South Korean defense industry firms have entered into a second-stage weapons export contract with Poland worth 30 trillion won (US$22.12 billion). This would elevate South Korea to the fourth-largest defense industry exporter worldwide in one go. However, the finalization of the contract, which was initially scheduled for the first half of the year, has been indefinitely postponed due to financial support issues.
According to financial sources on Oct. 17, the second-stage weapons export contract with Poland is facing delays, but there is hope that a solution will be found.
Attention is focused on whether Shinhan Bank will invest 2 trillion won in this recent Polish contract. At the end of last month, Shinhan Bank was the only commercial bank to participate in the “Defense Industry Export Project.” The financial support that Shinhan Bank has pledged is expected to amount to 3 trillion won by year-end. It includes 2 trillion won in trade finance, 120 billion won for technology credit guarantees, 780 billion won for financial support in 12 national strategic technology industries including the defense industry, and 100 billion won for loans to partner companies of defense industry conglomerates. Among these, the 2 trillion won for trade finance could potentially be utilized for the Polish contract. Considering the agreement with the Korea Trade Insurance Corporation (K-Sure), it is possible to explore a method where K-Sure provides the guarantee and Shinhan Bank executes the loan.
Defense funds could also serve as an alternative. Hana Bank established a defense fund in the second half of last year. This fund aims to create self-funding of around 40 billion won annually from this year until 2025 and operate it for a decade. Korea Development Bank (KDB) has invested in first-year self-funding to assist in the stable formation of the defense fund. However, it remains uncertain whether the defense fund will be allocated to Polish financial support because it strongly supports domestic companies and cannot be directly used for loans or guarantees. Operating the fund by including loan bonds is a possible approach.
The Export-Import Bank of Korea (KEXIM) and K-Sure provided support of 6 trillion won (US$4.42 billion) each for the first-stage weapon export contract with Poland last year. KEXIM’s limit for support to Poland is roughly around 1 trillion won (US$737.46 million). This limitation arises from the Enforcement Decree of the KEXIM Act, which allows support of up to 40 percent of the bank’s capital to the same corporation, among other factors. However, it is possible to exceed the 50 percent capital limit by utilizing special legislation. K-Sure is also reportedly feeling some burden regarding additional support to specific countries as its initial support in the first stage.
The government is exploring various methods, with the U.S. Foreign Military Financing (FMF) being a prominent example. The FMF is a program where the U.S. government provides financial support, including loans, to enable foreign governments to purchase U.S.-made weapons. This program operates without the involvement of financial institutions, and the funds are managed directly by the Department of Defense. However, as of now, South Korea’s Ministry of National Defense does not have a separate fund for such operations. A defense agency official said, “Currently, there is a budget through government subsidies, but this year, its limit has already been reached.”
There are also suggestions that the KDB’s Basic Industrial Stabilization Fund (BISF) should be utilized. The BISF was established in June 2020 and has been used to support companies like Asiana Airlines, Jeju Air, and basic industrial cooperation partners. With a substantial scale of 40 trillion won, this fund can only be used for new capital support until the end of this year. Even if it isn’t used as defense funding this year, some have proposed that the fund could be repurposed or renamed to utilize the resources that have been set aside.
A financial industry insider stated, “The situation with the Polish weapon contract is different from when we exported nuclear power plants to the United Arab Emirates (UAE). Poland, in comparison to the UAE, has relatively limited cash reserves, and considering the risks, any company involved may feel a burden when it comes to financial support.”