As an anxious world watched Russia deploy soldiers along its border with Ukraine in January, Germany offered to send Ukrainian troops 5,000 helmets. The offer — coming from a country highly dependent on Russian natural gas delivered through Ukraine — was widely treated as a joke.
Fast forward a month and Germany shocked industry watchers and politicos as it promised to ship anti-tank and anti-aircraft systems to Ukraine, upending a defense policy in place since the end of World War II. It also announced a massive increase in its defense budget, one that is lifting defense stocks.
"With the invasion of Ukraine, we are in a new era," Chancellor Olaf Scholz said. "(Russian President Vladimir) Putin created a new reality with his invasion of Ukraine. This new reality requires a clear response. We have given it."
A growing list of other countries, ranging from Canada to Romania, are also pledging to help equip Ukraine, launching a weeklong bonanza, and possibly a new era for investors in defense stocks. Major defense stock leaders surging to new highs included Northrop Grumman, General Dynamics and Raytheon in the U.S. In addition, U.K.-based BAE Systems, Europe's largest defense contractor, also took out new highs.
The long-term defense demand picture is far from complete. Many spending promises made in the past week must be approved by legislators and budget committees. Yet plans to move large quantities of armaments and supplies into Ukraine seem to confirm at least a short-term bump in defense-related demand.
Putin Becomes A Bridge-Builder In The West
Yet the battle for Ukraine has enlisted even historically neutral countries in the effort to resist and penalize Russian aggression. Sweden, a non-NATO member, announced it would send anti-tank weapons, helmets and body armor to Ukraine. Finland pledged assault rifles and anti-tank weapons. Switzerland joined the European Union in sanctioning Russia and said it would freeze Russian assets.
The invasion also upended long-standing political barriers. Finland and Sweden are considering joining NATO. Ukraine has mounted a last-ditch effort to become a European Union member. In the U.S., flashes of political consensus have accompanied White House sanctions on Russia. Now, "dozens of lawmakers from both parties" are calling for a ban on the sale of Russian oil, according to Politico.
And even China, which has remained rhetorically neutral on Putin's tactics, appears to be in early stages of shifting from a purely pro-Russia stance. Putin wagered that he could march into Kyiv as he did in Crimea in 2014 and face few consequences. Instead, the gamble has so far unified Europe and much of the West.
Defense Stocks Hit New Highs
U.S. defense stocks have soared since the conflict started. Northrop, General Dynamics and Raytheon have all run to record highs since Russia invaded Ukraine. IBD's Aerospace/Defense industry group rallied more than 9%. The industry gained despite a decline by Boeing. The aerospace giant lost ground as sanctions carved the Russian airspace out of commercial transport markets.
Javelin anti-tank missiles, built by Lockheed Martin and Raytheon, are part of a $350 million weapons package approved by the Biden administration for Ukraine. This is on top of the more than $2.7 billion in U.S. security support for Ukraine's military since 2014, including more than $650 million in 2021.
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Germany pledged it would send Ukraine 500 of Raytheon's Stinger missiles and 1,000 unspecified anti-tank missiles. That's in addition to 2,700 Soviet-era, shoulder-fired Strela missiles promised earlier. Germany's deal must still be approved by its Federal Security Council.
Analysts say these and other moves help shift discussions of global defense spending and defense stocks from Afghanistan toward Russia, China and North Korea.
"It's very early days but I think it will be interesting to see how this evolves and what that portends for European defense and security spending and posture and acquisition in the next year," said Carisa Nietsche, an associate fellow for the trans-Atlantic Security Program at the Center for a New American Security.
German Defense Spending Does A Surprising About-Face
So far, Germany has professed the most notable shift in defense spending among countries. After Russia's 2014 invasion of Crimea, NATO agreed on a deadline for all member countries to increase their defense spending to 2% of GDP by 2024. In 2018, Chancellor Angela Merkel declared Germany would not meet NATO's spending target for a decade.
President Donald Trump, who considered the NATO agreement to be largely obsolete and "unfair, economically" to the U.S., threatened to pull the U.S. from the alliance unless Germany faced up to its defense spending commitments.
Berlin wasn't entirely dragging its feet. It made incremental spending increases. Germany increased its 2021 NATO defense spending 3.2% year over year, to a record high of 53 billion euros.
