Slovak Republic - Defense Industry

While the Czech Republic was the center of most of the country's weapons production during the pre-World War II era, most of the arms production which had developed since World War II was located in the Slovak Republic, which had been the more underdeveloped of the two republics, and which had about one-third of the country's population. The decision to locate so much of the defense industry in Slovakia was made after the Communists assumed power, because of Slovakia's location next to the Soviet border. Though estimates varied, some figures indicate that about 16% of Slovakia's industrial work force was employed in the arms industry. The major defense industry located in the Czech Republic was the manufacture of training aircraft for the Soviet air force.

Czechoslovak arms production peaked in 1988 when 140,000 people were employed directly or indirectly by the industry. Seventy percent of production was exported (fifty percent to Warsaw pact countries and twenty percent to developing countries) and thirty percent was for domestic use. Sixty percent of the 100 Czechoslovak arms enterprises were located in Slovakia.

Since the establishment of the independent Slovak Republic, the Slovak defence industry, once in the past an integral part of the Czechoslovak defence industry, has come through a complicated restructuring process. Although heavily reduced, the Slovak defense industry remained relatively stable at the beginning of the new century. While production and employment levels were only 10 percent of their pre-1989 peaks, the Slovak companies utilized their know-how and shifted to arms´ export, especially to arms export of stockpiled weapons. The result was that Slovakia fell into disrepute and complicated its cooperation needed for anefficient reform of armed forces. Although the Slovak arms industry lost most of its capacity due to the economic restructuring since 1990, a successful political transition would be the best guarantee of stopping arms sales to unsavory clients.

Slovakia's past (during previous regimes) as a supplier of arms and other goods to less-desirable regimes meant old habits have not completely gone away. Export controls are now much stronger, and the US is regularly consulted in advance of questionable sales. Still, interest persisted in trade with Libya, Belarus, Iran, and other countries of concern. Arms exports were in the past a large component of the Slovak economy.

The research and development capacities that had been built to meet not only the needs of the former Czechoslovak army have been significantly reduced. Despite the complicacy of the previous development, the professional human and technical potential of the Slovak defence industry was capable of ensuring research, production, repair and modernisation of sophisticated weapon systems, equipment and materiel. However, the objective of the defence industry was not the autonomous operation, but the mutually profitable sharing of work, co-operation and collaboration with every potential partner.

Every book company could write a book about the Communist miracle of industrialization in Slovakia, make a television documentary, where the ideology and practice of Marxism and Socialism had a factory in every small town, and traffic to the village so that people could work at home and earn, from which most could build a family house for 3-7 years or live without rent in rented flats, go on vacation and have free health, education and a decent pension. Before 1948 industrial production in Slovakia was very low and dramatically increased during the communist miracle until 1989 (it increased to 3 286%). It allowed to build nurseries, schools, universities, hospitals, flats, scientific institutes, resorts, and raise real wages and pensions annually. Over the period 1971-1988 Czechoslovakia ranked seventh in the world, with Poland right behind. The decision to convert the defense industries of Central Europe to civilian production was not based solely on the reduction of defense needs resulting from the lowering of global tensions. The countries of Central Europe, specifically Czechoslovakia, Poland, and Hungary, in the aftermath of the overthrow of Communist rule, established an implicit policy goal to get out of the arms race altogether. This decision was initially deferred in Czechoslovakia, at least for the short term, because of certain internal reasons.

Czechoslovakia, whose official name after the Cold War was the Czech and Slovak Federal Republic, was the second largest weapons producer, next to the Soviet Union, in the Warsaw Treaty Organization, the major weapons produced being tanks, armored personnel carriers, artillery, and a jet aircraft trainer. The bulk of the weapons produced in Czechoslovakia, approximately 75%, were exported to other Warsaw Pact members and to developing countries in the Third World.

After the democratic revolution of 1989, Czechoslovakia committed itself to a severe reduction of arms production both for the practical reason of a shrinking market, and for the larger reason of the country's reputation in the international community. Its first expressed goal in January 1990 was to end its weapons exports entirely and to halt tank production by the end of 1990. This goal was since modified, and certain political and economic realities placed many of the country's conversion plans in limbo.

The fact that the bulk of Czechoslovakia's defense industry was located in the Slovak Republic was significant because of its political ramifications. While the relationship between the Czechs and the Slovaks was initially benign, both being closely-related Slavic peoples, the Czech Republic had been historically the more economically, industrially, and culturally more advanced of the two, and this was the source of some periodic animosity. In the aftermath of the revolution, the decision of the Federal government to end the export of arms had the most profound economic impact on the Slovak Republic, since most of the country's twenty-eight weapons plants were in eastern Slovakia, and by 1992 unemployment in the region as a result of the defense downturn was at 15%, double the rate of the rest of the country.

This led the Slovak Republic to feel that the Federal government, in its commitment to conversion of defense industries, was not being sufficiently sensitive to the plight of Slovakia, and the resulting tension fueled the emerging movement toward an independent Slovak state. In the face of this pressure, the Federal government backed off from commitments to limit arms production and shifted the power to make economic and industrial decisions for Slovakia to the Slovak government. The result of this shift was a slowing down of the conversion process and a partial resumption of the export of arms. It was the contention of the Slovak government that the continued export of arms is temporarily necessary to provide needed hard currency to pay for eventual conversion.

