On the surface, the international arms market may appear to be a mere forum for buying and sellings weapons. However, the actual workings of defense markets are highly nuanced and often involve geopolitics. For example, an arms sale between two nations is generally a sign of trust and collaboration, while arms embargoes indicate animosity between states. The process of purchasing complex or sensitive equipment usually involves months if not years of negotiations between the supplier and the buyer on issues such as price, profit margins, future maintenance, etc.
Inter-state military sales also tend to involve an “offset agreement.” The idea behind an offset is to balance the military trade equilibrium between the countries participating in the sale. Many governments worry that purchasing foreign equipment is denying their own country the opportunity to expand its manufacturing. To counteract this, the seller of the foreign gear agrees to set aside funds or resources to bolster manufacturing in the purchaser’s country, “offsetting” the industrial effects of awarding military sales deals to foreign nations. Offsets are usually tailored to the unique needs of the buyer and constraints of the seller; that is to say, there is no standard offset type. Methods for offset compensation range from an agreement to purchase co-produce the product, an investment in the buyer’s industrial base, an agreement to purchase goods directly from the buyer, etc. A full list of offset definitions, as drafted by the US’s Bureau of Industry and Security, can be viewed here. Oftentimes, high-value deals utilize a multitude of these techniques.
Because negotiations of large arms transfers are complex and time-consuming, the failure of such deliberations can be politically significant. Poland’s recent cancellation of negotiations for 50 Eurocopter EC725 Caracal helicopters exemplifies this.
The saga began when Poland requested a new medium-lift utility helicopter for its military. Poland operates domestically-produced PZL W-3 Sokół utility helicopters but was searching for a higher-performance offering to complement the relatively underpowered Sokół. Three competitors, Sikorsky (now part of Lockheed Martin), Leonardo (now Leonardo-Finmeccanica), and Eurocopter (now Airbus Helicopters), entered medium-lift helicopters into the competition. Sikorsky and Leonardo entered the contest through their Polish subsidiaries, meaning their aircraft would have been largely produced in Poland had they been selected. Nevertheless, Poland’s government awarded the contract to then-Eurocopter.
Downselecting to Eurocopter put the program on shaky footing; many were angered by the ruling Civic Platform party’s decision give the contract to a French firm over two Polish competitors. During Polish elections, the Law and Justice party alluded to a possible cancellation of the negotiation, indicating widespread popular skepticism of the program. Opposition parties railing against unpopular military contracts is not uncommon. Indeed, Canada’s prime minister Justin Trudeau frequently attacked the F-35 Join Strike Fighter as an example of poor decision making by the previous government, although he has thus far declined to withdraw Canada from the program.
Poland’s Law and Justice party eventually won the national election, prompting a major shakeup of the Polish military establishment. The Law and Justice party (abbreviated PiS), which runs on a Eurosceptic and nationalistic platform, had stated its desire to focus on bolstering military expenditures and awarding a larger portion of defense purchases to Polish firms. The Caracal’s then-underway negotiations came under strain as a result.
Once the PiS took power, the main point of contention between the parties was the offset deal. By this point, Eurocopter had been purchased by Airbus, a European aerospace firm. Polish officials wanted an extraordinarily generous offset of at least $3.5 billion, equivalent to the value of the sale itself. Evidently, this was not an acceptable stipulation for Airbus, because the deal eventually fell through, with the PiS government stating: “Poland considers the negotiations with Airbus Helicopters on an offset agreement related to the contract to purchase multi-purpose helicopters to be terminated. The contractor did not present an offset agreement that would sufficiently secure the economic interest and security of the Polish state.”
Eurocopter officials were taken aback by the sudden termination of the negotiations. While Eurocopter had not yet produced any helicopters for Poland, the drawn-out deliberations undoubtedly cost Airbus a fairly large sum. Airbus officials went as far as to accuse the Polish government of deliberately misleading them. Airbus CEO Tom Enders stated: “We spent a huge amount of efforts and money in recent years trusting that we were in a fair and professionally conducted competition. We will of course seek remedies.” Enders also lamented that “[n]ever [has Airbus] been treated by any government customer the way [the PiS] government has treated us.” This language is extraordinarily strong. Oftentimes mid-level officials will privately express disdain with the state of a deal, but for the supplier itself to call into question the credibility of the buyer in a public statement is rare. Even when deals fall through after many years, both sides generally adopt a diplomatic approach and refrain from jeopardizing future deals.
It is not uncommon for military sales to fall through; however, for a government to cancel a multi-billion-dollar program so late in negotiations is uncommon and leaves the seller down millions of dollars in administrative costs. Usually, selecting a supplier is a signal that the program will go through, and Airbus’s statements suggest that Polish officials blindsided them with the cancellation.
That could have been the end of the saga, but the repercussions actually extend further than a mere vendetta between an aerospace company and the Polish procurement establishment. Various European companies own shares in Airbus, so European governments had a stake in the negotiations. When negotiations between an American company and a buyer fall through, the fiscal impacts on the American government are relatively limited, as the US government itself is not a shareholder in any defense corporations. In Europe, however, the loss of a large contract has fiscal impacts on the states themselves; Germany and France each own around 11% of Airbus.
In this case, France responded more vocally than Germany; French president Francois Hollande went as far as to cancel a trip to Poland in the wake of the news. France had previously canceled the sale of two Mistral-class amphibious assault ships to Russia, partially as a result of Polish pressure. The failure of Poland to reciprocate by approving the Caracal deal likely increased the French government’s animosity towards Poland.
The whole debacle demonstrates how defense deals can be fraught with diplomatic implications. During the Ukrainian annexation crisis, European states stood in solidarity against Russia and entered negotiations to strengthen defense ties. The election of the PiS jeopardized these talks, but Poland’s cancellation of the helicopter program was the final nail in the coffin, at least for now. This should be a cautionary tale for governments worldwide: any negotiations with state-owned defense companies could severely jeopardize ties should they fall through. While the PiS may not regret its decision, any future Polish governments which need to engage with France diplomatically or financially will likely be cursing the PiS for years to come.