Is it possible for you to list the main output of the Latvian and Lithuanian defense industries? How would you compare the capabilities of the Estonian, Latvian and Lithuanian defense industries? Who plays the leading role?

It is necessary to clarify that none of the Baltic states possesses what could be termed as classical defense industry. With a few exceptions, where companies make products or render services solely to military customers and would not be able to repurpose them for some other customers, most of our industrial capacity, technology and competence is dual-use.

This means they are based on competencies, technologies and products developed in the civilian sector and then adapted for use by military customers and customers in the broader security sector (law enforcement, intelligence services, border security, etc.). In many cases, our companies do not even work directly for the military or security end-users but produce components and sub-systems or render services to larger foreign defense contractors. This is why you can see that their industry associations invariably refer to themselves as "defense and security" (sometimes also adding "aerospace").

We do not make tanks, fighter jets, missiles, anti-armor weapons or firearms. All three Baltic countries have a similar profile in terms of civilian science, technology and engineering, which means their strengths in responding to the needs of the military customers are also similar. Those are mainly in information and communication technology, electronics, sensorics, robotics, health and energy technologies and other such spheres.

Thus, each country has companies working to produce unmanned vehicles, ISR (intelligence, surveillance, reconnaissance) sensors integrated with command, control and communication (C3I) systems, cybersecurity and AI-enabled solutions, anti-drone and electronic warfare equipment, space technology, medical equipment and similar solutions, which are needed by both military and civilian security organizations.

Of course, there are some differences. Lithuania, for instance, has a world-class laser industry, which means there are companies seeking to leverage their technologies for the military sector. It has also managed to scale up its nano-satellite industry (as a result of which a leading company has been bought by Norway's Kongsberg).

Estonia leads the way in the development of ground robotics and maritime technology, with the corresponding benefits for military end-users. Latvia focuses a lot on 5G communication solutions as well as leveraging health technology for military needs. But overall, I would not distinguish one or another country as being far ahead in terms of some particular industrial capacities – they all have fairly similar profiles.

The COVID-19 pandemic and the war in Ukraine have prompted a greater focus on localized production and local services, thus shortening the supply chains and ensuring security of supply and assured quick access to maintenance and repair in times of crisis.

This is driving a wave of investments in all [the Baltic]  countries into both the maintenance and repair of military equipment (e.g. of CV90 infantry fighting vehicles in Estonia and Boxer IFVs in Lithuania) and local production (e.g. Patria armored vehicles in Latvia). This is already yielding important results in terms of local competence and capacity that can also be used for foreign customers (e.g. one Lithuania-based German company is repairing damage to German-made main battle tanks from the war in Ukraine). These constitute the beginnings of a genuine, classical defense industry.

However, the most important development based on the existing political will, the well-recognized needs of our armed forces, and geostrategic realities is yet to take place – the local production of a variety of munitions, from firearms ammunition to grenades, mines, to artillery ammunition and, perhaps in the distant future, some types of missiles.

There is only one functioning ammunition factory in the Baltics – a state-owned facility in Lithuania producing  small caliber (5.56mm and 7.62mm) NATO standard ammunition. All three countries are aiming to move forward and establish, with the help of foreign investments and competence, local production of ammunition – especially of 155mm artillery shells – but we are still some distance away from fully realizing these ambitions.

The Estonian defense industry accounts for less than one percent of the country's GDP. What share of GDP does the defense industry account for in Latvia and Lithuania?

Again, due to the fact that we do not have a "defense industry" in the strict sense, the estimates are rather imprecise, as companies producing products for military customers or foreign defense contractors usually also have product lines for civilian customers as well. So, counting the added value produced by our security and defense industry invariably includes revenues generated from serving non-defense customers.

The Lithuanian government estimated that the country's security and defense industry's turnover was around €700 million in 2022, which is 46 percent higher than in 2018. That will have certainly grown since 2022 due to the demand caused by the war.

However, this constitutes roughly just 1percent of the country's GDP. In the same year, all companies that are members of the Latvian security and defense industry federation generated the revenues of about €750 million, or around 1.8 percent of GDP. But in both cases these figures should be taken with a grain of salt, as we do not know how much of that was generated from security and defense customers rather than by selling goods and services to entirely civilian markets.

Do you think the mass production of FPV (first-person view) drones would be beneficial? What would be the main obstacles to such an undertaking?

FPV drones are playing an increasing role in warfare, even though we should not exaggerate that at the expense of investments into other capabilities, such as artillery or anti-armor weapons.

