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Will Russian Aggression in Ukraine Spark a New Arms Race in Europe?

By Rich Smith – Mar 23, 2014 at 3:45PM

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In one NATO member state, the race to rearm has already begun.

"By his open repudiation of the Budapest memorandum, President Putin has ... provided a rationale for [Europeans] to arm themselves to the teeth."
-- Canadian Prime Minister Stephen Harper 

Russian tanks -- not just for parades anymore. Photo: Wikimedia Commons.

Three days after Russian diplomats assured the West that Russia would not invade Ukraine, Russia ... invaded Ukraine. In the weeks since, troops that Russian President Vladimir Putin steadfastly insisted were not "Russian" consolidated control over the Crimean Peninsula, storming military bases, snapping up Ukrainian warships stuck in port, setting up missile batteries -- and finally, annexing the peninsula to Russia.

To date, Ukraine has not responded militarily to Russia's actions. But from a point of extremely low military preparedness, the nation is slowly taking steps to stand up its armed forces to oppose further encroachment on its territory. Reserves have been mobilized and volunteers continue to stream into army recruiting offices. Ukraine's Verkhovna Rada has upped funding for defense by $635 million -- and in case that's not enough, the Ukrainian Ministry of Defense held a telethon that raised $1 million in donations via text message.

Ukraine's army helped out America in Iraq. Meanwhile, it withered away at home. Photo: Wikimedia Commons.

Nor is Ukraine the only country acting to "arm itself to the teeth."

Teeth bared across the continent
In Lithuania, President Dalia Grybauskaite requested the relocation of a half dozen U.S. F-15 fighter jets to her country, warning: "Russia today is dangerous. After Ukraine will be Moldova, and after Moldova will be different countries."

Estonian President Toomas Hendrik agrees, saying "events in Ukraine show that ... Estonia and the [other] Baltic states ... must invest more in our national defense." 

Russia's move into neighboring Ukraine, and worries over a possible incursion into the Transdniester region of nearby Moldova, have set Poland on edge as well. Two weeks ago, the U.S. beefed up its military presence in NATO-ally Poland by sending a dozen F-16 fighter jets to a base in-country. The crisis next door is likely, too, to accelerate Poland's deployment of a massive Poland is investing in a $43 billion air defense system to be dubbed "the Polish Shield." Designed to protect Poland from hostile aircraft, drones, cruise missiles and even tactical ballistic missiles, the "Shield" project is currently reviewing potential contractors to build it -- with defense contractors Lockheed Martin (LMT -0.25%) and Raytheon (RTN) offering up their Medium Extended Air Defense System and Patriot air defense systems to consideration.

Even the Vikings are nervous
Most recently -- and most unexpectedly -- we learned that another country that has had its tussles with Russian in the past, Sweden, is also looking to arm up.

For more than a decade, Sweden has skimped on defense spending, with the result that some sectors of its military are now at less than 25% of their Cold War strength. Budgeted at a less-than-impressive 1.5% of GDP as recently as 2006, Sweden's defense spending has shrunk to an anemic 1.05% of GDP in 2014 -- and the country's own Armed Forces Command recently warned that in the face of a hypothetical Russian attack, the country would fall within a week.

Now, faced with actual Russian aggression in Ukraine, Swedish deputy prime minister Jan Bjorklund is making the un-controversial observation that "we need to return to our original defense doctrine of having the capability to defend our borders."

New plans, now under consideration, call for Sweden to more than double the rate at which it produces diesel-electric submarines for coastal defense. The five subs Sweden may build would, in and of themselves, require a 25% increase to the country's defense budget. And that could be only the beginning.

Peter Hultqvist, chairman of the Parliamentary Defense Committee, has argued that beyond building a few more subs, Sweden must "build a stronger and better resourced defense." He continued: "Having a robust air and naval presence in the Baltic Sea and a strengthened military base on Gotland Island is fundamental to defending future threats."

What it means to investors
At the risk of stating the obvious, with countries like Canada -- and Sweden -- start talking up military rearmament, something significant is afoot. These are hardly warmongering nations, after all, but Russia's actions in Ukraine have set them on edge. The result could be billions of dollars of new funding unlocked for defense spending -- and new opportunities for investors.

Now would be a very good time for investors to take a close look at the major defense stocks and begin considering which ones might make for good bargains if talk of rearmament turns into actual increases in defense spending.

Like its diesel-electric attack submarine HMS Gotland, will Sweden's defense budget rise from the depths? Photo: Wikimedia Commons.

Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of Lockheed Martin and Raytheon. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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