Cashing in conflict: the Ukraine War and its business implications in Uk and Europe
How business is seeking rich rewards from surging military spending triggered by the Ukraine war
Russia’s invasion of Ukraine has piqued the self-interest of private investors and military firms which calculate that the increased military spending spurred by the conflict will boost growth for defence-focused companies.
And there’s little wonder why, with world military spending growing for the eighth consecutive year in 2022 to an all-time high of €2,042 billion, according to new data published by the Stockholm International Peace Research Institute (SIPRI).
By far the sharpest rise in spending (+13 per cent) was seen in Europe, largely accounted for by Russian and Ukrainian military expenditure. However, military aid to Ukraine and concerns about a heightened threat from Russia strongly influenced many other states’ spending decisions, as did tensions in East Asia.
Serge Weinberg, chairman of €43 billion French pharmaceuticals and healthcare multinational Sanofi, is one of the most prominent of the private investors tapping into this heightened state of defence awareness in the wake of the Ukraine war.
He is championing the consolidation of France’s fragmented aerospace and defence supply chain via Weinberg Capital Partners, his investment firm which has raised over €100mn for a new fund backing French defence companies. It expects further fund-raising to double that figure.
Weinberg’s campaign coincides with president Emmanuel Macron calling last year for French defence contractors to emulate a “war economy”. Macron’s administration backs the creation of investment funds to support some 4,000 small and mid-sized companies supplying the likes of defence and aerospace titans Airbus, Dassault Aviation and Thales.
“The bigger defence companies are concerned about having a solid supply chain. This is becoming even more important given the perspectives of additional military spending that is set to come through with the next multiyear military budget,” Weinberg told the Financial Times in March.
“There is a need for additional production capacity, ability to build up stocks, and therefore there is a need to strengthen the financial structures [of these groups],” the former chairman of PPR and CEO of Rexel added.
SIPRI data shows that military expenditure by states in Central and Western Europe totalled $345 billion in 2022. In real terms, spending by these states for the first time surpassed that in 1989, as the cold war was ending, and was 30 per cent higher than in 2013. Several states significantly increased their military spending following Russia’s invasion of Ukraine in February 2022, while others announced plans to raise spending levels over periods of up to a decade.
‘The invasion of Ukraine had an immediate impact on military spending decisions in Central and Western Europe. This included multi-year plans to boost spending from several governments,’ said Dr Diego Lopes da Silva, Senior Researcher with SIPRI’s Military Expenditure and Arms Production Programme. ‘As a result, we can reasonably expect military expenditure in Central and Western Europe to keep rising in the years ahead.’
Some of the sharpest increases were seen in Finland (+36 per cent), Lithuania (+27 per cent), Sweden (+12 per cent) and Poland (+11 per cent).
‘While the full-scale invasion of Ukraine in February 2022 certainly affected military spending decisions in 2022, concerns about Russian aggression have been building for much longer,’ said Lorenzo Scarazzato, Researcher with SIPRI’s Military Expenditure and Arms Production Programme. ‘Many former Eastern bloc states have more than doubled their military spending since 2014, the year when Russia annexed Crimea.’
The war in Ukraine has sparked plans for a significant increase in military spending in many other European countries, including France, Germany, Poland and the UK. With governments investing more in drones, sensors, cyber and artificial intelligence, private investors’ antennae are twitching.
That said, environmental, social and governance (ESG) consideration weigh heavily on some fund managers’ minds. Many are wary of being seen to support weapons manufacturers, opting instead to invest in developing dual-use technologies for both civil and military applications.
The two top private equity defence deals by value were consummated by Advent International, which bought UK-listed groups Cobham for £4bn in 2019 and Ultra Electronics for £2.8bn in 2022.
Tanks a lot
The war has also seen the number of military vehicles sold by private dealers in the UK to Ukraine soar since Vladimir Putin’s full-scale invasion last year.
As Ukraine’s forces have scrambled to arm themselves in the face of Russia’s onslaught started by the full-scale invasion in February 2022, with towns like Bakhmut and Avdiivka now under daily attack in the war, the demand for weapons has never been higher.
British businessman Nick Mead spent decades buying military vehicles from the UK Ministry of Defence for his entertainment company Tanks A Lot, but since February 2022, Ukrainians desperate for tanks and armour have been buying them off him. But Mead’s vehicles are not the only ones on the road to the war.
More than €34 million-worth of military vehicles were shipped from the UK to Ukraine between April and September 2022 alone, according to government data, while in the whole of 2021 only £37,000 worth of vehicles were sold, in 2020 it was £550,000 and nothing in 2019.
The soaring demand for British armoured vehicles has driven prices up, leading some to accuse sellers of profiteering. Mead says: “There’d be some people who’d think we’re profiteering out of war, and I guess we are and that hurts. What I’m trying to do is help Ukraine, and I wish a lot more people would help Ukraine.”
As for whether the surge in demand for matériel will intensify rivalry between suppliers belonging to the ‘Atlantic’ and European blocs, SIPRI’s Scarazzato reveals there are many discussions at the European level to coordinate procurement in favour of companies in the European Defence and Technology Industrial Base (EDTIB).
‘But the issue is notoriously thorny, as countries tend to favour their national industry. Moreover, the urgency and the pressure created by the war in Ukraine are pushing some countries towards off-the-shelves acquisitions often from the US companies or (in the case of Poland) South Korea.
Scarazzato adds a caveat, however. ‘European companies have been wary about ramping up production, wanting to see contracts signed before committing to investments. The reason is they want to make sure their return on investment is guaranteed, and not at the mercy of political wills.’