In a file photo, officials from Poland and South Korea, including the previous Polish defense minister, shake hands during the announcement ceremony of a major new arms agreement between the two countries. (Polish MoD)
WARSAW — On Dec. 3, South Korean President Yoon Suk Yeol briefly declared martial law, a move that critics widely viewed as an internal coup attempt. Since then, political uncertainty has gripped South Korea, with Yoon’s fate to be determined and interim leadership guiding Seoul.
It has the Indo-Pacific region watching carefully. But Yoon’s move also reverberated deeply 4,800 miles away in Warsaw, where Poland has spent several years tying itself to South Korea’s defense industry.
The political ramifications, and subsequent impact on the won — which hit a five year low versus the dollar in January, as the political crisis continued — have raised two key questions about whether Poland’s major investments could be impacted.
First, could there be any benefit to Poland’s big Korean buys if the won stays depressed? And second, is there any concern in Poland that they may not be able to get everything they want from the Koreans, given the big arms deals were signed under an administration that seems likely to be replaced sometime in 2025?
For now, everyone involved is putting on a brave face that business is normal. But Marek Świerczyński, head of security and international affairs desk at the Polityka Insight center for policy analysis based in Warsaw, told Breaking Defense that “The question is how this crisis will affect the functioning of the Korean economy, including the defense sector, and what long-term effects it will have on both sides.”
“The longer this crisis lasts, regardless of possible ‘profits’ on the currency, the worse for the future of strategic cooperation between Poland and South Korea. Let us remember that the Koreans’ competitors are not sleeping,” Świerczyński said. “Despite the Korean side’s quick assurances that nothing is changing in relations with Poland, this situation is a cold shower for Polish decision-makers.”
The Korean Industrial Machine
Over the last decade, South Korea has worked to make itself into a global arms exporter. Those efforts do seem to be paying off: The combined operating profit forecast for 2024 of the four major defense companies, three of which have major deals with Poland, was estimated at 2.114 trillion won, according to local reports from financial information company FnGuide.
Hanwha Aerospace is projected to have operating profits rise 94.65 percent year-on-year to 1.35 trillion won. In 2022 Hanwha Aerospace signed export contracts for K9 self-propelled howitzers and K-239 Chunmoo multiple rocket launchers with Poland.
Hyundai Rotem, driven by its K2 tanks, is projected to see an operating profit to surge by 116.66 percent to 455.1 billion won. The company delivered 84 K2GF tanks to Poland under its first contract last year and plans to deliver an additional 96 tanks this year.
KAI is anticipated to have an 11.28 percent increase in operating profit at 275.4 billion won. It is also set to include development earnings from the FA-50PL, a customized variant for Poland, which will begin deliveries at the end of this year.
All told, Poland has signed over $16 billion worth of contracts with South Korean firms since the start of 2022. However, many of those deals are being broken down into tranches, which are negotiated individually over time.
Which gets to question number one: Could Poland take advantage of the weakened won as it is negotiating future tranches, and save some zlotys in the process?
Speaking on background, a representative for a number of Korean firms in Poland downplayed concern, saying that while the companies are monitoring the situation, “there is probably no such thinking at all” that the won situation will impact Poland’s plans.
That is, at least in part, because Poland isn’t buying things in Korean currency. In a statement to Breaking Defense, the Ministry of National Defense said that “payments for military equipment obtained from the Korean direction are made in US dollars, in accordance with the adopted schedule for the implementation of contracts.”
Given that the deals are not done in Korean currency, the Polish Ministry of State Assets (MAP) said in a statement that “when contracting deliveries, the purchasing power of the won is not so important. In turn, the division of the order for a given equipment into individual tranches depends on the agreements between the parties to the contract and depends on the capabilities of the manufacturer as well as the needs of the ordering party.”
“Due to the fact that all contracts are settled in USD, the sensitivity of the price to the change in the won exchange rate is theoretically ambivalent,” the MAP statement added, while acknowledging that “paradoxically … a long-term decline in the won exchange rate may increase the price of Korean products.”
Świerczyński said that in his experience, the MND’s Armament Agency tends to downplay the idea of hedging against exchange rates on international deals.
“It should therefore be assumed that there are no mechanisms for pre-emptive purchase of Korean currency or overpayment at its lower exchange rate. However, it should be recalled that there were cases of repayment of tranches, e.g. for the Wisla air defense systems (the Polish name for Patriot systems), if there were funds available for use in the MND budget at the end of the year. However, the current situation, at the beginning of the new budget year, is different,” Świerczyński said.
“Of course, it is always better to buy something cheaper than more expensive. If, as a result of the prolonged crisis, the South Korean currency maintains a low exchange rate, then in a sense we can benefit from this.”
Political Instability And Industrial Capacity
The second question then: Is there concern South Korea’s internal political situation will impact delivery, whether because the won’s crash raises prices in the supply chain or because a new government could cancel contracts?
Asked that question, the defense ministry replied that “the MND does not comment on the political situation in other countries.”
MAP responded that there should be no real issues: “From an industrial point of view, the agreements contain appropriate provisions regarding cooperation, not directly related to the current internal political situation in both countries. The Polish side has not received information that could indicate that the current situation in [South] Korea may have any negative impact on business relations built on the basis of long-term agreements.
“Of course, the development of events in Seoul is being closely monitored,” the statement reads.
The industry representative emphasized that in South Korea there is bipartisan support for defense equipment exports to Poland, and that the companies themselves are dedicated to making deliveries happen on time and on budget.
“These companies have a very high level of responsibility, even culturally old-fashioned, and for them obligations are sacred. So, there are no threats, nothing there negatively affects production,” the representative said. “But of course everyone is following the development of the political situation in South Korea with the hope that this crisis will end as soon as possible.”
Świerczyński, for his part, agreed that defense exports are a non-partisan priority for Korea.
But, he cautioned, “the political earthquake that was the attempted coup and its consequences must have an impact on the institutions and the people functioning in them. Let us recall that the Korean Ministry of National Defense was headed by a close confidant of the compromised president, who is no longer a minister. We do not have a full picture of the purges, but we can imagine what a crisis of trust exists within the institution, which was somehow subordinate to the president.
“All this does not create a favorable landscape, and the problem that can be seen in Seoul with stabilizing the situation does not inspire optimism,” Świerczyński stressed.
