Authors: Samantha, Aidan, Alex, and Angely
Topic: Russian-Ukrainian War
Defense Markets
The whir of a ‘Goida’ drone is heard overhead, controlled with first-person VR-like goggles by a Ukrainian soldier miles away, before it finds its target, exploding and disabling a Russian-made T-90 tank. This common scene from war in Eastern Ukraine underscores not only the tragic loss of life, displacement of people, and capturing of territory, but also changes in the defense industry in Ukraine, Russia, and around the world.
The size of the war unleashed in 2022 exposed western defense establishments’ lack of preparedness as they have spent most of their recent efforts defeating smaller militaries and terrorist organizations. Western countries struggled to meet the output demands of the large-scale conflict particularly in producing artillery shells. However, this modern conflict brings military officials valuable experience and insight to what future conflicts of this scale could require.
The global defense industry has been greatly shifted by the war in Ukraine with the top 100 global defense contractors earning $632 billion in revenue in 2023 alone, a real-term annual growth of over 4%. This number is up from 2022 when the defense industry took a slight hit, and projects further growth in the future as the many conflicts around the world continue to escalate and demand for arms rises. Of the 100 largest companies in the United States, 41 of them have a large increase in revenue of 2.5% across the entire defense sector in 2023 while Russian firms enjoyed 40% growth in revenue from 2022 to 2023. As seen, changes in defense industries differed across regions and is broken down further below.
Ukraine
Ukraine’s manufacturing landscape has shifted broadly towards defense contracting since the war began in August 2022, when Ukroboronprom, their leading defense contractor exported just $1.2 Billion in arms annually.
Ukraine’s tech sector has shifted to focus primarily on defending the invasion and has been a primary factor in the country’s successes. Specifically, Ukrainian defense companies have made breakthroughs in producing military drones. In 2022 the country had just 35 drone manufacturers, but the field will explode with hundreds in 2024. Local companies are now capable of producing up to 4 million drones and robotic systems annually and will produce an estimated 2 million in 2024.
Additionally, in late 2023, the Ukrainian Minister of Strategic Industries Oleksandr Kamyshin stated that the production of mortar rounds increased by 42 times and the production of artillery shells by 2.5 times in 2023, as the country aims to be a leader in defense manufacturing and partner to the west.
Government spending is also helping to fuel growth from Ukrainian defense contractors. Weapons procurement funding soared to $6 billion in 2024, a 50% increase from 2023, and a figure that is pushing local firms to potentially surpass $20 billion in production value.
Joint production, development, and military equipment partnerships with at least 10 European countries and six NATO members have further helped propel Ukraine’s defense industry forward.
Western Europe
The defense industry across Europe as a whole also notably transformed since the initial invasion in 2022. Europe found themselves ill-equipped to deal with the demands associated with the large-scale modern conflict, and the European approaches to policy, outputs, and technology were tested leading to evolutions in the defense industry.
In November, the Aerospace, Security and Defence Industries Association of Europe (ASD) stated that “after the Russian annexation of Crimea in 2014, the combined defense budget of EU Member States has seen only an increase of approximately 20%, a figure that pales in comparison to the substantial increases by Russia and China, which have raised their defense budgets by nearly 300% and 600% in that period, respectively.”
Various emergency measures were taken after the events of 2022 aimed solely to replenish the stock of missiles and artillery shells needed to provide Ukraine sustainable aid in the long run. Along with monetary aid, they also proposed an initial measure called the European Defence Industrial Reinforcement through Common Procurement Act (EDIRPA) which aimed to address the most pressing issues in defense capabilities and establish an incentive and method for multiple member states to procure defense mechanisms together including missiles and shelling rounds.
Resulting from the war in Ukraine, the EU has invested money heavily in defense measures, contributing over 5.6 billion euro to Ukraine’s cause while Europe’s entire defense industry grew by 16.9% in 2023. Across the continent, governments seek to upscale their defenses resulting in positive results for defense firms. The ASD claims that the aerospace, naval, and land sectors all compiled 158.8 billion euro in revenue in 2023 alone, with each sector growing by over 15%. The growth also gave way to increased employment opportunities with ASD firms adding 76,000 jobs last year.
Eastern Europe
Russian aggression in Ukraine threatens not only Ukraine itself, but also the neighboring Eastern European countries that have historically had conflicts with Russia and belonged to the USSR. In 2023, Poland almost doubled its military spending from 15 to 27 billion US dollars. Russia’s neighbor, Finland, raised its military defense budget from 4.5 to 6.9 billion US dollars in 2024. Finland joined NATO in August of 2023 and since then, the Finnish government has promised to increase efforts to secure the Finnish-Russian border.
Ultimately, the Ukraine-Russia War is reshaping the defense and technology industries in their Eastern European neighbors. In Latvia, tech companies are releasing and experimenting with new tech by putting them in play in Ukraine. Kaspars Pollaks, who serves as the Director of LMT Defense, a state-owned technology defense company, said, “[Ukraine], unfortunately, is the best defense technology experimentation ground in the world right now. If you are not in Ukraine, then you are not in the defense business.”
