Check out this timeline.
In 2008, Russian tanks invaded and crushed the military forces of the U.S.- and EU-allied Republic of Georgia. Weak objections were raised by the governments of France and Germany -- but little more.
Two years later, French defense contractor DCNS signed a landmark deal to build and sell to the Russian Navy a pair of 16,500 Mistral-class amphibious warfare ships, each capable of putting ashore an assault force of up to a 40 tanks, 16 helicopters, and 900 assault troops -- or a combination of the three. The deal, worth $1.7 billion, was the largest sale of Western weaponry to formerly Soviet Russia in recent memory.
One year after that, German defense contractor Rheinmetall joined the Russian arms race, inking a $167 million contract to build a combat training facility for the Russian Army, capable of churning out 30,000 fully trained soldiers per year.
Yes, you read that right. France and Germany, two countries that in the not so distant past fought wars against -- and even invaded -- Russian territory, are now selling weapons to the Russians. Napoleon, the Kaiser, and Adolf Hitler himself must be rolling in their graves.
Or at least they were.
Not so fast, Tex
Fast-forward three years, and once again, Russian troops are on the march into a former Soviet republic, this time invading and annexing the Crimean Peninsula of Ukraine -- shooting unresisting Ukrainian soldiers and seizing Ukrainian warships and military bases in the process. This time, while concrete actions to defend a Western ally are nearly as lacking as was the case in the Georgian war, economic sanctions are beginning to take shape.
Counting the effect of the latest round of sanctions announced by the Obama administration this past week, Russian stocks have lost roughly 8% of their value since the start of the Crimean Crisis, while the Russian ruble is down about 10%.
And in a move directly targeting the Russian military at the heart of this problem, Germany announced Wednesday that it is suspending performance of Rheinmetall's contract with the Russian Army, which had been slated for completion this year. France is contemplating a similar move with respect to the two Mistral warships -- one of which, the Vladivostok, is similarly due for delivery this year.
What it means to investors
Now, U.S. investors may be tempted to dismiss all of this as irrelevant to their investments, reasoning that all this just serves France and Germany right -- they shouldn't have been selling arms to Soviet Communists in the first place. But that thinking would be wrong on two points.
First, President Putin isn't a Soviet Communist. Technically, he's more of a Russian imperialist. And second, the reason DCNS and Rheinmetall sought out Russian buyers for their arms is fully applicable to U.S. investors in the defense contracting sphere.
Across America, and Europe, and around the globe, defense budgets are drying up as governments attempt to slim down their finances deal with the aftermath of the financial crisis. This lack of defense spending at home has forced national defense contractors to look abroad for new customers to shore up their revenue streams.
DCNS and Rheinmetall may have chosen poorly in picking Russia as their go-to customer. But some of the places American companies have been selling arms lately are nearly as sketchy:
- $100 million to upgrade the capability of Pakistan's air force ...
- $600 million in sales to train troops for the Libyan army, plus another near-$600 million sale to supply Libya with two Lockheed Martin (NYSE: LMT ) C-130J military transports ...
- $1 billion to sell Saudi Arabia 15,699 dangerous missiles that may end up who knows where ...
- ... and $2.4 billion worth of shoulder-fired anti-aircraft missiles and other armaments, all heading for Iraq -- and with the same caveat.
Arguably, these deals are all necessary to keep the defense industry's revenues flowing. Still, it doesn't take a lot of imagination to see how any one of these deals could result in significant blowback for U.S. foreign policy -- and significant damage to the same defense contractors that are now eagerly seeking out these sales around the globe.
The biggest problem Europe faces ...
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