Ivo Kesler // 13 August 2025

Sharing over a 600-kilometre-long border with Ukraine, Romania is at the heart of Europe’s evolving geopolitical tensions. Yet, at a time when security concerns on the eastern flank of the North Atlantic Treaty Organization (NATO) bloc are escalating, Romania’s defence sector – anchored by the state-owned giant ROMARM – finds itself severely underprepared.

ROMARM, a legacy of the centralised communist economy, epitomises inefficiency. The company’s inability to adapt to contemporary requirements is particularly striking when viewed against the backdrop of Romania’s recent defence budget increases. But increased funding has failed to realise a meaningful modernisation of the state-owned holding. Plagued by outdated facilities and an ageing workforce (50 years old on average, with some workers continuing well into their seventies), the production plants rarely operate at full capacity. This reality sharply contrasts with Romania’s strategic necessity: a responsive, dynamic defence sector.

In the broader European context, the EU has introduced several initiatives, ranging from the Act in Support of Ammunition Production (ASAP) to the €800 billion ReArm Europe Plan/Readiness 2030. While these programmes offer an unprecedented pooling of resources, they risk overlooking the foundational issues that plague ROMARM. In essence, these top-down funding efforts may be futile if the underlying corporate governance and operational models remain unchanged. It is, therefore, clear that simply increasing budgets cannot compensate for the failure to institute a comprehensive overhaul of ROMARM.

The inefficiencies within ROMARM are not merely operational; they are structural. Corruption scandals have further damaged its already precarious reputation, demonstrating that state ownership encourages political interference and financial mismanagement. A recent investigation exposed opaque procurement procedures that facilitated widespread embezzlement and kickbacks across several ROMARM subsidiaries. Notably, a 2023 probe into the over-invoicing of weapons systems at the Cugir Arms Factory revealed a troubling pattern of financial misconduct and lack of oversight. These scandals have not only eroded public trust but are also emblematic of a culture in which political appointments and patronage flourish unchecked. Corruption and mismanagement are, of course, the norm in Romanian state-owned enterprises (SOEs). But when such dysfunction intersects with matters of national and European security, the consequences can be far more than just financial; they can be genuinely perilous.

Furthermore, the absence of genuine competition due to state control has throttled innovation and suppresses research and development, leaving Romania inadequately equipped to manage today’s sophisticated defence challenges. We just need to look at ROMARM’s dismally low investment in innovation. In 2023, the government promised to allocate 2% of its $8.4 billion defence budget to research and development. Now compare this figure ($168 million) with the whopping $403 million spent by Germany’s private-sector defence firm, Rheinmetall, on research and development in 2022. The defence research and development budget of Romania is half that of a single private company in Germany.

Moreover, Romania’s offset requirements – a practice mandating that foreign companies reinvest a substantial portion of their contract value back into the local economy – have inadvertently created barriers rather than incentives to investment. Intended to attract foreign investment and stimulate domestic production at the same time, these offset obligations frequently make Romania a less attractive market for international defence firms, deterring the innovation and external expertise essential to revitalise the industry.

Further complicating matters is the fragmented structure of the defence sector itself. ROMARM, as the largest state-owned conglomerate, comprises 15 subsidiaries; but it coexists alongside other state-owned or partially state-owned firms. Romanian legislation mandates that the state retain at least a 50% share in all defence companies, curbing the potential for broader private investment. Governance structures are equally complex: procurement policy is overseen by the National Agency for Public Procurement, strategic planning and execution fall under the Ministry of Defence, while the Ministry of Economy has administrative control over state-run enterprises. Additionally, any defence contract exceeding €100 million requires parliamentary approval, adding yet another bureaucratic layer that hampers agility in procurement.

So, how is it that, more than 30 years after the fall of communism, Romania’s defence sector continues to function in such an outdated and inefficient manner? The answer lies in persistent institutional and political–economic barriers. A deeply entrenched preference for state ownership enables extractive institutional structures, where political elites benefit from retaining control over strategic sectors. This status quo is reinforced by political appointments and a legacy of political patronage within state enterprises. This is a hallmark of extractive institutions, as described by Acemoglu and Robinson (2019). This environment discourages genuine reform, as vested interests seek to preserve the status quo, which benefits those in power.

This stagnation is extremely hard to overcome, but not impossible. The EU offers clear examples of how a free-market approach can accelerate modernisation in the defence sector. Germany’s Rheinmetall and France’s Thales are exemplary success stories, demonstrating that private ownership significantly boosts efficiency, drives technological innovation, and expands employment opportunities. Rheinmetall, in particular, illustrates how private enterprises can swiftly adapt and respond to rapidly changing demands of modern warfare, substantially contributing to NATO readiness. The path forward for Romania is clear: It must decisively break from the outdated, centralised model. Privatisation is not merely an economic imperative; it is a strategic necessity. A privatised defence sector, free from bureaucratic constraints and political patronage, can rapidly innovate, scale up production, and meet NATO standards and EU strategic autonomy goals effectively. Such a competitive approach would help Romania leverage entrepreneurship and innovation in the market, qualities notably absent in state monopolies.

Romania stands at a critical crossroads now. The question is not whether it should pursue reform, but how quickly it can transition to a free-market model. Given Europe’s rapidly shifting geopolitical landscape, there is an urgent need for economic and structural reform in Romania. Privatising ROMARM and eliminating the mandatory 50% state ownership requirement in defence companies would eliminate inefficiency, corruption, and stagnation, paving the way for innovation, agility, and economic growth. Romania’s national security – and Europe’s broader security architecture – depends upon the success of this overhaul.

Ivo Kesler is a Research Intern at EPICENTER.