The fall of
Russian defence spending, and
the rise of NATO

Throughout the Cold War, arms exports were largely dominated by the defining superpowers of the era – the United States and the Soviet Union. Locked in a decades-long arms race, the two opposing states were producing and exporting huge quantities of military equipment, dwarfing the other global powers.

That chapter came to a close with the fall of the Soviet Union in 1991, which saw that state reconstituted into the Russian Federation. For several years, Russian arms exports were markedly lower, lagging countries such as Germany and France at certain points.

But from the early 2000s, the gap between the US and Russia was closed, and the competition to be the world’s leading arms exporter once again became a two-horse race. That is, until 2014.

Source: SIPRI Arms Transfers Database. Included for illustrative purposes only.

In 2014, following Ukraine’s Revolution of Dignity, Russia moved to annex Crimea and pile support behind pro-Russian separatists in the Donbas region. Arms exports fell sharply, as Russia looked to supply weapons and equipment to troops fighting in Ukraine. Over the next five years, as shown by the above chart, exports fell further – as Russia geared up for its full-scale invasion of Ukraine in 2022.

In that time, Russia has been surpassed as the second largest arms exporter by a leading European NATO member – France. France’s share of global arms exports has risen to 11% – just ahead of Russia and just behind the US (34%). This represents a 47% increase between 2014-2018 and 2019-2023.

Source: Euro News; SIPRI Arms Transfers Database. Included for illustrative purposes only.

So, what happened? Firstly – Russia’s need to retain arms for the Ukraine conflict, and the subsequent imposition of trade sanctions as punishment, has left a gap in the market. But beyond this, France has struck major deals with the likes of Qatar, Egypt, and India – namely for the Dassault Aviation’s Rafale fighter jet, preferred over Russian alternatives. India alone, accounts for 30% of French arms imports.

And France is not the only European NATO member upping its game – Italy’s arms exports increased by 86% over the past three years.

The increasing arms exports of France and Italy coincides with a rise in demand – European countries have nearly doubled their arms imports between 2014-2018 and 2019-2023, with purchases increasing by 94%. Around 23% of this was transferred to Ukraine, to aid in its defence against Russia’s invasion.

And so, for the first time in decades, two NATO members are leading global arms exports. In February of this year, NATO’s Secretary General, Jens Stoltenberg, announced that NATO’s European allies will spend 2% of their collective GDP on defence, for the first time since the alliance’s creation. The 2% target was set back in 2014, following Russia’s invasion of Crimea, and it seems that members are beginning to take that target seriously.

Poland is a prime example, this year spending around 4% of its GDP on defence. The country’s President, Andrzej Duda, even suggested during a visit to the US that the target should be raised to 3% for all NATO members.

But even if the original 2% target is collectively reached, only 18 of the 31 NATO members will be hitting it individually. So, while things are generally moving in the correct direction, there is still more work to be done.

As Brad Bowman, senior director of the Center on Military and Political Power at the Foundation for Defense of Democracies, puts it: “Every capital neglecting its commitment and failing to meet the spending floor this year has some serious explaining to do. We are witnessing the worst invasion in Europe since World War II. What the heck are those remaining governments waiting for?”[1]

When we consider more recent developments, such as the conflict between Israel and Palestine (and now Iran), it seems as though geopolitical unrest is worsening. More and more munitions are being diverted to these conflicts, depleting stockpiles and necessitating further spending.

So, while this trend continues, there is potentially an investment opportunity, especially when looking at the companies providing military equipment or cybersecurity tech to European NATO members and allies.

One interesting avenue is the EQM Future of Defence Index (NATONTR). Constituent business operations must derive more than 50% of their revenues from the manufacture and development of military aircraft and/or defence equipment, defence technology applications, or cybersecurity contracting with a NATO+ member nation.

A single stock cap of 5% is used to avoid overconcentration. In addition to this, the index employs a single country cap of 60% – as a result, allocation to European defence names is boosted. As of time of writing, approximately a third of the index’s holdings are domiciled in Europe.

Some key European names within the index include German automotive and arms manufacturer Rheinmetall, which last month forecasted its 2024 sales would hit a record €10 billion, compared with €7.2 billion the previous year. Despite many German industrial companies suffering following the energy crisis, Rheinmetall has seen strong growth.

Another holding, BAE Systems, the British aerospace, defence, and information security company, has seen it share price gain 120% since Russia invaded Ukraine. It has seen numerous orders off the back of geopolitical concerns, including a $754 million contract from the US army.

These two European names, Rheinmetall and BAE systems, have registered stock increases of 79% and 16.26% year-to-date (YTD). For comparison, US-based General Dynamics have seen an increase of 10.65% YTD, and Lockheed Martin a decrease of -1.27%.

European defence spending, it would seem, is showing no signs of slowing down. With geopolitical tensions seeming to worsen day-by-day, this trend may be poised to continue in the medium to long term.

Last year, HANetf launched Future of Defence UCITS ETF (NATO). The ETF aims to provide exposure to NATO and NATO+ ally defence and cyber defence spending. Uniquely, the defence ETF incorporates a NATO screen, with the aim of capturing the defence spending of geopolitically responsible state actors. Since its launch, the ETF has accrued over $300 million in assets under management (AUM) and was recently highlighted as the Best Innovative Newcomer ETF at the XENIX ETF Special Awards UK 2024.



For professional investors only. Thematic ETFs are exposed to a limited number of sectors and thus the investment will be concentrated and may experience high volatility. Investors capital is fully at risk and may not get back the amount originally invested. Exchange rates can have a positive or negative effect on returns.

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