Economic Beneficiaries Of The Conflict

Any major conflict has a group of business interests involved. If someone loses, someone else gains: it is the question of balance of these parties and their societal significance.

The most evident beneficiary of any conflict is the military-industrial complex and related industries.

Additionally, there are industries that have benefited from changes in the economic landscape, such as those that have displaced competitors and captured new markets. Companies that provide infrastructure for these industries are also beneficiaries. Within the context of the European drama, these include LNG producers and infrastructure builders for liquefied natural gas transportation.

Finally, there is a third group of beneficiaries: financial institutions that quickly reoriented their investments towards military-related sectors. Here, we see a paradox: some of the most active investors in the military industrial complex are ESG funds that are designed to promote social development and environmental sustainability.

According to the Stockholm International Peace Research Institute (SIPRI), total defence spending worldwide reached $2,443 billion in 2023, a 6.8% increase from 2022, the largest annual increase since 2009. As military budgets bloat, the conflict generates new enrichment opportunities.

In 2023, the 31 NATO member states accounted for $1,341 billion, representing 55% of global military spending. The United States’ military spending increased by 2.3% to $916 billion in 2023, accounting for 68% of NATO’s total military expenditure. Most European NATO member states have also increased their defence spending. Their collective share of the NATO total was 28%, the highest in a decade, with the remaining 4% coming from Canada and Turkey.

Among European nations, Poland saw the largest annual increase. To use Leo Tolstoy’s metaphor, Poland got excited “like an old war horse that hears the trumpet.” Poland’s defence spending, the 14th highest in the world, amounted to $31.6 billion, after a 75% increase between 2022 and 2023.

Arms manufacturers will undoubtedly receive orders for years and years ahead, given the requirement for NATO nations to spend at least 2% of their budgets on defence and the motivational statements from several political leaders to exceed this benchmark.

The armed conflict in Ukraine, the ongoing war in the Middle East, and concerns regarding the rise of both China and North Korea are prompting the Group of Seven (G7) countries, which include five NATO members and all of which are military allies of the United States, to increase their defence spending.

The increase of such spending up to 4% of the group’s GDP under an “extreme” scenario would lead to a further depletion of public finances and a total public debt of $10.8 trillion over the next decade, according to calculations by Bloomberg Economics. This increase in debt will occur if current social and other programmes are not reduced.

Under the “moderate” scenario of increasing defence spending to 2% of GDP, as prescribed for NATO members, additional US national debt would not change significantly. However, with an “extreme” increase of 4%, it would amount to an extra $3.3 trillion. For Germany, the former scenario would mean an additional $272 billion in debt, while the latter would produce $1.6 trillion. The figures would be $421 billion and $1.4 trillion respectively for Japan, $189 billion and $1.1 trillion for France, $184 billion and $923 billion for Italy, $298 billion and $896 billion for Canada, $213 billion and $745 for Spain. Finally, the United Kingdom’s debt would remain unchanged under the “moderate” scenario, but would rise to $757 billion under the “extreme” one.

France, Italy, and Spain would be particularly at risk if additional spending were financed through borrowing. Given that military spending is projected to increase to 4% in Italy, the public debt-to-output ratio would rise to 179% by 2034, compared to 144% this year. The United States, which already commits 3.3% of its budget to defence, would see its debt increase from 99% to 131% under this scenario over the next decade.

The military-industrial complex is becoming as appealing an industry as vaccine production amid the coronavirus crisis, with stocks of certain arms manufacturers rising as rapidly as those of vaccine producers during the COVID-19 pandemic.

There has been a shift in the image and perception of this sector in society. Its activities are now seen as an integral part of everyday life and returns on investments in weapons are expected to be comparable to those in Big Pharma during the pandemic. Previously, investing in weapon manufacturers was regarded as socially questionable, similar to investing in tobacco production.

Analysts have noted that the performance of shares in arms companies during the military conflict between Russia and Ukraine bears a striking resemblance to the performance of pharmaceutical stocks during the coronavirus pandemic.

Look at the movement in the shares of BioNTech during the pandemic and stock prices of Rheinmetall, a major arms manufacturer, prior to and following the escalation of hostilities in Ukraine.

A further argument has been put forward: investments in the military-industrial complex act as an injection into the economy and assist in launching other industries through the multiplier effect. This point is actively promoted by lobbying groups seeking to expand military support for Ukraine.

