July 1, 2001
This report identifies strategic options available to the Bulgarian government and its defense industry, as well as the United States and its NATO partners, for transforming and repositioning the industry for the 21st century and facilitating its integration into the NATO and European Union industrial base. Since other Partnership for Peace (PfP) countries that are aspirants to NATO membership face similar difficulties concerning their defense industries, many of the recommendations herein apply to these countries as well.

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The report is based on numerous interviews with officials of government entities, private sector firms, and nongovernmental organizations and a review of pertinent governmental and private reports and original documents. A number of the members of the Atlantic Council’s working group visited Bulgaria and several of its defense firms in April 2001. Given limitations of time and access to information, the report does not, however, attempt to set forth a thorough review of each firm in the Bulgarian industry.

Discussion in the United States and Europe about the enlargement of the Atlantic Alliance has tended to focus on the central questions of security and defense policy. The difficult challenges of economic reform faced by the aspirant members of the Alliance have for the most part been treated separately and often primarily in the context of the enlargement of the European Union. Such an approach fails to address adequately the special problems faced by those countries of the former Warsaw Pact which were major contributors to the arsenal of the Soviet empire and its dependents around the world and which were faced with the collapse of a significant sector of their economies when the Warsaw Pact and the Soviet empire collapsed. No country faced such problems in more acute form than Bulgaria, which at its Cold War height produced ten percent of its gross domestic product in the defense sector, but which never consumed more than seven or eight percent of its own defense production.

The opportunity to bring the economic, political and social problems associated with the reshaping and reorientation of the defense industry of Bulgaria into focus in connection with the issues presented by the country’s aspirations to join NATO was therefore welcome by the Atlantic Council. Our hope is that the presentation of this report will act as a catalyst for government and corporate action not only in the United States, but also in Western Europe. There can be little doubt that such action would well serve the goals of Western policy as they have developed since the collapse of the Soviet Union.

Executive Summary

Historically, in its former role within the Warsaw Pact, Bulgaria was a major producer of small arms and light weapons for export. At the peak in the late 1980s-early 1990s, Bulgaria produced more than US $1 billion of such weapons for export, representing nearly 10 percent of the country’s GDP. About 70 percent of such sales were to other Warsaw Pact countries, 25 percent to Soviet client states all over the world, and only 5 percent to domestic sources, principally the Ministry of Defense. Direct employment during this period was estimated at 115,000 persons, with an additional 400,000 in indirect support.

Since the end of the Cold War, the country’s defense industry has experienced massive reductions in production and sales – primarily as the result of two sets of events. First, the collapse of the Warsaw Pact sharply curtailed its traditional markets in Central Europe, the Soviet Union and the former clients of the Soviet Union worldwide. This resulted in significant industry downsizing and sizable debt from cancelled sales or unpaid obligations. Second, and more recently, the Bulgarian government’s promising new policy against the illicit export of small arms and light weapons – the industry’s major source of revenue in the post-Cold War era – has exacerbated its condition. The resulting loss of revenues and sales has created serious economic and political problems for the current pro-Western Bulgarian government.

Conclusion

No one approach exists for restructuring and revitalizing the Bulgarian defense industry. However, a combination of the approaches recommended above is likely to produce short-term improvements in terms of increased profitability and employment stabilization. This can provide the window of time necessary for governments and industries to take the longer-term actions needed so that the Bulgarian industry can be positioned, through transformation and full privatization, to exploit the real, concrete opportunities for long-term revitalization.

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