Europe's munitions crisis: Billion-dollar deal on the brink – Why Rheinmetall's mega-factory in Bulgaria is faltering

Rheinmetall and VMZ Sopot: How a historic arms deal threatens to fail over small change

Europe's arms industry is booming, and the demand for artillery ammunition is higher than ever as a result of the war in Ukraine. Amid this historic arms buildup, the planned multi-billion-euro joint venture between the German arms giant Rheinmetall and the Bulgarian state-owned company VMZ Sopot seemed like a strategic milestone. A new ammunition factory in the Balkans was intended not only to alleviate Europe's shortages but also to revive Bulgaria's once-glorious arms-making tradition. However, what the previous government celebrated as a historic success has, following a change of government in Sofia, turned out to be a financial house of cards. A lack of formal contracts, a glaring funding gap in EU subsidies, and a risky contractual asymmetry at the expense of the Bulgarian taxpayer are now seriously jeopardizing the project. This economic analysis illuminates the complex financial, political, and geopolitical dimensions of an arms deal that is emblematic of the challenges facing current European security policy.

A billion-dollar project facing political headwinds

Bulgaria was once a serious arms exporter. At the height of its military-industrial capabilities in the late 1980s, the small Balkan country ranked among the world's ten largest arms exporters, with the arms complex around the industrial city of Sopot at the heart of a multi-billion-dollar export industry. The VMZ Sopot plant employed over 22,000 people at that time and was one of the communist regime's most important sources of foreign currency. The collapse of the Eastern Bloc in 1989 dealt this industry a devastating blow: the decades following the fall of communism were marked by declining production, factory closures, massive job cuts, mounting debt, and the complete loss of the Soviet market. VMZ Sopot survived, but with a workforce reduced to fewer than 3,000 employees and frozen bank accounts.

This historic collapse of an entire industrial region is key to understanding the decision-making dynamics that, almost four decades later, would drive the Rheinmetall project. The hunger for reindustrialization, for jobs, and for the resurgence of an industry with deep state roots remains a powerful motivator in Sopot and in Bulgarian politics to this day. In recent years, VMZ Sopot has indeed experienced a remarkable upswing: Russia's war of aggression against Ukraine caused a surge in demand for Soviet-compatible munitions. In 2023, VMZ achieved net sales of 828 million leva, double the previous year's figure, and increased its workforce to over 4,100 employees. This revival laid the groundwork for an even greater strategic leap.

The pact during the arms boom: How the billion-dollar project came about

The project with Rheinmetall can be understood as a response to a fundamental structural challenge: While Bulgaria had mastered the production of Soviet-style ammunition, it lacked the technological capacity to manufacture 155mm artillery shells to NATO standards – the most urgently needed caliber in Europe given the intense artillery battles in Ukraine. The German arms manufacturer Rheinmetall, for its part, was in a phase of unprecedented expansion and was strategically seeking production sites in Eastern Europe that combined favorable labor costs, existing arms manufacturing experience, and EU membership.

In August 2025, the then Bulgarian Prime Minister Rossen Schelyaskov met with Rheinmetall CEO Armin Papperger in Düsseldorf. The meeting resulted in an agreement to build two munitions factories near Sopot. One plant was to produce powder and cartridges, the other 155mm artillery shells. In October 2025, a framework agreement was signed in Sofia: Rheinmetall would hold 51 percent of the joint venture, and the state-owned company VMZ Sopot 49 percent. The factory, located on a site of approximately 100 hectares, was to produce around 100,000 shells annually, as well as propellant charges for up to 150,000 shells and approximately 1,300 tons of propellant powder. Shell production was planned to begin in 2027, and the production of energy materials in 2028. The total investment was estimated at over one billion euros.

Politically, the project was marketed by the then-government as a historic investment: one of the largest industrial investments in recent Bulgarian history, the creation of nearly 1,000 skilled jobs, and an expression of a strategic partnership with Germany, the country's most important trading partner. The prime minister at the time spoke of a major step forward for Bulgaria's industrial and defense capabilities. Rheinmetall CEO Papperger emphasized the enormous demand for munitions in Europe and NATO in the coming years.

Europe's rearmament architecture and the SAFE mechanism

To understand why the project's financing model ultimately proved to be built on sand, one must grasp the institutional framework of the SAFE instrument. In May 2025, the EU Council adopted the SAFE Regulation (Security Action for Europe), a new EU financial instrument with a loan volume of up to €150 billion. These are long-term, low-interest loans financed through the issuance of EU bonds, designed to help member states fund their defense investments. The maturities are exceptionally favorable: a 15-year grace period followed by a repayment period of up to 40 years. Given these conditions, interest from EU member states was enormous – according to available information, 19 EU member states have already drawn on the entire €150 billion.