Following the escalation in February 2022, there has been a significant increase in orders within the defence sector, which has historically been a major contributor to the United States economy.

According to a recent report by the Wall Street Journal, citing data from the Federal Reserve, industrial production within the defence industry (including space-related activities) has increased by 17.5% over the past two years.

First, European allies of the US are renewing and upgrading their military equipment, including replenishing supplies for Ukraine.

Second, the Pentagon is placing significant orders for new equipment and restocking military supplies that were depleted due to support for Ukraine.

For example, Germany is to purchase new CH-47F Chinook helicopters valued at $8.5 billion. Poland is upgrading its fleet of helicopters and tanks by purchasing American weapons. In addition, Poland has agreed to acquire 486 HIMARS multiple-launch rocket system launchers from the United States with deliveries expected in 2025. Lithuania is also increasing its arms procurement from the United States.

Certainly, society should be aware of those who have benefited from investments in the escalation of the European conflict. American businesses are at the forefront.

Lockheed Martin’s sales rose by 2.4% in 2023, reaching $67.571 billion, while Northrop Grumman’s sales increased by 7.3% from 2022, totalling $39.3 billion. Raytheon saw a 10.7% increase in sales, reaching $74.3 billion for the year. General Dynamics also experienced growth, with its revenue increasing by 7.2% to $42.272 billion in 2023.

Similar trends can be observed in other countries as well. For example, the revenue of Czechoslovak Group, a Czech arms manufacturer, increased by 71%, reaching €1.7 billion in 2023.

Rheinmetall, a German defence company, is worth highlighting. One year ago, its chairman, Armin Papperger, considered a stock price of €300 to be “realistic”. However, the stock is now trading at over €440. With more than 33,000 employees, the company produces a range of products including tanks, trucks, air defence weapons, ammunition, and laser targeting systems. Due to increased demand for its products since the military conflict aggravated, the company’s stock price has quadrupled.

“A new decade of security policy has begun,” said Armin Papperger, CEO of Rheinmetall AG. He announced that this year’s revenue for Rheinmetall will exceed €10 billion for the first time, an increase of one-eighth from last year’s €7 billion. The management expects a turnover of €20 billion in the long term.

Rheinmetall, one of the leading manufacturers of artillery ammunition in the Western world, is expanding its production capacity. According to Papperger, it aims to produce 700,000 rounds per year by the end of 2024, an increase from the 70,000 per year before the conflict in Ukraine. This figure is projected to reach 1.1 million by 2027.

Rheinmetall has already announced plans to build at least four weapon factories in Ukraine, driven by forecasts of record-breaking profits from arms sales.

Several companies in related industries have also demonstrated consistent positive results exceeding market expectations.

Over the past two years, major aerospace companies have seen an increase in revenue and net income of 25%-30%, as well as a 50% increase in capitalization.

Airbus SE (EADSY), a major supplier of military aircraft and helicopters, saw revenue grow by approximately 80% and net income increase by approximately 115%. Its capitalization also increased by 50%.

Safran SA (SAFRY), a leading supplier of aircraft engines, nacelles and propulsion systems, experienced revenue growth of 42% and an increase in capitalization of 87%, with net income reaching €1.7 billion.

BAE Systems plc (BAESY), a defence, security, and aerospace company, saw a 40% increase in net profit on 20% revenue growth, with capitalization increasing by 70%.

The dynamism observed in European companies reflects the overall performance of the MSCI World Aerospace and Defense Index, which has grown by more than 40% since May 2022.

The market for military radio electronic systems is witnessing rapid growth. In the period 2022-23, MBDA, a joint venture owned by BAE Systems, Airbus, and Italy’s Leonardo, concluded contracts worth €15 billion for air defence equipment and the expansion of missile production with the governments of Poland, France, and Germany, among others. The share price of Leonardo, Italy’s largest engineering conglomerate, has increased by 198% in the past two years. German Hensoldt, a manufacturer of radar systems, has also reported an increase in demand for its products. Eurostat reported an overall increase of 7% in electronics sales within the Armament sector in 2022.

Unmanned aerial vehicle (UAV) production for delivery to Ukraine has also seen a dramatic increase. The use of UAVs in the conflict zone has accelerated investment in this sector. Combat drones have begun to be employed in all conflicts during the new decade.

