Rheinmetall’s Baltic Entry Exposes Divisions Over Defence Deals

Facing Russian threat, Lithuania and Latvia have rolled out the red carpet for the German defence giant “Rheinmetall” to build artillery ammunition factories. Estonia opted for an open competition, hoping to secure more favourable terms.

When Lithuania broke ground on a joint ammunition plant with Germany’s arms producer Rheinmetall (RHM) last November, it turned into a national spectacle. The president and head of government, alongside with other ministers, lined up with shovels. Local news agencies later ranked the factory’s construction among the year’s most significant developments.

Latvian Prime Minister Evika Siliņa – who met RHM chief Armin Papperger again in the Munich security conference this month – thanked him for investment in Latvia’s security, resilience and economic development. 

Siliņa has as much personal credibility at stake in the success of Latvian plant as country’s strategic interests. It was her talks with Papperger at Munich last year that set it in motion.

At the same event, the CEO of RHM was also seeking out Estonia’s minister of foreign affairs. According to Margus Tsahkna, Papperger was worried that Estonia’s defence officials had been ignoring RHM pitches to build a similar 155mm shell factory in the northernmost Baltic country.

What follows are two strikingly different approaches. Latvia and Lithuania have welcomed RHM and its terms with open arms, eager to secure its factories. Estonia, in turn, has judged the conditions unfavourable and is seeking an artillery ammunition manufacturer through an open tender instead, a joint investigation of Re:Baltica, Delfi (Estonia) and the Lithuanian public broadcaster LRT shows.

Russia’s threat is felt acutely across the Baltics, fuelling public’s anxiety and shaping states’ policies. To protect themselves, the three countries have doubled their defence budgets, but also are seeking stronger NATO presence – from over 10,000 alliance troops to military investments.

There has been little public debate about the conditions of these deals, partly because few details have been made public. Russia’s war in Ukraine has created a climate in which there is willingness to accept almost any terms in the hopes that this would deepen NATO’s – in this case Germany’s – stake in Baltic security. In this atmosphere, even probing questions about the deal’s conditions can be seen as undermining national security.

51:49

Lithuania was first to bring RHM’s attention to the Baltics. Having heard that the company was looking at Hungary and Ukraine, Lithuania’s Deputy Minister of Energy and Innovation contacted it. “The competition for investment was fierce, so we looked at how to ensure that Lithuania was the first choice in the Baltics,” said a source from the then ruling coalition.

The project resulted in a massive 340-hectare construction site near Baisogala in Lithuania’s Radviliškis district. The planned investment in the 155mm shell factory is estimated at €300 million. Of that, RHM would invest at least €133 millions, according to news agency BNS (the rest would be invested by state-owned Epso-G Invest and the Giraitė arms factory). RHM has pledged to create 250 jobs and production is expected to begin in 2027.

The plant will be operated by a joint venture in which the German partner will hold 51 percent of the shares – giving it control over all strategically important decisions – while Lithuania’s state companies will own the remaining 49 percent.

“That was the management model they proposed. We discussed whether the state should retain control, but there were no major disagreements,” the ex-government source said. “Since the company has the expertise, leases the land at market price, and RHM’s presence is in our strategic interests, we agreed that RHM would take a 51 percent stake.”

In addition, Lithuania will provide the necessary infrastructure – including roads and related facilities – and has committed to buying back a guaranteed amount of the ammunition produced each year. 

Same in Latvia

The factory in Latvia will be built on virtually identical terms. RHM will have a joint venture with State Defense Corporation (VAK), a recently established state-owned company responsible for managing Latvia’s investments in the military industry. RHM will have 51, Latvian state – remaining 49 percent of shares.  This ownership structure “has proven successful in many other joint ventures,” RHM spokesperson Jan-Phillipp Weisswange told Re:Baltica via an email.

Economy Minister Viktors Valainis told Re:Baltica that this share distribution was a prerequisite for RHM to agree to a joint factory in the first place. Another condition was that the partner had to be the state, not a private entrepreneur. “They would not consider other options,” he said. “RHM participation in this company is of greater importance. I (..) not had any fear that RHM would somehow try to outwit us in order to achieve dominance.”

Investment professional Kristīne Bērziņa, who for many years led the Latvian Private and Venture Capital Association, opined that the share split alone means little, since the most important provisions are set out in the shareholders’ agreement. “As a minority shareholder, Latvia must ensure its rights in key areas such as influence and veto power over company management, what happens if the ownership structure changes, if shares are sold, or if additional capital is needed. You need the ability to shape these decisions, and I see no reason why we cannot have this discussion in public,” she said. 

Latvian factory’s costs are estimated at €275 million, with Latvia contributing €134 million. The government insists that the reason to get involved is as much strategic as profitable. “We have made calculations for both optimistic and pessimistic scenarios. Under any of them, we remain in positive balance, and this is an economically justified investment,” Valainis said. 

