Drone interceptors, AI swarm software and battlefield lasers are emerging from startups in the Baltic states and Poland as Central Europe spends record sums rearming against Russia.

Lithuania is spending more than 5% of GDP on defence this year and Poland 4.7%, while Estonia has committed to spending about 5.4% annually until 2029 and Latvia is approaching 4.9%. The frontline states are already close to, or exceeding, the 5% of GDP target that Nato allies adopted for 2035.

Much of the money still goes on tanks, artillery and long-range weapons. But the war in Ukraine has shown that cheap drones, electronic warfare and software can determine battles. The EU is also lending member states money on the condition that most is spent on European equipment. Together, the two shifts are turning the region from a buyer of foreign weapons into a test bed for its own technologies, with companies beginning to sell abroad.

Drones over the border

Russia's war in Ukraine is the immediate driver, alongside fears that the Baltic states or Poland could be next. Existing hybrid threats include sabotage, disinformation and incursions by drones. Poland has shot down Russian drones after an airspace breach, while drones have repeatedly entered Baltic airspace, as well as that of Romania and Moldova further south. Estonia, Latvia and Lithuania have asked the EU for an urgent €500mn for drone defences, and the planned drone wall along the eastern flank is due to reach initial operational capability by late 2026.

Uncertainty over the US commitment to European security is another driver. Facing the possibility of a US disengagement, the Baltic states have invested heavily in their own defences. Poland has done the same, although it continues to buy American equipment; Warsaw signed a $4bn US defence financing agreement in September.

Brussels pays for European kit

The cost is substantial for small and middle-income economies, leaving open the question of whether Emerging Europe can afford to rearm. The EU's answer is the Security Action for Europe (SAFE) instrument, adopted in May 2025, which offers up to €150bn in long-term loans as the first pillar of the ReArm Europe plan, which aims to mobilise more than €800bn.

At least 65% of component costs must originate in the EU, Ukraine or eligible EEA/EFTA countries, and projects are generally expected to involve joint procurement by at least two countries.

Central and Southeast Europe are among the main beneficiaries. Under the European Commission's provisional allocations in September 2025, Poland was allocated €43.7bn, Romania €16.7bn and Hungary €16.2bn, followed by Lithuania with €6.4bn, Latvia with €5.7bn, Bulgaria with €3.3bn, Estonia with €2.7bn, Slovakia with €2.3bn, Czechia with €2.1bn and Croatia with €1.7bn.

Latvia's Origin Robotics won €4.5mn from the European Defence Fund (EDF) for unmanned targeting technology, while its BLAZE interceptor is among the systems Latvia is buying with SAFE funding. Latvia has also earmarked €28.3mn for landmine purchases under the EU programme.

Romania signed a €30.7mn SAFE-financed contract for 34 small reconnaissance drones, part of an industrial cooperation project in the country, Romania Insider reported. Latvian telecoms group LMT leads VANTAGE, a six-country EDF project worth about €11mn to develop a vertical take-off drone, while Lithuanian laser maker Altechna Sensing is involved in the EDF's 100 kW-class laser weapon project.

The Commission has proposed €131bn for defence and space in the next seven-year EU budget, roughly five times current levels.

The Baltic drone hunters

The Baltic startup scene has shifted sharply towards defence. Defence, security and resilience companies raised €104mn across 47 funding rounds in 2025, accounting for 15.4% of all Baltic startup funding, according to the Baltic Deep Tech Report 2025, published by Iron Wolf Capital, Startup Estonia, Startup Lithuania and WALLESS. The report identifies 271 such startups.

Estonia accounted for 87% of the capital raised and ranks seventh in Europe for defence venture funding. Baltic deep tech as a whole outpaced the US, EU and Nordic countries, with defence startups attracting investors.

In a ranking compiled from 34 experts by the Delfi newsrooms in Estonia, Latvia and Lithuania and published in April, Estonia's Frankenburg Technologies and Origin Robotics took the top two places. Frankenburg, founded in 2024, is developing low-cost, mass-produced missiles to intercept drones. It has raised about €40mn and has a partnership with South Korea's Hanwha Aerospace.

Origin's BLAZE is an autonomous interceptor drone designed to address the economics of air defence, in which cheap attack drones can be launched in swarms to exhaust missiles costing far more per shot. Latvia, Estonia and Belgium received their first BLAZE systems in February, becoming the first countries in Europe to field a fully autonomous interceptor-drone capability within months of ordering them.

Lithuania's Unmanned Defence Systems, ranked third, produces reconnaissance and strike drones, as well as AI-driven swarm and command software used by Lithuanian and Ukrainian forces. Estonia's KrattWorks, which builds drones designed to operate when GPS and radio links are jammed, increased production from about 100 drones a year to more than 100 a month in 2025.

Each country has developed its own specialities, according to a map of 200 Baltic defence companies compiled by Venture Faculty and Dealroom. Lithuania is a global leader in lasers: Light Conversion holds about 80% of the global market for tunable femtosecond lasers, Brolis Defence operates in the military segment, and Vilnius-based startup Astrolight has tested unjammable ship-to-ship laser links with the Lithuanian Navy.

Estonia is strongest in software, cybersecurity and robotics. It is home to Milrem Robotics, whose THeMIS unmanned ground vehicle has been used in combat and which was acquired by the UAE's EDGE Group in 2023. Latvia has established itself as a drone hub and leads the international Drone Coalition.

Beyond European funding, Estonia has a €100mn state defence technology fund managed through SmartCap, which aims to grow the industry from about €500mn to €2bn by 2030. Lithuania has doubled its defence technology programme to €5mn.

Rheinmetall broke ground in November 2025 on a 155mm artillery shell plant in Baisogala, Lithuania, representing an investment of up to €300mn. Officials have described it as the largest defence investment in the country's history.

Polish labs, Czech heavyweights

Ukraine remains central to the shift, as the world's fastest-moving source of experience in drone warfare. Its BRAVE1 programme puts frontline units at the centre of identifying and testing new technology. Kyiv is seeking to attract private capital for underground defence plants, expanding lending to arms manufacturers and deepening drone cooperation with Finland, Latvia and other countries.

Ukrainian production is also expanding westwards. Drone-swarm software company Swarmer is to build an air defence manufacturing plant in Poland, while Warsaw has offered to host a Ukrainian Patriot missile plant as Kyiv's interceptor missile supplies run low.

Europe has failed to offset the end of US military funding for Ukraine, while its arms support for Kyiv is sharpening the confrontation with Moscow. Russia has already described Western peacekeepers deployed in Ukraine as legitimate targets.

About 230 defence technology startups have been founded across Europe since 2022. Defence now accounts for 10% of European venture capital funding, up from less than 1% in 2020. But of the $12.3bn raised by defence venture funds by the end of June 2026, $11.4bn went to the US, nearly half of it to Anduril, according to an ICDS brief.