment at specific plants can occur well beyond the terms of an offset agreement. If conducted properly, this can also facilitate a new center of management for Romanian defense industrial development independent from the ROMARM director’s office and the Ministry of Economy.

Private capital

In the long run, a key task of the US State Department should be to improve the enabling environment for American private capital in the Black Sea Region and throughout the eastern flank. As it stands, Romanian private industry faces enormous capital generation barriers, stemming from Romanian and European banks’ unwillingness to lend to defense-related enterprises on the one hand and the difficulty in attracting Western European and North American private capital on the other. The US can influence this situation by working with firms already interested in defense investment more broadly, although it is unclear if at this point the State Department has the institutional capacity to take the lead.

Third-party partnerships

The US should target parts of the Romanian defense industry for third-party partnerships on critical systems. The most reasonable foreign partners are Ukraine, Poland, and Czechia, given their geographical proximity, shared strategic interests, and different stages of privatization and marketization of state-owned defense enterprises. US involvement should even go to the level of drafting memorandums of understanding and structuring contracts between Romanian firms and their international counterparts, even if the US is not involved in contract delivery.

 

Harry Halem, a 2024 a Title VIII Black Sea Research Fellow at the Middle East Institute, is a PhD candidate in International Relations at the London School of Economics and Political Science, a Senior Fellow at Yorktown Institute, and a Senior Fellow in Defense at the London-based Policy Exchange.

Photo by DANIEL MIHAILESCU/AFP via Getty Images

 

Notes

1 D (Former head of ROMARM and Romaero, currently head of a private defense-industry association) emphasized the degree to which post-Communist defense and economy ministers did not want to view the Romanian defense industry as a competitive enterprise.
 

2 C (defense-focused legal professional) and J (Romanian defense-focused legal professional), both of whom have worked on the FMS process, view its transfer of risk from the purchaser to the US as a well-intentioned but extraordinarily counterproductive policy. Q’s (former Romanian defense minister) rejoinder was that Romanian industry was simply not optimized to provide effective defense articles in the 1990s and 2000s, but the situation has become extraordinarily entrenched. K (head of a Romanian private arms firm) has struggled with major contracts given the proclivity to buy from abroad. Q, who served as defense minister during part of the period of the country’s accession to NATO, did not seem to think better coordination could influence the situation, simply because the Ministry of National Defense does not have control of the Romanian defense industry — the Ministry of Economy does.
 

3 L (head of a defense-focused trade union) touted a major training initiative that was concluded around five years prior — the initiative was a success, but the government never expanded it. However, L’s focus remained on the state-owned factories.
 

4 C, J, K, L, and P (director of a private Romanian Defense Firm) all identified the Cugir facility as particularly productive, while emphasizing the broader issues in the Romanian defense industrial workforce.
 

5 O and P have established a joint venture to meet additional demand in this area.
 

6 D explained this disparity by referencing the sophistication, size, and greater concentration of the Romanian aerospace industry prior to 1991.
 

7 Romanian capital access is not particularly limited. Per C’s observation, the Romanian economy has exploded over the past 10 years, and growth is likely to continue, with only unemployment remaining somewhat static. Romania is a popular destination for major Western European firms because of its combined reasonably low labor costs and well-trained human capital.
 

8 Both K and P had excruciatingly difficult experiences setting up their operations. In K’s case, a major Romanian retail bank almost canceled his account outright and repossessed the funds, a situation warded off only by luck and a well-placed friend in the national office. P highlighted that he and his business partners kept little of their money in the country’s retail banks and attempted to maintain secondary business interests to ensure stable lines of credit.

 


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