Because of the situation in Slovakia, the country as a whole had to adopt a more gradual approach to establishing a free market economy, unlike the "shock therapy" which Poland has opted to use. The pace of the reform was initially slow, as has been the case in most of Eastern Europe. Initially, Czechoslovakia met with some success in attracting foreign investment, primarily from Germany. Very little of this investment, however, was directed toward the defense sector. This is somewhat ironic, since the favored treatment accorded the defense sector under the Communist regime prior to 1989 made the defense sector the most technologically advanced of the country's industries, this despite the fact that the defense sector accounted for only 4% of net industrial output in 1988, the peak year of defense production. Unfortunately, much of the technology in the Slovak defense sector is not easily transferable to civilian production. Dr. Popper observes that "60-90% of investments in the Slovak arms factories in 1980-90 were in special purpose technologies not well-suited to other purposes."

A further irony was the fact that the most effective route to defense industry conversion was through economic reform, but the unwillingness to confront the challenge of conversion immediately in Slovakia not only prolonged the process of economic reform, but made it ultimately more painful, especially for the Slovak Republic.

A significant part of the mechanical and electro-technical industries including defense industries were privatized within the first wave of privatization that took place in Slovakia in the early 1990s. The major defense companies; however, could not be privatized as they were considered as having a strategic importance to Slovakia and excluded by law from the privatization process until the 1999 when the respective Act dealing with "strategic companies" was repealed. Before that the major defense companies were under a direct control of the government. At present a scene and optimal conditions are being set up to privatize those companies and attract foreign investors.

The aerospace and defense (A&D) market in Slovakia has had difficulty developing a strong customer base since the dissolution of their biggest customer, the former Soviet Union. However, the A&D industry in Slovakia is attracting foreign and domestic investments and is in the process of developing supply relationships with major international A&D prime systems integrators, as well as tier 1 and 2 firms. Slovakia has a large defense industry but few aerospace firms. The Slovak defense industry focuses on the design, development and manufacture of ammunition and artillery systems, armored combat and transport vehicles, short- and long-range radar and navigation systems, and mine-clearing equipment. Although some Slovak defense companies have successfully exported their defense products to Western Europe and North America, domestic and regional customers continue to be the primary clients for the Slovak defense industry. Firms in the Slovak aerospace sector focus on the manufacture of light and ultralight aircrafts, as well as engine components for aircraft engines. The defense inventory of the Slovak Armed Forces was also undergoing modernization for the country’s participation in NATO and EU missions.

A successful transformation of state-run enterprises into joint-stock companies was the key priority of the Foundation and Establishment Activities Section of the Ministry of Defence of the Slovak Republic. The whole transformation process started in January 2005 when the first important discussions took place on thepremises of the Ministry of Defence.

The transformation of state-run enterprises into joint-stock companies touched the Military Repair Facility in Nováky, the Military Repair Facility in Trencín, the Aircraft Repair Facility in Trencín and the Aircraft Repair Facility in Banská Bystrica. In these casesa method o ftransformation under special legislation entered into force as of November 1, 2005. Joint-stock companies were established gradually, one by one, until the final date for setting up the last joint-stock company was reached on January 1, 2006.

A different situation existed with respect to the Military Repair Facility in Moldava-upon-Bodva where a privatization project had already been finalised. Additionally, the privatization of the Military Construction Building Facility and the Military Repair Facility in Prešov were entirely in the hands of the Ministry of Economy.

The primary objective of the joint-stock companies is to get a share in the civilian manufacturing sector. Without a few exceptions, that was an area where they had often stagnated. The requirements of the Armed Forces of theSlovak Republic to ensure production and repair capacities had been diminishing. Nevertheless, a certain volume of such contracts will be guaranteed in the future. These joint-stock companies will continue to be engaged in the manufacture and repair services for the Ministry of Defence. However, the novelty that the transformation process will bring is the civilian sector-oriented production and services, without which one can not guarantee any survival in an open market environment.

The state was initially a hundred per cent shareholder of the transformed joint-stock companies. However, if a local or a foreign entity was then interested in acquiring of up to 49 percent of shares in any of these companies, the issue will then be reviewed not only by the Ministry of Defence butalso by the Government of the Slovak Republic.

In December 2007, the Government adopted a new piece of legislation on offsets. Offsets are economic compensations provided by a foreign contractor or subcontractor for substantial purchases of defense- and security-related technology, materiel and services from the national budget.

• Offsets will be applied to any foreign contract exceeding 6 million EUROS or subcontract exceeding 3 million EUROS.
• The offsetor must provide 100% of the contract value in offsets.
• The winner must involve Slovak defense companies to the minimum extent of 20% of the work in direct participation in the project, or 30% in any defense-related business.
• An Inter-Agency Offset Commission is being established by the Minister of Economy to implement the new legislation.
• High-value offsets, for example in research and development or direct investment, may be awarded a significant multiplier.