The National Defence Ministry has notified military technology manufacturers that it might triple orders this year given the security crisis in the region caused by the annexation of Crimea by Russia and the continuation of the turmoil, which seems to become worse.
To increase orders, the ministry needs a government decision raising its budget for this year, which amounts to 6.8 billion lei (EUR1.5 billion) or a little more than 1% of the country’s gross domestic product.
In comparison, Ukraine used to allocate about 2.7% its GDP to defense spending prior to the conflict with Russia, while Russia allocated about 3.8% of its GDP and the USA some 3.9%.
“The National Defense Ministry notified us before Easter to be ready to get two to four times bigger orders in terms of value in two or three weeks. The companies to get such orders are Avioane Craiova, Aerostar and IAR Brasov,” says Mihail Toncea, one of the main shareholders of Aerostar Bacau (ARS.RO) and chairman of the Association of Romanian Aeronautical Companies (OPIAR).
“Still I think Defense Ministry cannot go over the budget approved for this year so before everything else, there should be a government decision increasing its budget.”
Not only the Air Force but also the Army and the Navy plan to increase spending, he added.
If the intended military spending increase does happen, the companies in this industry will be among the few beneficiaries of the crisis in the region.
Prime Minister Victor Ponta early in April announced the government was considering boosting the budget allocated to the Defense Ministry to 2% of GDP by 2017.
Seven or eight years ago Romania used to spend more than 2% of GDP for military purposes, but such spending has been going down every since to half of what it once was.
“As a NATO member Romania is required to maintain defense spending at 2.13% of GDP. Still, other NATO members have cut spending during the crisis of the last years, as well,” Mihail Toncea said.
Aerostar is the largest Romanian-held aeronautical company and has been forced to scale back domestic operations in recent years due to the dwindling military allocations by the government. While military orders coming from the government accounted for more than half of its revenue before the crisis, last year, exports generated 86.3% of its sales. The company posted RON212 million revenue and RON14.8 million net profit in 2013.
The management of state-run IAR Brasov, says it, too, was notified about a potential increase in orders from the National Defense Ministry this year.
“The National Defense Ministry contacted us to inquire if we can provide about EUR10 million worth of repairs and maintenance for Puma helicopters and other support services and we replied we could give them whatever they needed,” says Neculai Banea, general manager of IAR Brasov.
“Such orders need approval from the government, it is the only one able to increase the budget of the Defense Ministry.”
Additional orders from the government would be a breath of fresh air for the helicopter manufacturer this year, badly hurt the by the slashing of the military spending. From RON200 million revenue in 2008 it went down merely RON35.4 million in 2013 and laid off some 600 people in the meantime, retaining only about 300.
IAR Brasov’s most important clients are the National Defense Ministry, the Ministry of Administration and Interior and the Romanian Intelligence Services. They all use IAR316B Alouette III and IAR330 Puma helicopters, for which the company provides maintenance, repairs, upgrades and spare parts depending on the needs and funds allocated, which have significantly declined in the last few years.
The defense budget cut also showed in the steep decline of the revenue of Avioane Craiova, once one of the main competitors on the Romanian aeronautical market. Its revenue shrank to RON3.2 million in the first nine months of 2013, while losses were three times that, RON11.5 million.
The budget the government used to allocate was enough for IAR Brasov to build helicopters and Avioane Craiova to build airplanes, but neither has made any helicopter or plane in the last few years due to the budget cuts, merely providing maintenance and upgrade services.
Romania ranks 51st in a ranking of world military powers compiled by globalfirepower.com website and 57th in the world by 2013 GDP. (EUR1=RON4.4517)
(English version by Loredana Fratila-Cristescu)