Will Hungary be the center of armaments in Europe?

Key Findings

  • Rheinmetall is building tank and ammunition plants in Hungary
  • Orban is eying the defense industry as a boost to the economy

Hungarian Prime Minister Viktor Orban refused to send weapons to Ukraine after Russia’s invasion, saying he didn’t want his country to be dragged into a war. Last month, he hit out at the German government for agreeing to dispatch tanks

But that’s not stopping the European Union’s populist-in-chief from trying to turn Hungary into a weapons hub to profit from what’s become one of the most lucrative industries in Europe. And that means deepening ties with corporate Germany, even as he needles politicians in Berlin.

Rheinmetall AG is building three factories in Hungary to make tanks, ammunition, and explosives. Initial production will go toward orders from before the war to upgrade the Soviet-era equipment of the Hungarian military. It will also lay the groundwork for a new Hungarian defense industry, which Orban hopes will soon become a major arms exporter.

The blueprint is Hungary’s auto industry. Mercedes-Benz Group AG, BMW AG, and Volkswagen AG’s Audi factories have become linchpins of the local economy. Officials make no secret that new investment may also help shore up political ties with Germany at a time when Orban’s priority is to unlock more than $30 billion in funding that the EU suspended over corruption and rule of law concerns.

“The defense industry will add another cylinder to our economic engine, similar to what we have already accomplished in other parts of the economy, such as the car industry,” and “I only hope that it improves the German-Hungarian relationship even further.”
Defense Minister Kristof Szalay-Bobrovniczky said in an interview in Budapest.

Relations between Germany and Hungary have been fraught in recent years over everything from the EU budget and LGBTQ rights to the response to the war in Ukraine and Orban’s coziness with Vladimir Putin. Away from the political optics, though, the embrace between the Hungarian premier and German executives has been growing tighter.

Since Orban’s return to power in 2010, foreign direct investment by German companies — for long the most important foreign source of jobs — has continued to surge, despite rising concerns about corruption and the erosion of the rule of law under his leadership.

Last year, as the EU suspended Hungary’s funding, Mercedes-Benz and BMW announced their involvement in $10 billion of investments in a country that’s now ranked the most corrupt of the bloc’s 27 members by Transparency International.

relates to Europe’s Rebel Leader Woos Germany to Profit From Arms Race
The Rheinmetall Infantry Fighting Vehicle.Source: Rheinmetall AG

Rheinmetall said it’s investing “three-digit million euros” in Hungary as the maker of the high-tech Leopard tank expands its footprint in Europe. While setting up factories in countries that place military orders isn’t unique, Hungary is different because it’s part of a joint venture with the state. 

Orban’s government co-financed the Rheinmetall plants for an undisclosed sum. One of the three factories will produce the Lynx armored infantry vehicle, of which Hungary has ordered 218. 

The company said the importance of a market isn’t measured just by order volume. “The willingness of both sides to jointly develop a long-term strategy and partnership is equally relevant,” it said in a statement to Bloomberg.

There’s also the possibility, down the line, that Hungary will be used to ship arms to Ukraine. Rheinmetall’s plans include potentially sending the next-generation tank, the Panther, to Kyiv “in 15 to 18 months,” Chief Executive Officer Armin Papperger told Handelsblatt Business Weekly this month. They could be produced in Germany or Hungary, he said. 

Chancellor Olaf Scholz’s government is trying to convince Rheinmetall to choose Germany over Hungary as the location for its future weapons and defense factories because of the jobs, according to a person familiar with his economic strategy. Senior German officials plan to discuss weapons and munition procurement with Papperger on the sidelines of this weekend’s Munich Security Conference, a person familiar with the talks said.

But what’s mission-critical is that manufacturing is ramped up quickly and the weapons are made within the EU’s single market, even if that’s Hungary. 

Former Chancellor Angela Merkel was seen for years as shielding the Hungarian nationalist from tougher EU scrutiny for the sake of European unity, while Orban openly set about dismantling liberal democracy. By contrast, Scholz has been supportive of tough EU financial penalties against Orban’s government.

Germany's Chancellor Angela Merkel And Hungary's Prime Minister Viktor Orban News Conference
Angela Merkel and Viktor Orban will be at the Chancellery in Berlin in February 2020. Source: Bloomberg

The real leverage is corporate, said Tamas Varga Csiki, an analyst at the National Public Service University’s Defense Institute. “At the end of the day, German politicians are happy when their businesses are happy,” he said. “Like the car industry, the defense industry will be another way to protect the Germany-Hungary relationship from being destroyed by political differences.”

For Rheinmetall, the deal with Hungary to effectively foot the bill for building the plants in return for a share of the profits is an opportunity to push Germany for something similar. The trouble is that appetite in Scholz’s coalition for such a close alliance is limited, though negotiations are fluid, said two people familiar with the matter.

CEO Papperger has floated the idea of locating a new ammunition powder factory in Hungary instead of Saxony unless his terms are met, the people said. They declined to be identified while talks are ongoing.

For now, the Lynx factory is expected to gear up into mass production in July. The other two plants will produce 30-millimeter caliber ammunition for Rheinmetall’s Lynx infantry fighting vehicle from 2024. 

There are also plans to produce projectiles for the Leopard 2 main battle tank and calibers for the self-propelled howitzer 2000, the type of weapon Germany has sent to Ukraine. 

Hungary’s emergence as a potentially key weapons hub also sets up a political conundrum for Orban, namely, whether he will reverse a position to supply arms to Ukraine.

The first few years of output at the three Rheinmetall plants will go toward meeting the Hungarian government’s order, Defense Minister Szalay-Bobrovniczky said in the interview late last month. He declined to speculate about a change of policy later on.

While Ukraine has become the main export market for arms, Hungary’s importance for Rheinmetall may remain even after the war next door. The rules for exporting weapons made in the country are less strict than in Germany, where the Nazi past has led to strict control of export licenses, says the analyst Csiki.

“No one is going to protest in front of Parliament in Budapest if the weapons produced here end up in a conflict zone,” he said.

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