But for a country that sharply reduced its military when the Cold War ended in 1989, that was far from enough.
Germany's military, the Bundeswehr, found itself with "a small but hollow force with few signs of improvement, and all of a sudden the Russian army hopped into view," said Richard Aboulafia, a managing director at AeroDynamic Advisory.
What had been impossible to do in a decade looked politically possible overnight. On Feb. 27, Scholz announced plans to boost spending to the 2% mark by 2024. He also earmarked 100 billion euros for a military modernization fund. Now it's up to the country's budget-minders and lawmakers to follow through on the pledges.
"We have to ask ourselves — what capacities does Putin's Russia have and which capacities do we need to counter his threats?" Scholz told parliament.
Germany's Defense Spending Wish-List
If Germany is to live up to Sholz' military pledge, it must overcome a long-standing defense deficit. A Feb. 25 Der Spiegel magazine report found that Germany slashed its number of tanks to just 300 from 5,000 since 1989, and reduced its military aircraft to 230 from over 700.
Berlin long considered buying Boeing's F/A-18 Super Hornet and heavy-lift helicopters. Despite being the largest economy in Europe, and fourth-largest in the world, it said it didn't have the budget.
Defense And Aerospace Stocks And Industry News
But the expanded German defense budget puts the Lockheed F-35 stealth fighter in the affordable category. And the purchase of Boeing's Apache attack helicopters has moved "to the front burner," Aboulafia said. It could also open the door to Berlin buying more Eurofighter Typhoons, a multinational fighter produced by Airbus, BAE Systems and Italy's Leonardo.
A report from Defense Weekly notes Germany isn't just eyeing fighter jets. It is also trying to budget funds for the Future Combat Air System (FCAS), a joint effort with France. Updated heavy transport helicopters, and modern Patriot air defense missile systems from Raytheon, are also on the list. Germany could also accelerate its very gradual embrace of drone technology. This included a $1 billion deal with Israel in 2018, and participating in the Eurodrone project, a joint effort managed by Airbus with Italy and France.
Aboulafia estimates that Germany could "move pretty quickly" in acquiring the new weapons systems.
Europe Fortifies Defenses
As Berlin shops for weapons from the U.S., it's also committed to developing advanced weapons at home.
Scholz said Germany needs help to " build the next generation of fighter jets and tanks here in Europe together with European partners — and France in particular."
One critical question for investors in defense stocks is whether Germany's moves will push more countries to increase their defense budgets.
"I think we'll certainly see an incremental shift across the continent as countries are thinking about their defense budgets for the next few years," Nietsche said. "I think that France has long valued a partnership with Germany on these issues, and I think to some extent has been waiting for Germany to wake up to the shifting geopolitical situation."
The types of weapons needed have also changed. Instead of fighting wars abroad, Europe now faces threats near home — a need to prevent terrorist activity and contain Russia's aggression.
"It's going be less about expeditionary and more about European defense, and that will be a change," Aboulafia said. "For Germany, it's from no defense to a lot more defense. For countries like France or Britain, they might have to return to more of a Eurocentric strategic approach."
The U.K.'s Royal Navy could shift its budget away from expensive carrier deployments across the Pacific meant to counter China, as London turns to matters closer to home.
Is This All A Russian House Of Cards?
Outside the EU, advanced technology from the U.S. is becoming an urgent need. Eastern European and Nordic countries have been solidifying their relationship with the U.S. amid Russian aggression by going "for the high-end systems that give them a strategic relationship," with the U.S., according to Aboulafia.
Last year the U.S. State Department cleared a sale of General Dynamics M-1 Abrams tanks to Poland, and Finland announced a deal for 64 F-35 fighter jets in December. Finland also ordered extended-range Lockheed Joint Air-to-Surface Standoff Missiles (JASSM-ER) and Raytheon Sidewinder Missiles.
Still, the war in Ukraine could be still in its early days. Analysts warn it's too soon to draw long-term conclusions about global defense spending, despite promises for increased funding.
In one potential scenario, "The whole thing is revealed to be a Russian House of Cards and the threat dissipates," Aboulafia said.
Follow Gillian Rich on Twitter at @GillianRich_ for energy news and more.
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