The previous Bulgarian government had planned to use the SAFE instrument as the main source of financing for its share of the joint project. The plans originally envisioned up to €960 million from the SAFE framework, to be used as a low-interest loan for the construction of the two plants and the establishment of the joint venture. In total, Bulgaria intended to raise nearly €4 billion through the SAFE mechanism for its entire rearmament program. The then Finance Minister had pointed out that despite this borrowing, the national debt would remain below 60 percent of GDP – a reference to Bulgaria's historically low debt burden, which stood at 27.8 percent of GDP at the end of 2025.

But therein lay the crucial design flaw. As it stands, the SAFE regulation only allows 10 to 15 percent of the funds to be used for building production capacity. This was publicly stated by the new Deputy Prime Minister and Minister of Economy, Alexandar Pulev, in early July 2026. What is sufficient for the overall financing of a defense program is simply inadequate for a specific industrial construction project of over one billion euros. With a Bulgarian investment of around 420 million euros, a maximum of 42 to 63 million euros could be accessed via the SAFE instrument as a subsidy for production capacity – a fraction of the required sum.

The new Radew cabinet and the sober assessment

The revelation of this funding gap coincided with a period of political discontinuity. Following a protracted cycle of political instability, marked by mass protests against corruption—Bulgaria experienced eight parliamentary elections between 2021 and 2026—the Progressive Bulgaria coalition, led by former President Rumen Radev, won the snap election in April 2026 with a clear majority. On May 8, 2026, the new Radev government took power. Alexander Pulev, an Oxford-educated economist and financial manager with international experience, became Deputy Prime Minister and Minister of Economy.

The new government swiftly conducted a critical review of the previous government's key projects. What Pulev revealed during his hearing before the National Assembly's Economic Committee in early July 2026 was sobering. First, no formal contract existed, only agreements of intent with Rheinmetall. Second, Bulgarian interests had not been adequately protected in the existing agreements—the Bulgarian side had agreed to everything with the German side without insisting on reductions in license fees or the inclusion of Bulgarian subcontractors. Third, there were technical problems at the proposed site that necessitated a comprehensive review of all essential project parameters. And fourth—the most serious problem—there was simply no funding.

The already paid sum of 40 million euros cannot simply be written off. Pulev explained that these funds flowed to Rheinmetall – a common practice when awarding a factory construction project to a third party. In this case, however, a company called Iganovo appeared in an opaque arrangement to commission a construction company and build according to Rheinmetall licenses and architectural specifications. This arrangement – ​​43 million euros to Rheinmetall, followed by 270 million euros for a construction company that would have built the plant outside the joint venture and then leased it to the joint venture – is fundamentally different from a direct joint investment. In other words, the Bulgarian side would have been bearing the lease costs for a plant in which it was only a minority shareholder.

The asymmetry problem: Who bears which risk?

Pulev's revelations expose a structural asymmetry in the project that is particularly explosive from an economic perspective. In a joint venture with a 51:49 shareholding in favor of Rheinmetall, the governance question is of paramount importance: Who controls strategic decisions? In the previous agreements, Rheinmetall held the majority stake and thus, in effect, operational control. At the same time, the Bulgarian state was to bear the lion's share of the construction investment – ​​and this in a structure where the building would not even have been owned by the joint venture, but would have had to be leased. For the Bulgarian taxpayer, this would have meant maximum financial risk with minimal control.

Furthermore, Pulev criticized the lack of safeguards for the interests of Bulgarian subcontractors. In an economy like Bulgaria—the poorest EU member state, whose population is massively affected by emigration—the multiplier effect of an investment of this magnitude is crucial in determining whether it truly has a transformative impact on the regional economy. If the supply and construction are entirely outsourced to German or Western European companies, a large portion of the economic benefits simply flows abroad, while the risks remain localized. This issue is not unique to Bulgaria in the economic policy debate surrounding defense joint ventures in Eastern Europe—it arises in a similar form wherever Western European corporations cooperate with state-owned defense companies in structurally weak regions.

Added to this is the issue of licensing fees. Rheinmetall's technology for 155mm ammunition and propellant powder is proprietary. The use of this technology by the joint venture, or for Bulgaria's own share of production, is subject to ongoing licensing fees, which generate a continuous outflow of capital to Germany throughout the project's duration. The new Bulgarian government has recognized that no attempt has been made in the negotiations to date to limit these licensing payments or reduce them at Rheinmetall's expense. This is a classic problem with technology-asymmetric partnerships: the technology provider profits even if the project is not as economically successful as hoped.

