By the time I reached Russia, the tanks had fallen silent.
By the summer of 1995, the Grand Spectacle of Soviet military might -- the annual parade of tanks, armored personnel carriers, and mobile ICBMs through Red Square -- was no more. A new democratic, peace-loving, and, more importantly, cash-strapped government was in power. Red Square had become a temple not to the Arms Race, but instead to zagnivayushi kapitalizm*, ringed by hotels under renovation, a GUM department store filled to bursting with Western goods, and the beginnings of Russia's first, massive underground shopping mall.
Say it with me now, all together: "Sell-outs."
Sell-outs no more
This Friday, that all changes as the Red Army returns to its old stomping grounds on Red Square in the first display of post-Soviet military might seen since 1991. (Historians among you will note Friday's celebration lags our own V-E Day by 24 hours. That's because the Russians celebrate Victory Day on May 9 -- call it V-We day). But whatever you call it, on Friday, more than 6,000 troops supported by 110 armored vehicles will trundle again across rustic cobblestones fronting Lenin's Mausoleum, as 30 warplanes fly CAP overhead.
According to now-former Russian President Putin, the parade's revival marks "a demonstration of our growing defense capability." Which brings us to why we're discussing all this on an investing website: Does Russia's "growing defense capability" pose a threat to U.S. hegemony in international arms dealing, and the investing prospects of stocks like General Dynamics (NYSE: GD ) and Raytheon (NYSE: RTN ) ?
Selling out ... for profit
At first glance, you might not think so. After all, Russia's 2008 domestic military budget amounts to a bare $42 billion. While hardly chump change -- two U.S. defense contractors, Northrop Grumman (NYSE: NOC ) and Boeing (NYSE: BA ) , are feuding over a contract to build air tankers for about that sum -- it's a pittance by comparison to the $481 billion that the U.S. intends to spend on defense this year.
But domestic defense spending is just part of the picture -- a part that leaves out international sales. Russia earns some $8 billion a year selling MiG-29 fighter jets to Syria, Sukhois to Venezuela, India, and China, S-300 missile batteries to Iran, and most recently, APCs to Greece. It funnels the bulk of these sales through state-owned defense conglomerate RosOboronExport (literally, if unimaginatively: "Russian-Defense-Export"), and those sales have more than doubled since 2000.
Competing mainly on price, but increasingly on quality and service, the resurgence of Russia's defense industry poses a real threat to U.S. arms sales. In recent years, the gap between U.S. and Russian arms sales has shrunk from a 3-to-1 to 2-to-1 ratio. RosOboronExport reportedly has a backlog of orders stretching well past $30 billion.
Russia is also sidling up to Europe's EADS. For reasons unknown (but pretty easy to guess at), it aims to buy as much as a 25% stake in Europe's premier defense contractor, using state-owned bank VTB Bank as its front. And EADS is returning the favor, working to establish a joint venture with Russia's Irkut, now part of national champion United Aircraft.
While some European leaders have expressed discomfort with the idea, there's some truth to the old rubric: "The enemy of my enemy is my friend." All too often, Russian and European defense contractors are finding themselves on the same (losing) side of a battle for international market share. Last year's contest among Lockheed Martin (NYSE: LMT ) , Airbus, and United Aircraft to sell transport planes to India was one recent example. The upcoming contest to sell the Indians fighter jets offers another. And while Russia did not participate in Norway's invitation for bids on its new fighter jet, that contest (which, incidentally, Lockheed seems to be winning) could easily have been a third.
So, do I think a resurgent Russia is paving the way for a defense contracting merger with its old capitalist enemies in Western Europe?
In a word: No. That's just too crazy even for a conspiracy-theorizing Kremlinologist like me to envision. But as Russia's interests continue to align with Europe's, I would instead suggest a threat to firms like United Tech (NYSE: UTX ) and GE (NYSE: GE ) , which make much of their money subcontracting work from more single-minded, defense-oriented customers. As the tanks roll across Red Square once more, the reverberations will be felt everywhere.
Hey, it's already starting to feel like old times again. So tanks for the memories, Tovarisch Putin.
Further defense industry Kremlin-watching available in our archives:
*Fool contributor Rich Smith translates: It means "rotting Capitalism," before segueing into a Russian military joke: "Corporal Ivanov! Why do you always close one eye before firing your rifle?" (Say it with me now) -- Because if I close both eyes, I can't see the target!" Ba-dum-bum.
Rich enjoys lame jokes, but does not own shares of any company named above. The Motley Fool has a disclosure policy.