Ukraine conflict a boon for defense industry
The Russia-Ukraine conflict is a boon for American defense contractors, which are in line to profit from increased Western military spending to bolster Kyiv’s forces and adapt to instability in the region.
In the weeks following Russia’s invasion, Congress approved its largest-ever defense spending bill, while U.S. allies in Europe pledged to dramatically ramp up their defense spending to counter the Russian threat, measures that will bring lucrative new contracts to the arms industry.
“There’s a lot of possibilities for ways that the contractors will benefit, and in the short term we could be talking about tens of billions of dollars, which is no small thing, even for these big companies,” said William Hartung, senior research fellow at the Quincy Institute for Responsible Statecraft.
President Biden on Tuesday signed a $1.5 trillion government funding bill that allocates $782 billion toward defense, roughly $30 billion above his initial request and nearly 6 percent larger than last year’s package. The bill also provides $6.5 billion in military support for Eastern European countries, including $3.5 billion in additional weapons for Ukraine.
The additional Ukraine aid comes on top of more than $1 billion the U.S. has already spent in the past year to arm Ukrainian soldiers with modern weapons, including Javelin anti-tank missiles, manufactured by Lockheed Martin and Raytheon Technologies, and Raytheon’s anti-aircraft Stinger missiles.
“There’s an old saying: ‘A high tide raises all ships.’ So I think when you start putting that kind of money into the pipeline, certainly we want our companies to compete for that,” said Arnold Punaro, a retired three-star general and former staff director on the Senate Armed Services Committee who now works as a defense industry consultant.
One defense lobbyist told The Hill that the near-term implications of quickly sending more equipment and defensive systems to the Ukrainians means “we’re going to have to backfill some of that ourselves, so that will force the Pentagon to buy more from some of the defense companies.”
And in the long term, the lobbyist said Democrats and Republicans expect an increased defense budget next year as well.
“So that will pump more money into procurement and into [research and development],” they added.
Contractors are also eyeing additional sales in Europe, where several countries, including Germany, Poland, Sweden and Italy, have announced they will increase their defense budgets.
Citing Russian aggression, Germany said Monday that it would purchase up to 35 American Lockheed Martin F-35 fighter jets, a major reversal from its previous plan to revamp its aging fleet with a combination of older, less expensive American- and European-made jets.
That comes after German Chancellor Olaf Scholz announced late last month that the nation would invest $111 billion in a new military investment fund and increase defense spending above 2 percent of its gross domestic product.
“We are proud of the confidence the German Federal Ministry of Defense and Luftwaffe officials have shown in choosing the F-35,” Lockheed Martin said in a statement.
Since the start of the new year, Lockheed Martin’s stock has soared nearly 25 percent, while Raytheon, General Dynamics and Northrop Grumman each saw their stock prices rise by around 12 percent.
In a January earnings call, Lockheed Martin CEO James Taiclet said that the “renewed great power competition” would lead to inflated defense budgets and additional sales. On the same day, Raytheon Technologies CEO Greg Hayes told investors that the company expected to see “opportunities for international sales” amid the Russian threat.
“The tensions in Eastern Europe, the tensions in the South China Sea, all of those things are putting pressure on some of the defense spending over there,” Hayes said. “So I fully expect we’re going to see some benefit from it.”
The defense lobbyist also predicted a major gain for U.S. defense firms thanks to increased European defense spending.
“As much as many countries have their own defense industrial base, they don’t make everything they need themselves. So they are going to rely on us in many cases for missiles, for aircraft, for ground vehicles,” they said.
Defense industry groups also cited rising tensions as they pushed U.S. lawmakers to pass a spending bill rather than settle for another continuing resolution, which would provide far less defense funding.
The National Defense Industrial Association (NDIA) warned lawmakers in January that failing to pass a spending bill “risks signaling a lack of seriousness and competence to counter Russian aggression in the Ukraine and Chinese actions in East Asia and the South China Sea.”
Lawmakers have said that the war and humanitarian crisis in Ukraine brought on by Russian President Vladimir Putin pushed them to come together and pass an omnibus bill after months of stalled negotiations. Congress ultimately provided far more aid to Ukraine than Biden requested.
“From a legislative standpoint, our legislative policy team is focused on the plus-up in the budget above the requested amount to support Ukraine and the fact it seems to have helped the public understanding of defense priorities for deterrence,” Kea Matory, the NDIA’s director of legislative policy, said in an email.
Lawmakers have indicated that spending hikes aren’t temporary. House Armed Services Committee Chairman Adam Smith (D-Wash.) said earlier this month that the 2023 budget will grow even larger because the Kremlin’s invasion “fundamentally altered what our national security posture, what our defense posture needs to be.”
The 2022 government spending bill, which passed both chambers with overwhelming bipartisan support last week, included billions of dollars for ships and planes that the Pentagon didn’t ask for, a common occurrence in Congress.
Congress authorized $27 billion for Navy ships, including $4 billion for several vessels the Navy didn’t ask for, and $900 million for additional Boeing F/A-18 Super Hornet fighter jets the Navy had hoped to phase out. The bill also provides billions to purchase 20 more Lockheed Martin C-130J transport planes than the Pentagon requested.
Lawmakers representing districts with substantial defense industry jobs, often the top recipients of contractors’ political donations, typically push for these purchases. Sen. Roy Blunt (R-Mo.) and Rep. Vicky Hartzler (R-Mo.), ranking member on the House Armed Service Tactical Air and Land Forces Committee, fought for the inclusion of F/A-18s and other vehicles manufactured in St. Louis.
“This is really about the economics of it and the domestic politics,” Hartung said.