MILAN — The Hungarian government and its state-owned holding N7 have signed three joint ventures in December alone, part of a large-scale spending spree for new weapons and production plants.
The deals, involving major foreign defense manufacturers, come amid a reported shortage of personnel to operate and build the equipment.
Over the past few years, the European country has embarked on a journey to modernize and bolster its defense-industrial base, having neglected it for well over a decade. This has translated into an approximate $1.4 billion increase in defense spending for 2023, compared to the year prior, which means the budget is nearing $4.5 billion, per analytics business Janes.
According to statements by Hungarian Defence Minister Kristóf Szalay-Bobrovniczky, this will allow the country to raise military expenditure to 2% of its gross domestic product — a year earlier than expected. NATO set that goal for its members, of which Hungary is one.
Roughly 30% to 40% of the funds are expected to go toward capability development and upgrading military stocks.
The focus on military production comes as the Budapest government is increasingly isolated within the European Union. Some see Prime Minister Viktor Orbán as working to undermine the bloc, which is home to many of the defense companies seeking to do business in his country.
“The defense budget had been declining since the end of the Cold War, where at its lowest point in 2010, Hungary only had one operational military transport helicopter and less than a dozen combat-ready armored vehicles,” said Péter Wagner, a senior research fellow at the Hungarian Institute for Foreign Affairs and Trade.
That left the government with two alternatives, he explained: Either spend an enormous amount of money outside of Hungary, or bring in as much domestic production as possible. The country has primarily banked on the latter.
In the last month, the government and N7 signed three joint venture agreements:
- With Germany’s Rheinmetall for the production of explosives in response to a European shortage of ammunition.
- With Germany’s Dynamit Nobel to become the first customer of the RGW 110 HH-T anti-tank weapon.
- With the Czech Republic’s Colt CZ Group to supply the Hungarian military with firearms.
These deals, in a similar fashion to other ones, share common elements: a transfer of technology and capabilities, the building of an in-country manufacturing plant, local add-ins with future procurement of the weapons to the Hungarian Defence Forces, and the foreign entity retaining majority shares.
The European Union has long criticized Budapest over several issues, ranging from judicial independence to corruption to the misuse of EU funds. In a report published in July 2022, the European Commission concluded Hungary could no longer be deemed a democracy, having become an “electoral autocracy,” where European values are under systemic danger.
According to local advocates, what makes Hungary’s defense ecosystem an attractive destination for investors can be categorized into distinct pillars. Firstly, a number of international entities cite the country’s logistics infrastructure and central location — acting as a gateway for foreign firms to Central and Southeast European markets — as a selling point.
Secondly, Tamás Csiki Varga, a senior research fellow at the Budapest-based Institute for Strategic and Defense Studies, said that “procurements are strongly bound to long-term defense-industrial investment on a spectrum, from assembling through production to future joint innovation, rather than a one-time arms purchase.”
Varga added that the newly developed defense industry receives both government benefits and subsidies. The country further offers a relatively cheap and well-trained labor force as well as a lower production cost per unit than elsewhere.
In addition, “arms exports are not politically sensitive in Hungary,” he noted. “While conforming with international weapons transfer regulations, there are no political or domestic societal gridlocks that could hamper their exports to conflict regions.”
The U.S. Commerce Department’s International Trade Administration refers to Hungary as having a regulatory climate that makes it increasingly challenging to conduct business. Hungary is facing a budget deficit estimated by the agency as amounting to $8 billion; that could likely increase with the EU’s decision to freeze nearly €22 billion (U.S. $24 billion) in long-term subsidies, previously an important economic driver for the country.
Since 2016, the International Trade Administration reports, multinational companies have identified shortages of qualified labor as the “largest obstacle” to financing in Hungary.
Elisabeth Gosselin-Malo is a Europe correspondent for Defense News. She covers a wide range of topics related to military procurement and international security, and specializes in reporting on the aviation sector. She is based in Milan, Italy.