Discussions have been ongoing over several years on how to build the military industry in Latvia. Industry meetings have been organized to bring together the army with its needs, and entrepreneurs. There is also an improvement in the regulatory framework, which did not actually foresee the production of military goods.
Since the first Russian attack on Ukraine eight years ago, much emphasis has been placed on the fact that Latvia has local resources to supply the army in a crisis situation, also taking appropriate decisions. Now, gradually increasing the involvement of local businesses, armored vehicles are being assembled in Latvia, and ammunition is also produced.
One of these companies is Vairog EU, whose owner Juris Viktors Ozols, as an engineer, started the business by creating equipment for the production of military goods.
"The starting phase was more like building equipment, specifically in the military area, in the ammunition field. We produced equipment that produced shells, and we also produced small-caliber ammunition specifically for snipers and so on. And when we'd been doing this for several years, we figured out that we can increase our capabilities and took on charging, too,” Ozols said.
The Defense Ministry entered into an agreement with Vairog EU in 2019 for a period of five years on the establishment of a plant and the supply of ammunition. Manufacturing experience, reputation, and other capabilities were assessed. The Cabinet granted authorization to enter into a contract. The advance payment was EUR 8 million and the total amount of the contract envisaged was more than seventy million. In addition, the company must report on both the cost of production and the circulation of financial means, as well as the limits on profits. Ammunition prices were at the time were locked for the entire contract period.
Compared to other contracts concluded by the National Armed Forces (NBS), in the contract concluded by Vairog EU, munitions prices are 10-30% higher in individual positions, in others similar to those offered by intermediaries. However, AM pointed out that this is also a matter of supply in times of crisis. For example, the ordering of munitions from the NATO procurement agency should take into account even twice as high prices and deliveries only after a year.
Due to Covid and the war, supplies are also delayed from Vairog EU. “The situation is improving for us, we are now past the toughest period. And we see that our capacity, which we will pass on to AM, will increase significantly in the next few months,” Ozols said. “For us now, the biggest problem is supplies from abroad. And it is perfectly understandable in terms of Covid, with the war in Ukraine and with the product we are dealing with. It's high value right now around the world. And then we have newly entered this market [..] so we have had a very big fight with the suppliers and so on,” Ozols said.
In parallel, since 2021, NBS has also concluded contracts with other suppliers. Vairog EU has in the meantime been able to develop a production plant, start production and receive quality certificates, including compliance with the NATO standard. The accreditation shall be performed by a ballistics laboratory designed by them for munitions testing. It will also be open to the armed forces.
The military industry is subject to extremely strict regulation. Other issues posed to the industry are banks being reluctant to finance the sector, and a number of the most influential players in this market being at least partly owned by national governments. For those who have no such back, it is more difficult to get ahead. In order to help develop military production in Latvia, the government supported the idea of building a joint venture between the Defense Ministry and LMT in July.
LMT Board Chairman Juris Binde stated: “This corporate governance system, financial accessibility – all of that clearly gave the government the basis to decide that LMT could be the company that would organize the infrastructure and ecosystem of the military industry in Latvia.”
LMT is already cooperating with AM in various projects, as does NATO and the European Defence Fund projects, working with unmanned vehicles, drone management, command control, and other systems.
However, the Board of LMT, comprising four representatives on the Swedish side and two members of the Latvian State delegated council, has not included the item on the agenda. “The first reaction may not be exactly what we had planned. But nothing is over now. The elections are over now, the new government will be drawn up, and I think that the Latvian State will also vigorously defend its interests directly in the field of defense. And will also convince all shareholders that such a decision must be taken,” Binde said.
Defense Minister Artis Pabriks said he discussed this with the Swedish Defense Minister: “I said we have a problem here because Swedish shareholders are not in any way interested in even examining this need for LMT to cooperate with us in this capital company.”
However, there was also no clear message from the members of the Council on the Latvian side about what had been planned. Moreover, for more than a year now, the Council has lacked one representative on the Latvian side. The candidate was found in February, but it received a negative opinion from the security authorities and a new search has not yet been announced.
Minister of Economy Ilze Indriksone (National Alliance) said: “The Council supports and the representatives of the Latvian side want this company to be founded, but in order to make this kind of decision, it is important that the other party wants it. It cannot be decided if only one party is willing to do so, which is essential for the development of the company, and this is one of those decisions. It might have been that there had not been enough preparations to convince the owners on the other side that this would be the right way for this company to set up a joint venture.”
This year, AM's total procurement from different types of suppliers for small-caliber and gunslinger ammunition is around €9 million. €12.5 million are planned next year and around €15 million next year.