The defense budget between NATO ambitions and fiscal reality

The political background of the funding blockade is inextricably linked to the ambitious rearmament program that Bulgaria is pursuing simultaneously on several levels. At the NATO summit in The Hague in 2025, Bulgaria committed to increasing defense spending to 5 percent of GDP by 2035 – with at least 3.5 percent allocated to nuclear defense and up to 1.5 percent to defense-related investments. For comparison, in 2025, defense spending amounted to approximately 2.14 percent of GDP, which in absolute terms corresponds to about $2.755 billion. The draft 2026 state budget projects defense spending of €2.693 billion, equivalent to 2.15 percent of GDP.

These commitments are substantial, but they are fundamentally focused on the procurement and operation of military systems – not primarily on the construction of arms factories. The 2026 budget foresees the taking on of up to €10.4 billion in new public debt, including an EU defense loan of up to €3.261 billion. These figures illustrate the fundamental problem: Bulgaria is already using a significant portion of its available borrowing capacity for procurement programs. Another billion-euro loan for the construction of a gunpowder factory – even under favorable SAFE conditions – would noticeably increase the debt-to-GDP ratio, although at a projected 31.3 percent in 2026, it remains well below the EU limit of 60 percent.

The implicit logic of the previous government was this: the project would finance itself through its own revenues, since demand for NATO munitions would remain structurally high for the foreseeable future, and the favorable SAFE loan terms with a 15-year grace period would allow for easy debt reduction from factory proceeds. This calculation is not inherently flawed from an economic perspective – VMZ's doubling of revenue to 828 million leva in 2023 demonstrates what a functioning arms factory can generate in this geopolitical era. However, it presupposes that the financing structure actually works as politically claimed – and therein lies the problem.

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Rheinmetall's expansion logic and its limits in Eastern Europe

To understand the situation from a corporate strategy perspective, it's worth looking at Rheinmetall's position. The Düsseldorf-based corporation is experiencing a period of exceptional growth: Sales rose to €9.9 billion in 2025, an increase of 29 percent compared to the previous year. For 2026, the company expects further sales growth of 40 to 45 percent, reaching up to €14 billion. The order backlog reached a record high of €63.8 billion at the end of 2025 and is projected to more than double to €135 billion in 2026. CEO Armin Papperger speaks of an era of rearmament in Europe, which offers Rheinmetall growth prospects the likes of which the company has never seen before.

In this context, the Bulgaria strategy is part of a broad decentralization strategy for ammunition production across Europe. Rheinmetall has or plans to establish plants in Germany, Lithuania, Ukraine, Romania, Spain, and now Bulgaria. The logic behind this is compelling: existing German capacities are insufficient to produce 1.5 million artillery shells per year – the stated target for 2027. Eastern European locations offer lower labor costs, politically motivated state support, and, in countries like Bulgaria, even existing defense infrastructure. For Rheinmetall, the Bulgaria project is therefore primarily a component of a comprehensive industrial policy strategy. The 51 percent majority stake ensures operational control, the proprietary technology secures revenue from licenses, and the local partner company contributes land, regulatory expertise, and political legitimacy.

From the perspective of a Western European industrial group, this model is rational and consistent with global standards for technology-driven joint ventures. However, it is not automatically aligned with the economic development interests of the host country. This creates a structural tension that is in no way specific to Bulgaria: the investment conditions are largely set by the technologically and financially superior partner, while the weaker partner bears the state risk. This mechanism has been described in development economics literature as the resource curse of technology dependency – it affects countries that possess raw materials or existing infrastructure but rely on external technology and therefore remain in a structurally weaker negotiating position.

Geopolitical dimension: Bulgaria's strategic positioning under pressure

The new Radev government has not rejected the project outright, but has announced renegotiations. Defense Minister Dimitar Stoyanov explicitly emphasized that Bulgaria would not abandon its investment in the gunpowder factory and that negotiations with Rheinmetall were imminent. This distinction is politically important: it is not about a fundamental decision against Western arms partnerships, but about renegotiating the terms.

The geopolitical context makes such a renegotiation both urgent and difficult. Germany is not only Bulgaria's most important foreign trade partner – it is also the dominant country in the EU and one of Bulgaria's strongest NATO allies. An overly aggressive renegotiation strategy with Rheinmetall risks diplomatic friction at a time when Bulgaria depends on Western European support for its rearmament programs and potential Eurozone accession ambitions. As recently as June 2025, the ECB assessed Bulgaria's progress toward a possible euro adoption on January 1, 2026, positively, even though the budgetary situation has become more strained since then.