The problem is that the country that has absolute dominance in terms of production is China – hardly an ally of Estonia. The EU has identified this capability as an important industrial gap, so mass production in the Baltics would help address that, as well as increase the availability of these machines for our own armed forces in wartime and, more importantly, increase our ability to assist Ukraine in its ongoing fight against Russia.

There are several challenges. Some are the usual ones – money, people, knowledge – and can be dealt with through various financial support mechanisms, investment incentives, training programs, the sharing of know-how, but especially through the mechanisms that provide constant exposure of the designers and producers to the battlefield realities and dynamic needs of military end-users.

Baltic UAV makers (not only of the FPV drones but also military-grade specialized drones for various command levels) are trying to test their solutions in Ukraine. The Lithuanian Ministry of Defense has made it mandatory to pass a real-life electronic warfare test in Ukraine before considering contracts for such producers. Of course, this is easier said than done, as sometimes the Ukrainians are reluctant to share all the data from the battlefield performances of the equipment they use. However, overall, having a continuous feedback loop with the military end-users is key to ensuring FPV and any other mass market-oriented drones – most of which are designed with benign civilian uses in mind – are well adapted and useful in battle conditions.

One of the challenges is the supply chains of the components. Most of them are usually sourced from China (not just the drones themselves), but this is certainly not in the long-term strategic interest of the Baltic states, NATO and the EU. One Lithuanian producer said they have now managed to almost entirely source the components for their drones from on-Chinese suppliers, but it took time and made the end product more expensive. So, in terms of the bigger picture, we will have to overcome this challenge while also keeping the costs down.

In your opinion, is there scope to use local sources of production on a larger scale in the Baltics?

It depends. Security of supply and ease of access in crisis and wartime form just part of the commercial considerations and investment decisions by the private sector.

Even when those considerations are strong, it is necessary to be competitive in international markets and build on the competitive advantages and technological edge that our industries possess or seek to build. Our armed forces cannot be their sole customers. They are small and have limited (and sometimes rather basic) needs which would not justify large investments. Their purchasing power, albeit growing, is also not fully available to local industry – a lot of our defense investments are committed to purchasing weapons and equipment from foreign sources, as no local equivalents are possible.

Our industries will always need to look for profitable niches and opportunities for capturing broader international markets in those niches. In many cases, partnerships with large defense industrial companies will be required.

But the preferable solution is to build scale through the balance between national needs, international markets, and dual civilian-military use.

Why did German arms manufacturer and systems developer Rheinmetall go to Lithuania and not Estonia or Latvia?

It is the result of a long-lasting strategic partnership in defense between Lithuania and Germany that started with the acquisition of various weapon systems and equipment. It then continued in the form of the Germany-led NATO EFP battlegroup and is bound to expand with the permanent deployment of the German brigade in Lithuania.

The country has become very familiar to some of the main defense contractors servicing Germany-made equipment (e.g. the Lithuanian Defense Services, which maintains and repairs various vehicles, from main battle tanks and infantry fighting vehicles to self-propelled howitzers, is jointly owned by Rheinmetall and German heavy equipment manufacturing company KMW). Also, the country has become more familiar to the broader German industrial community, given that German companies made major investments in such areas as the production of components for the German automotive industry.

Given the massive gap between the artillery production capacities and needs of NATO countries and Ukraine, producers are looking for new opportunities to expand this production. They weigh up multiple factors, including the overall business environment, availability of qualified labor force, land and infrastructure, land zoning, environmental and safety regulations, and so on.

Overall, Lithuania has made great strides in improving its business environment, as a result of which it now ranks eleventh in the World Bank's Ease of Doing Business rankings (compared to Estonia's 18th place and Latvia's 19th). But all three are fairly similar in their business environments and have had successes in attracting foreign investment, including in defense (as confirmed by the recent announcement by AI defense company Helsing, defense, that it will establish an office in Estonia).

The Lithuanian government made this particular investment by Rheinmetall an absolute top priority and took steps to make sure that the process to obtain all the permits (some provisional) has been reduced to as little as half a year – down from the usual two years.

Large investments into the defense sector were also made free of any corporate tax for a period of 20 years. The authorities were quick to identify suitable state-owned land for the factory and negotiated effectively with its current tenants to vacate it.

The parliament has also recently passed a specialized security and defense law (modeled largely on a similar Danish law), further enhancing the transparency, predictability and mechanisms of interaction between the government and industry – something which will benefit the entire sector, not only this particular project. Getting Rheinmetall to invest was really a whole-government team effort, but even then, it was not an easy feat to accomplish.

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