In addition, the global drone market, including civilian drones, is already experiencing high growth rates. According to forecasts by specialized organizations, such as droneii.com, it is projected to grow at a rate of approximately 14% annually. The increasing use of drones in military applications is driving growth in associated sectors, as demonstrated by a report from ResearchAndMarkets.com which forecasts annual growth exceeding 8% for the production of batteries used in aerospace and defence applications.

The key consequence of the conflict has been the redistribution of the global gas market. By discontinuing the purchase of cheap Russian gas, European nations have shifted toward acquiring costly American LNG. The United States, which banned LNG exports back in 2016, has emerged as the world’s leading exporter of this commodity.

European countries, after stopping most imports of natural gas from Russia, have resumed the development of previously inactive LNG import projects and begun to develop new ones. Already in 2024, Europe’s LNG receiving capacity is expected to increase by one-third compared to 2021.

Germany is leading in terms of expanding LNG capacity, despite protests from environmentalists and the general public. Previously, the country did not import LNG, as it is expensive and environmentally questionable. For the first time, Germany imported LNG in January 2023 with more than 80% of current supplies coming from the United States.

The Biden administration has greenlighted a number of LNG projects, including the Calcasieu Pass 2, the largest terminal in Louisiana. However, on January 26, 2024, Biden suspended approval of new licenses, as the Department of Energy decided to study the impact of LNG supplies on climate change.

At the same time, there are currently five large export terminals under construction in the United States that will double capacity by 2030. Clearly, it would be difficult to abandon these plans. Therefore, regardless of the outcome of any assessment of the climate impact of LNG, it will be essential for the United States to maintain its sanctions on Russian gas and continue to present an image of its political unreliability to Europe.

For European countries, switching gas suppliers would involve significant costs for constructing new infrastructure. According to GEM estimates, the total capital costs for LNG terminals would be €44.4 billion and for gas pipelines, €39.7 billion. More than half of these costs are attributable to three countries – Germany, Italy, and Greece. The European Commission has emphasized that LNG terminals, “like other energy infrastructure,” are financed through end-user fees.

The transition to LNG procurement is accompanied by increased environmental risks. This is primarily due to potential leaks that may occur during the loading of LNG into tankers and during transportation and unloading at the destination point.

Globalenergy Monitor, a reputable environmental NGO, has highlighted that LNG infrastructure projects currently under construction may result in additional annual greenhouse gas emissions equivalent to those from 50 coal-fired power plants, and this figure is expected to increase six-fold when considering all planned projects.

There is another risk. Eurogas association has expressed concerns regarding Europe’s need for more gas from the US than the country is currently able to produce. Current supplies remain insufficient to fully replace Russian gas imports into Europe.

We could discuss the flexibility of financial capital (including the ethical aspect) at length, but let’s focus on two cases: the movement of capital from Europe to the US, using Rheinmetall as an example, and the flow of investment from ESG funds, committed to responsible investing, into the arms sector.

Behind the largest military-industrial entities are financial institutions, many of which have ties to the US – even if the company may be a European-based brand.

By the end of Q3 2023, over 1,200 ESG-compliant funds held approximately $5 trillion worth of aerospace and defence-related stocks, according to a market research report by Morningstar Inc.

Alexander Stafford, Chair at the All-Party Parliamentary Group on ESG (United Kingdom), commented on the issue, saying that the consequences of the military operation have strengthened the case for ESG investments in defence-related assets.

Sonali Siriwardena, Head of ESG at Simmons & Simmons, noted that it is becoming increasingly difficult to identify whether investments are being deployed for defence or aggression: “It’s a question of how do you ensure that these investments are being used for a defensive purpose as opposed to indirectly contributing to offensive action.”

However, there are individuals and organizations who oppose such an approach while they try to support the waning ESG sector.

Sasja Beslik, SDG Impact Japan Chief Investment Strategy Officer, believes that any investments by ESG funds in weapon companies are unacceptable. “I have no problem with people investing in weapons companies or stock, but don’t do it under the sort of umbrella of ESG or sustainability, because it’s not. These are products that kill people.”

According to Bloomberg, despite efforts to promote defence investment within the European Union (EU), some major institutions such as the European Investment Bank (EIB) have opposed investment in weapons manufacturers. Meanwhile, Mairead McGuinness, the European Commissioner for Financial Stability, Financial Services and the Capital Markets, said that defence is a critical factor for the resilience and security of the EU, and therefore for “peace and social stability.”