Europe slow to sign military procurement contracts needed to supply Ukraine with weapons

Europe slow to sign military procurement contracts needed to supply Ukraine with weapons
There are lots of pledges, but Western governments remain reluctant to sign long-term contracts with defence companies needed to invest into new production to supply Ukraine. / bne IntelliNews
By Ben Aris in Berlin June 20, 2023

The West has piecemeal sent Ukraine some powerful HIMARS and Storm Shadow missiles as well as a few dozen modern Leopard 2 main battle tanks. A squadron or two of F-16s are next on the list of arms on their way to Kyiv. But the West has been slow to sign off on the multi-billion long-term procurement contracts the defence industry requires in order to make in large volumes the nuts and bolts guns and ammo Ukraine so badly needs to actually win its war with Russia.

After more than 15 months of full-scale war in Ukraine, the West has yet to commit to the contracts with arms producers to build the new factories that are needed to keep supplying Ukraine with weapons. 

The West has sent some high-profile sophisticated precision missiles that are better than anything Russia has, which have caught the headlines, but the reality of the war in Ukraine is that is it little more than a war of attrition, an artillery duel of dumb shells and drones strikes. As bne IntelliNews reported, Ukraine is running out of ammunition and running low on artillery shells, armoured vehicles and other weaponry at a time that Russia is aggressively expanding its own military production.

Kyiv’s existing stores of Russian-made equipment are becoming depleted, as are the West’s own stockpiles, raising the risk of shortages by the end of the year.

The Ukrainian army was blasting through 180,000 artillery shell rounds per month, whereas before the war the US was producing only 14,500 shells per month, and EU about the same amount. Since the war started the US is now producing 20,000 rounds a month and has invested into new capacity that could increase that output to 90,000 rounds per month “eventually,” the Washington Post reports. 

"Ukraine will soon completely stop using its own equipment, as nothing will remain. All that they are fighting with and all that they are using all this is brought in from abroad," Russian President Vladimir Putin scoffed at the recent investment conference in St Petersburg. "You can’t fight like this for long.”

Nato spokesperson Oana Lungescu said the alliance was “continuing to work to rapidly address shortfalls in ammunition stockpiles, enhance interoperability and interchangeability and strengthen the transatlantic industrial base.” But little has been achieved. 

Lungescu claims that Nato allies like the US, UK, Norway and France have already signed large contracts, but declined to provide additional details when pressed by the Washington Post this week. 

Nato countries have still not scaled up their spending to just bring them to the recommended 2% of GDP all members are supposed to spend on defence, and remain very reluctant to commit to billions of dollars of long-term contracts so the privately owned defence sector can invest into new facilities.

The lack of crucial materiel comes as Kyiv launches the long-anticipated counter-offensive, after which it may be vulnerable to Russia’s own riposte.

Yet despite the dire situation on the battlefield, European governments continue to dither over doing the long-term deals that would allow the defence sector to tool up and produce the badly needed weapons and munitions for a number of reasons.

The European defence industry is facing numerous challenges after decades of underinvestment, mismangement and bureaucratic red tape have left it unable to meet the escalating demands of increased production. Moreover, competition from non-European countries has added extra pressure on the EU’s defence sector that is undermining the effort to supply Ukraine. 

Nato underspend

Nato members are supposed to allocate at least 2% of GDP to their defence budgets but only 10 of the 30 members have actually done so; the aggregate spending currently accounts for 1.8% of their combined GDP.

Poland was already spending slightly more than 2% before the war started but has seen spending soar to just under 4%, as in addition to helping Ukraine, it now intends to build the most powerful conventional army in Europe that can permanently face down the Russian threat.

The US has actually decreased the amount it spends on defence between 2021 and 2023 slightly to 3.4%, but as its economy is so large its nominal spend of over $800bn dwarfs that of the UK and Germany, the second biggest spenders in nominal terms, that both spend just under €50bn a year each. However, many of the other countries that have made big increases in percentage terms are small economies like the Baltic States and contribute little to the nominal spend. The US is still carrying the can for Europe’s security.

Russian military spending grew by an estimated 9.2% in 2022 and now makes up an estimated quarter of all budget spending (large parts of Russia’s expenditure is now classified), to around $86.4bn – still only a tenth of what the US spends a year. But that was still equivalent to 4.1% of Russia's GDP in 2022, up from 3.7% of GDP in 2021.

And unlike the West, Putin has put his economy onto a war footing. Military factories are running three shifts a day and working 24/7, while civilian facilities have been converted to boost production further, according to remarks made by President Putin at the recent St Petersburg International Economic Forum (SPIEF). Defence production has tripled in the last year, giving the economy a war boost that could see it start to overheat, warned CBR Governor Elvia Nabiullina at the same event. Russia’s federal budget report showed Moscow spent RUB2 trillion ($26bn) on defence in January and February alone, a 282% increase on the same period in 2021, Reuters reported. 

That is going to make a difference on the battlefield. Russia made 1.7mn 155mm artillery shells a year – the vital workhorse ammo in the current conflict – before the war, but that will rise to 2.4mn by the end of this year, the New York Times recently reported. Germany’s biggest arms maker is struggling to increase its production to 450,000 rounds and Ukraine has already largely used up the stock of 1mn shells the US gifted it at the outbreak of hostilities.

In 2022, European countries did increase their defence spending by 13% to a total of $345bn, but the commitment to step up defence expenditure has yet to translate into signed contracts for weapons and ammunition.

