At approximately 10 p.m. Eastern Wednesday night, Russian military forces launched an all-out assault on their neighbor Ukraine. Russia's move sparked a sell-off in Russian stocks yesterday -- but an equal and opposite surge in the stock prices of U.S. defense stocks.
Logical, right? But here's where the story gets strange. As of 3:15 p.m. ET Friday, as the war continues to wage across Ukraine, shares of U.S. defense stocks Lockheed Martin (LMT 0.29%) and General Electric (GE 0.59%) continue to move higher, up 3.5% and 3.9% respectively -- but Russian electronic payments company Qiwi (QIWI) is up even more, rising 9.5%.
Does that make sense?
In the case of Lockheed Martin and General Electric, I'd say this stock market strength does indeed make sense. As Europe wakes up to the military threat posed by Russia, it's all but certain that defense budgets in NATO nations will rise, meaning more business for defense companies Lockheed Martin and GE as they sell, respectively, fighter jets to European militaries, and fighter jet engines to power them.
At the same time, Qiwi's rise might also make sense, depending on your perspective. Shares of the Cyprus-headquartered financial company (that according to S&P Global Market Intelligence does 81% of its business in Russia and elsewhere in the Commonwealth of Independent States) plunged 21% Thursday as investors freaked out over the potential disruption to Qiwi's business from Western nations leveling sanctions, freezing bank accounts, and threatening to cut Russia off from SWIFT, the information superhighway connecting financial institutions all around the world.
So far, however, the West has not yet gone so far as to cut Russia out of the SWIFT payments network, and investors in Qiwi may be heaving a sigh of relief over that, buying back shares today that they sold in a panic yesterday.
Of these two trends, however, I suspect that the defense business is the one best positioned to thrive going forward. Currently, just one in three NATO nations meets the agreed target of spending 2% of GDP on defense, and according to a report by the BBC, the average is less than 1.8%. Just reaching the old, pre-Russian invasion target of 2%, therefore, implies that defense spending in Europe will rise by 10%. And if calls to grow defense spending to 4% are heeded, defense stocks could positively boom, as sales more than double in future years.
Conversely, while Qiwi is getting a lift from the failure of Western nations to lock Russia out of SWIFT, that reprieve could be fleeting. Already today, we've heard that Germany and Italy, two of the three European Union nations that previously opposed kicking Russia out of SWIFT, have now come around to the opinion that it's time to take this step.
With momentum building for adding a SWIFT expulsion to the list of sanctions being levied against Russia, I suspect it's only a matter of time now before that step is taken. When that happens, Qiwi's stock gains today could spoil fast.