At the same time, the new Bulgarian government under Radev, whose coalition tends to advocate a more pragmatic stance in the Russia policy discourse, has a strong domestic political interest in securing public support for a project whose cost-benefit analysis appears questionable under the current conditions. The eight parliamentary elections in five years have demonstrated the volatility of the political climate in Bulgaria – a multi-billion-euro project perceived as an economic sell-out of national interests could easily become political dynamite.

The renegotiation scenario: options and limitations

What realistic negotiating options does Bulgaria have? First, a restructuring of the ownership shares is conceivable. Increasing the Bulgarian stake to 50 percent or more would at least formally address the governance asymmetry – provided that Rheinmetall agrees to such a shift, which is unlikely given the strategic importance of majority control for the group. Second, explicit subcontracting quotas for Bulgarian companies could be agreed upon to anchor the economic multiplier effect locally. Third, a cap on the license fees that Rheinmetall charges for technology use would be possible. Fourth, the financing structure could be completely rethought: instead of borrowing via SAFE, a combination of EU structural funds, equity investments, and bilateral credit lines might be considered.

All these options have their limits. Rheinmetall is in a position of extraordinary market power: The company has more orders than it can fulfill, and Bulgarian demands for renegotiation are coming at a corporation that could easily find alternative locations – or simply postpone the Bulgarian project while other projects are given priority. The €40 million already paid increases the pressure on the Bulgarian side not to let the project fall through, as failure would also mean a loss of reputation as a reliable investment location.

The technical problems with the site near Sopot – a forested area requiring rezoning – add another dimension of delay to the already complex situation. Even if all financing issues are resolved, the permitting process for converting forest land into industrial land takes time. The factory was originally supposed to be operational within 14 months. This timeline is completely unrealistic under the current circumstances.

Structural lessons from the Bulgarian-German arms project

The Sopot project raises fundamental questions that extend far beyond the specific case of Bulgaria. Europe is currently experiencing an unprecedented wave of rearmament: NATO members have committed to massively increasing defense spending, and the EU Council has created a €150 billion financing vehicle with the SAFE instrument. This is generating enormous pressure on smaller and economically weaker NATO members to build up production capacities – as quickly as possible and, ideally, in cooperation with technologically leading Western European partners.

The problem is that the political logic of speed and the economic logic of sustainable partnership structures are often at odds. When governments are under public pressure to deliver rapid, visible results—contract signings, job promises, symbolic milestones—they tend to postpone difficult details. The previous Bulgarian government signed memoranda of understanding with Rheinmetall and presented them as contracts. It presented a financing structure based on a misinterpretation of the actual SAFE conditions. And it paid €40 million before a single binding contract had even been signed.

This is not a problem unique to Bulgaria. Throughout Eastern Europe, Western European arms companies are pushing for joint ventures, and throughout Eastern Europe, the institutional capacity to negotiate highly complex contracts on an equal footing in a technologically asymmetric environment is often lacking. The lesson from the Sopot case is therefore that industrial policy cooperation agreements in the arms industry require the same careful scrutiny as privatization agreements – and the history of privatization in Eastern Europe during the 1990s is rich in costly lessons about the difference between political symbolism and economic substance.

What will become of the work

Despite all the difficulties, the fundamental need driving the project remains unchanged. Europe needs more munitions production capacity, Bulgaria needs industrialization and diversification of its export base, and Rheinmetall needs geographically distributed production facilities within the EU. This convergence of interests is strong enough to keep the project alive in the medium and long term – albeit under altered circumstances.

The new Bulgarian government must find a viable financing alternative by the end of 2026 and negotiate a contract structure with Rheinmetall that addresses the legitimate objections of the Minister of Economy. This will require time, negotiating skills, and a clear understanding of its own priorities. At the same time, the longer the negotiations drag on, the more likely it is that the project's strategic momentum will be lost – that Rheinmetall will prioritize other locations, and that Bulgaria will ultimately risk falling behind in the race for European munitions production.

Realistically, no contract signing or construction start is expected in 2026. A complete renegotiation of the project design, a reliable clarification of the financing, and the resolution of the site issues will take at least twelve to eighteen months, assuming everything goes smoothly. Whether the political stability of the Radev government will last long enough to bring this process to a successful conclusion is a legitimate question, given the Bulgarian parliamentary history of recent years. A project that was initiated under certain political circumstances and now needs to be renegotiated under different ones remains, by definition, vulnerable to the next political upheaval.

What is happening in Sopot is ultimately a lesson in the fact that the European arms buildup is not only an industrial policy and defense strategy challenge, but also an institutional one: The ability of smaller EU member states to design complex transnational investment agreements in such a way that the burdens and benefits are fairly distributed is a capability that still needs to be developed in many places.

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