No contracts

The West massively outspends Russia on arming itself, but the production of those weapons is all almost entirely produced by privately owned companies. These businesses are reluctant to invest hundreds of millions of dollars into new facilities unless they get cast iron long-term contracts. On the other side of the table, governments are unwilling to commit to long-term contracts for millions of rounds of ammo and hundreds of tanks they won’t need if the Ukraine war comes to an end soon. Indeed, the West’s reluctance to sign the necessary contracts strongly suggests that Western governments intend to push for a ceasefire sooner than later.

While a few contracts have been awarded, the pace does not align with the industry's expectations. Building new factories is further constrained by limited access to scarce resources and skilled labour. The smaller defence industry has to compete for materials with the much larger car and electronic sectors. Finding and hiring enough skilled labour to man a new weapons factory is another costly bottleneck.

The problem of supply is made even more complicated as Russia remains a major supplier of many of the raw materials needed, such as aluminium and titanium. France’s aerospace industry has already started to stockpile titanium and is hunting for new supplies.

“There is no sense of urgency,” Jan Pie, secretary-general of the Aerospace, Security and Defence Industries Association of Europe, told Politico, and urgent reforms to the defence bureaucracy are still lacking. “We are in a peacetime mood with all these processes,” he said.

These business problems have been exacerbated by the chaos that reigns in Europe’s biggest arms producer Germany. As the third-biggest provider of military aid to Ukraine in nominal terms, its defence sector has fallen into disarray following over a decade of botched reforms that have left its procurement sector dysfunctional, Der Spiegel reported recently.

The new Defence Minister, Boris Pistorius, was appointed at the start of this year to tackle the problem, but progress has been slow. For example, of the 400-odd Leopard 2 tanks German has, only about a third of them are combat ready.

In the meantime, the Bundestag voted through an emergency €100bn for military spending, on top of the €47bn already in the budget, but this money too is being disbursed slowly thanks to the bureaucratic snafus.

Private sector scaling up

Until Western governments finally commit to new long-term contracts, the private companies have been doing what they can to boost production at their existing facilities and several have even started to invest some of their own money into expansion while they wait.

Companies like Sweden’s Saab, Norway’s Nammo and France’s Nexter, as well as Germany’s tank-maker Rheinmetall and missile-maker MBDA, have invested their own funds to expand existing production. Saab, for instance, has already doubled its production and intends to double it again by early 2025. France has also doubled the production of certain items, including weaponry sent to Ukraine.

Germany's Rheinmetall aims to increase annual output of artillery shells from 450,000 to 600,000 by expanding existing plants and integrating the takeover of Spanish company Expal Systems.

The European Union has pledged to deliver 1mn rounds of 155mm artillery ammunition to Ukraine in the next year, with all shells being manufactured within the bloc. In April, the European Commission introduced the Act in Support of Ammunition Production (ASAP), a €500mn initiative aimed at boosting industrial production and replenishing member countries' ammunition stocks. A Defence Production Action Plan is also expected to be approved at a Nato meeting in Vilnius later this month.

However, despite all the breathless reports of Europe “scrambling” to make more money available, little has changed on the ground. Large sums have been pledged but after 15 months of escalating warfare, not enough is actually being spent.

“We’re taking a bit of a risk,” Saab CEO Micael Johansson told Politico, noting his company is investing in infrastructure, personnel and raw materials. “Those are our own investments completely,” he added, “it’s so important that we get some sort of long-term contracts.”

Germany’s biggest weapons-maker Rheinmetall has been particularly proactive and is negotiating several billion-dollar contracts to manufacture ammunition for Ukraine. According to the company's general director, Armin Papperger, a contract could be signed very soon to produce more ammo, with the first batches being sent to Ukraine in July.

"The government has ordered 300,000 rounds [of 155mm shells], and this year we will deliver up to 60,000," Papperger added. “When it comes to tank ammunition, we have the largest production capacity in the world. There is no problem. The situation is different for artillery ammunition with a calibre of 155 millimetres. We can currently produce 450,000 rounds per year, but Ukraine alone needs up to a million rounds. With the Spanish manufacturer Expal, which we would like to take over in the course of the summer, we intend to expand our joint capacity to up to 600,000 rounds. Other manufacturers have to supply the rest.”

However, Papperger admitted in an interview with the German Editorial Network last week that little of the state’s €100bn of emergency money has been spent so far, and that to supply Ukraine with a million artillery rounds governments will have to dip into their own strategic reserves this year. But that should change as the year wears on.

“Not that many contracts were signed in 2022, you are right. This year, however, that will change. We are currently in the process of negotiating several very large orders: tanks, ammunition, soon anti-aircraft and aircraft. This involves long terms and many billions of euros,” Papperger said.

Rheinmetall expects to receive more orders for vehicles, ammunition, electronics and radar systems worth billions of euros annually. And in a new direction, the company will start making fuselage parts for the American F-35 fighter plane which the German government has bought. Papperger also said that in the coming months, Nato will publish more accurate guidelines on how much industrial capacity needs to be increased "to ensure the security of Europe and Nato for the next ten years."

Concerns are also rising that what contracts that are signed will go to non-EU companies, potentially undermining the investment case in Europe further. Countries like South Korea, Israel and Turkey are actively marketing their weapons to Ukraine and the European paymasters. French President Emmanuel Macron warned countries at the GLOBSEC conference in Bratislava in May that if they purchase non-European products that they may face future problems. Indeed, Macron has strongly advocated for beefing up Europe’s military to become less reliant on the US security umbrella.

South Korea has already emerged as a leading supplier after it entered into a joint venture with Poland to produce arms and ammo that will initially be used to supply Ukraine.

The US has traditionally supplied half of Europe’s military equipment needs and has made it clear that it expects to win a large share of the necessary procurement contracts. Brussels remains divided on the issue, but the US still leads in the most sophisticated systems like the F-35 jet fighter.