Ukraine crisis may speed defence buys, but budgets stay stuck

Wed May 21, 2014 1:36pm EDT

* Poland brings forward decision on missile system

* Lockheed Martin sees more demand in eastern Europe

* Western Europe defence budgets unlikely to increase

By Victoria Bryan and Cyril Altmeyer

BERLIN, May 21 (Reuters) - The crisis in Ukraine may prompt governments, especially in eastern Europe, to move more quickly on defence procurement decisions - but western Europe is unlikely to loosen its restraint on spending, industry executives said on Wednesday.

With eastern European states nervous about Russia after it annexed Ukraine's Crimea region and massed 40,000 troops on Ukraine's borders, Poland already brought forward a planned decision on a new multi-billion-dollar missile defence system.

Other countries close to Russia and Ukraine may also start looking to boost defences or order more helicopters, executives at the ILA Airshow in Berlin said.

Lockheed Martin, which heads the MEADS consortium bidding for the Polish missile tender, said it was seeing increased interest in the missile system, notably from eastern Europe.

"We're seeing greater interest throughout the region and throughout NATO," Marty Coyne, business development director for Lockheed's air and missile defence business, said.

"Should Poland make a decision, there's interest in eastern Europe in how they could participate in a component type system. So instead of a 'Polish shield' it would grow to an 'Eastern European' shield," he added.

Airbus Helicopters said the Ukraine crisis had led to increased enquiries for its products and could lead to new purchase tenders. Military helicopters are of interest because they are used to transport troops quickly from place to place.

"Everybody in Europe and outside Europe is evaluating the consequences of this crisis on defence equipment, on military scenarios and I believe this will have an impact on acquisition programmes, both in quantity and in nature," Guillaume Faury, CEO of Airbus Helicopters told reporters.

"Russia was more and more considered as a non-issue and now it's back," he added.

Russia said on Wednesday troops were pulling back from the border with Ukraine where eastern regions have fallen largely under the control of pro-Russian rebels.

A withdrawal could ease tension before Sunday's presidential election in Ukraine, but the crisis has left its mark on demand.

"If you move to the east, it becomes more perceptible, but it has not transformed into anything concrete or tangible," Christian Scherer, head of marketing and sales at Airbus Defence & Space, said.

ALL QUIET IN THE WEST?

While eastern European countries may be reviewing plans and pushing through decisions, it seems unlikely that western governments will be increasing defence spending any time soon.

Defence budgets in the five largest Western European markets - Britain, France, Germany, Italy and Spain - decreased by 1.3 percent in 2013 according to IHS Jane's.

In Europe overall, budget defences are expected to fall to $237 billion by 2018, compared with $242.8 billion in 2013, Jane's also said in the report published earlier this year.

Glynn Bellamy, UK head of Aerospace and Defence at KPMG, said while he thinks the crisis will accelerate decision making, it won't necessarily lead to an increase in overall spending.

"A threat such as that will inevitably cause people to reprioritise," he said. "But countries have realised they have to balance their books. If, for example, they have to increase spending on missile defence, does that mean they will have fewer military personnel?"

Germany's new coalition government is carrying out a review of its defence portfolio and the outcome is not expected until the second half of this year, frustrating many at the airshow.

Proposals announced on Monday by Airbus, France's Dassault Aviation and Italy's Finmeccanica for the development of a new European drone met with a cool reception from German defence minister Ursula von der Leyen, who said there was no rush to make a decision.

Germany did however announce a stopgap measure to provide more Israeli drones while Europe produces its own technology.

(Additional reporting by Sabine Siebold and Tim Hepher, editing by Louise Heavens)

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