In the Balkans, Balkan arms-makers are booming with Ukraine as its greatest market. Compared to 2020, Serbian arms exports have nearly quadrupled while exports from Bosnia nearly doubled in 2024. In fact, roughly $890 million worth of ammo from Serbia has gone to Ukraine since the 2022 invasion. To keep up with this demand, Bosnian ammunition factories are in production almost 24/7. At the Balkans Summit held in February, President Volodymyr Zelensky made remarks stating that joint arms production was essential in the fight against Russia.
At the beginning of this war, Ukraine was highly dependent on defense technology from countries abroad such as Turkiye, the United States, and China. With these advancements in Eastern Europe and technological aid from its neighbors, Ukraine has greater and quicker access to vital instruments that make a difference in this war.
In contrast to most of Russia’s neighbors supporting Ukraine, Belarus has made its support clear for Russia. The country has maintained close ties with Russia, including the fact that Belarus allows Russia to go through the Belarusian-Ukrainian border to invade Ukraine. Currently, the Belarusian defense industry is almost entirely dependent on Moscow as its primary customer, receiving more than one-thirds of its exports. Russia is dependent on Belarusian arms companies for certain arms components, as well as outdated Soviet equipment which has been modernized by Belarusian manufacturers for Russian usage.
Russia
Russia’s defense industry has also had a stark shift since the start of the invasion. Domestic military production has grown massively, fueled by defense spending that has risen to an estimated 7.5% of GDP with around the clock production and at-times mandatory 12-hour shifts.
Russia’s sprawling military-industrial complex is now a central part of their economy and created 520,000 new jobs since the start of the war, and now employs an estimated 3.5 million people, or 2.5% of the population. For example, the Kazan gunpowder plant, hired more than 500 workers in December of 2023 hiring that tripled average monthly salaries.
Despite a planned 70% increase in defense spending to $121 Billion in 2025, Putin war machine financing faces headwinds from maintaining social spending and avoiding a large increase in inflation. Putin’s job is made easier, if only a little, from help committed by ally’s North Korea, China, and Belarus. Refraining from outright support, China has continuously exported dual-use technology, items that can be used for both civilian and military uses.
America
The United States is the largest single country monetary supporter of Ukraine, committing more than $125 Billion to their support since February 2022. Despite the divide among Americans over outflows of aid to support Ukraine, a large portion of money allocated for Ukraine by Congress, $68 Billion of the $113 billion appropriated is to be invested in America, helping revitalize the US defense industry.
American aid to the tune of $24 billion is also transferred to Ukraine directly via equipment transfers from US weapons and equipment inventories. Of the almost $26 Billion appropriated by congress to restock US stores, $16.8 billion has been assigned to replace equipment from US stores, channeling more money into American defense manufacturers.
Additionally, the Department of Defense has committed $3.3 billion in funding across 18 states to modernise defense contractor assembly lines. American money earmarked for Ukraine is helping to revitalize and boost factories.As a result of increased government support, revenue for US defense contractors increased 2.5% in 2023.
Trump’s Future Impact on Aid to Ukraine and Consequences for Europe
With each and every country contributing to its military spending on Ukraine, how would Trump’s reelection as president affect this in the future? Based on his current agenda, Trump has consistently abided by his claims in withdrawing defense expenditure for Ukraine due to the United States as the largest military spender providing too much massive spending to NATO. According to ABC News, his reason for this would be that many European countries who are also involved in the war don’t contribute as much as the US based on their expenditure amounts on defense, which he believes is economically unfair. In general, he’s prioritizing more on domestic affairs to leverage the US economy, yet the consequences of neglecting international affairs would produce struggling diplomatic relations with Europe by extending the war in Ukraine even further.
As a result, this may target many European countries to have pressure on increasing their military defense spending, particularly countries with higher taxes than the US. Thus, with these countries such as Canada, Belgium, Spain, as well as France and Germany, they may potentially be economically vulnerable in meeting the 2% target on defense spending on NATO coming from their own pockets. According to the Economist, the continent’s NATO members have already increased defence spending by 0.26% of GDP. All together , this reached a new average of 1.7% of GDP last year.
With these countries providing inadequate spending on defense with economical vulnerability, they will find other ways to scrape in more funding to accommodate their defense spending shares. One of these ways would be to rearrange their spending by withdrawing some amounts such as their health and welfare in order to reach their shared percentage to NATO. Another resolution they could turn towards is to rely on borrowing. However, this may be a gamble for many countries to consider since this would lead to larger deficits and debt for them to face in the future. Some countries like Italy and Spain have faced this sort of consequence where they both spent more on interest payment than the armed forces. Lastly they may also turn to European Union funding. The drawback with this is that the funding would benefit more on Eastern European countries and the funding has to actively occur and aid other countries if there’s another shock that happens within Europe.
What’s Next?
The trend is clear: a surge in government spending has broadly led to increasing growth for defense contractors regardless of nation or region. It’s unclear whether this growth will be sustainable or transient in light of war in Ukraine passing the 1,000 day mark and continued conflict in the Middle East. However, one thing is for certain: Trump is a wildcard. His future plans and unpredictable changes may put more economic pressure and vulnerability on both European and American defense contractors.