The basis of his optimism are the calculations that after initial warm-up, exports could generate around €300 million a year, reaching a total of €3 billion over the next decade. Ministry’s state secretary Raivis Bremšmits claimed the projected return would amount to three euros in earnings for every euro invested by the state.

Is there a catch? 

Apart from investing in a company for minority shares and building a surrounding infrastructure around the plant, both Latvia and Lithuania have committed to buy part of the produced shells. It remains unclear how they will ensure that the value matches the market price – or that the ammunition will not simply end up stockpiled in warehouses.

“We may have a Covid-19 vaccine phenomenon: how to calculate the purchase volumes wisely so that we have guaranteed protection, but not huge, rusting warehouses and large expenses to cover these obligations,” Rolands Valiūnas, who heads Lithuania’s investors organisation and is  partner at the country’s largest law firm, said during discussion in Delfi.  

While negotiations are ongoing, Latvian government is not disclosing the details of the deal. Bremšmits said the buy-back commitment would amount, “in the optimistic case, to 1:5, 1:7, somewhere in that range”. In turn, the minister emphasised that the guarantee works both ways as RHM also assumes export obligations. “We ask for your understanding that we cannot provide information about internal company issues,” RHM spokesperson told Re:Baltica.

Estonia’s “no”

Despite RHM lobbying of the Estonian government, the answer was polite rejection.  According to three sources with knowledge of the rationale behind that decision, RHM terms – which are similar to those of Latvia and Lithuania – were deemed as too aggressive. 

“The terms of the offer were such that a very large sum would come out of the pockets of Estonian taxpayers – first for the purchase of a share, then for the obligation to buy from them – and it would not have involved the acquisition of a majority stake, as we are now seeing in the case of Latvia,” Defence Minister Hanno Pevkur (Reform Party) told public broadcaster ERR.

Instead, the country announced a public tender for the plant’s construction and encouraged RHM to participate as well. “We had an open competition where different 155mm manufacturers participated, but Rheinmetall did not,” Pevkur said to Delfi.

Now Estonians are in negotiations to build a factory with another, yet unidentified, manufacturer. Even though the announcement of the deal has been postponed for several months, the minister remains optimistic. He stated that if the state had gone with RHM conditions, Tallinn’s investment would have been at least 100 million euros plus an obligation to buy production in a similar volume. 

The deal Tallinn is currently negotiating with unnamed manufacturer contains none of that – Estonia will only provide land and surrounding infrastructure. The producer will be able to receive the official large-scale investment grant worth up to 20 million euros from the Estonian Business and Innovation Agency.

Rather than entering bilateral deals with major defence companies that can dictate favourable terms by exploiting the Baltic fears, Estonia is focusing on developing industrial parks. However, it had a significant advantage compared to its Baltic neighbours: the country has some of the largest 155mm shell stocks reserves in Europe and its needs are in significant part covered by already concluded contracts.This means it was looking for a strategic partner to produce large caliber shells, but not rapidly fill its warehouses. 

Latvian Defence Minister Andris Sprūds (Progressives) won’t comment on the Estonian approach saying he does not know details on offers it received. While the talks with RHM are ongoing, he refused to discuss in detail as premature. 

Estonian foreign minister Margus Tsahkna insists the government shouldn’t only consider face–value metrics when deciding on long term military industry strategies and partnerships. “We need to also consider the price of political commitment that one or the other contract would mean, be it with Rheinmetall or any other European industry,” he said. 

So far, Baltic deals with RHM have escaped both public and parliamentary scrutiny.

German Green party’s defence specialist on the budget committee Sebastian Schäfer has long been critical of the arms manufacturer’s actions: “Rheinmetall is not a charity organization,” he said. “For the management of these companies, it’s all about profit, even if their marketing gives a different impression.”

He recalled the experience from previous RHM projects in Ukraine where “the announcement was always big, but it took a long time to materialize.”  Schäfer also called on the German government to be more open, particularly in terms of communication. “If you want to build a European champion,” he said, “then please do so transparently.”

 “We have not heard anything from the Ministry of Defense, except for what was publicly announced about the memorandum,” Raimonds Bergmanis (AS), head of the Latvian parliament’s defence committee which is supposed to oversee the military spending, told Re:Baltica. “But let them come and build. RHM is a big player.”

After laying the foundation stone for the first factory, the Lithuanian government announced that it had begun negotiations with RHM on an even larger project — an artillery ammunition competence centre. Talks began in January, with three government ministers representing Lithuania at the negotiating table.

“At the moment, no one can say which approach will ultimately prove more correct or more profitable,” Bērziņa concluded. “From a regional point of view, the main thing is that production finally begins and things start moving forward.”

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Authors: Sanita Jemberga (Re:Baltica), Holger Roonemaa (Delfi), Indre Makaraitytė (LRT)

Cover photo: Gatis Rozenfelds (State Chancellery)

Illustrations and technical support: Madara Eihe

Social media: Inese Braže and Ieva Strazdiņa

Baiba Vīksna in Riga and Maria Christoph and Sophia Baumann (Paper Trail Media) contributed to this report.

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