According to the analysts at GlobalFirepower.com, the Russian Army boasts an armored force of 15,500 tanks. But across the border in Latvia, Russia's tiny Baltic neighbor has a somewhat smaller arsenal with which to oppose it: three tanks. Tanks that look like this:
Now, consider that the Russian army facing Latvia on the other side of the border boasts ultra-modern weapons systems that look like this:
You can easily understand why a lot of folks in Latvia are starting to feel a bit nervous now that Russia has begun nibbling off pieces of its neighbors again. Even more so given that, after making a meal of Crimea and Eastern Ukraine, Russia recently began rattling sabres in the Baltics, alleging violations of the rights of Russian speakers in Lithuania, and insisting that Latvia declare Russian to be its official second language. It even -- reportedly -- abducted an Estonian officer from his post on the Russian border.
So you can understand why some folks in Latvia are saying that it's time to beef up spending on national defense. And, as it turns out, Latvia has begun doing just that.
When the going gets tough, the tough go shopping
Last month, we learned that Latvia's Ministry of Defense arranged to purchase 123 surplus British Army CVR(T) armored personnel carriers for its Army. The CVR(T)s, said to be of the Sampson (APC) and Scimitar (light tank) varieties, were first designed by British arms maker Alvis (now part of BAE Systems (OTC:BAES.Y) (LSE: BA)). So they're no spring chickens themselves. But for Britain's asking price of just $64.6 million, including the cost of refurbishment, the price is right on for this arms deal.
Most importantly, this purchase will increase the size of Latvia's armored vehicles force by 4,100%. That should make it look somewhat tougher "on paper" at least, and perhaps help to dissuade any would-be aggressors. And seeing as Britain was able to use the weapons in the former Yugoslavia, in Iraq, and in Afghanistan, the CVR(T)s must have some value to a modern army. At the very least, it could be a stopgap until the country can scratch together enough money to buy more formidable weapons systems.
Where there's a will, there's a way
Indeed, according to website Medium.com, which reported on the British arms sale last month, this is precisely Latvia's intention: to continue "bolstering its defensive firepower" and increase participation in military exercises with its NATO allies.
It's about time. According to the CIA World Factbook, Latvia possesses one of the world's sparest militaries and lowest levels of defense spending. In 2012, the country spent barely 0.9% of its $37.4 billion GDP on defense -- $344 million. Just bringing Latvia's defense spending up to the 2%-of-GDP level that NATO members are encouraged to maintain would therefore mean more than doubling its military budget.
And rectifying years of neglect for its military, and upgrading that military so that it can effectively cooperate with its NATO allies? That will almost certainly require the investment of hundreds of millions of dollars more.
What it means for investors
If this is truly Latvia's intention, as Medium.com reports, then last month's CVR(T) deal may be only the start of a larger Latvian arms-buying program. So what might that mean for investors?
For one thing, it means that European heavy weapons manufacturers Krauss-Maffei Wegmann (KMW) and Nexter have picked an excellent time to decide to merge their tank-building operations -- right at the very moment that Russian military adventurism in Eastern Europe is creating growth opportunities for defense contractors in the West. Increased investment in armor for its ground forces also opens an opportunity for KMW/Nexter rival General Dynamics (NYSE:GD), which, according to S&P Capital IQ data, is coming off eight-straight quarters of year-over-year declines in revenue at its Combat Systems division.
For General Dynamics, in particular, now is the time to get a move on, and begin marketing its much more muscular tanks to this very motivated buyer.