As fighting continues to rage in Syria, talks have begun over an alliance of convenience between Russia and Western forces, and fears of a "proxy war" between America and Russia are finally starting to die down. But up north in Europe, it's still looking a lot like DEFCON 3.
In Poland, Raytheon (NYSE:RTN) recently won a multibillion-dollar contract to help build a Polish Shield for air defense against threats from the east. Latvia has asked the U.S. to sell it Stinger surface-to-air missiles (also from Raytheon) for the same purpose. Estonia is buying 44 used armored personnel carriers -- not from Raytheon this time, but from the Dutch -- as part of a $155 million rearmament program. Meanwhile, in Lithuania, the largest of the Baltic states, the president has called for $1.6 billion in new military spending by 2020.
And as of last week, we know where a lot that money is going.
On Wednesday, Nov. 4, the U.S. Defense Security Cooperation Agency (the arm of the Pentagon that facilitates arms sales to foreign governments) notified Congress of plans to sell the government of Lithuania an arms package of 84 M1126 Stryker Infantry Carrier Vehicles (ICV), each armed with an M2 Flex Machine Gun and also a Mk44 Bushmaster ATK 30mm automatic cannon, an upgraded XM813 30 mm chain gun, or a "European variant" thereof.
In total, the contract is valued at $599 million. DSCA says that it has not yet determined who will serve as "principal contractor" on the sale. But given that General Dynamics (NYSE:GD) is the company that makes the Stryker, odds are close to 100% that it is General Dynamics that will win the contract.
Pursuant to Section 36(b) of the U.S. Arms Export Control Act, Congress has 30 days to review Lithuania's request before it must either approve or refuse the sale. Failure to take either action means the sale can proceed by default -- and it's important to note: Congress has never refused to authorize an arms sales notified to it by DSCA. Ever.
It seems, therefore, that this deal is going forward.
Calling Russia out?
Now, can 84 armored personnel carriers -- even armed with an upgraded 30 mm cannon, replacing the Stryker's standard-issue .50-caliber machine gun -- deter an invasion? Obviously not. Russia can still roll into Lithuania anytime it wants to -- if it dares. What's significant about this deal, though, is that it (1) indicates America's resolve to provide its allies with the weapons they need to defend themselves, and (2) indicates Lithuania's resolve to match actions with words, and spend as much as necessary to beef up its own security.
What it means to investors
For a defense industry that's struggled for years to keep profits growing in the face of a ratcheted-back U.S. military budget, Europe's newfound commitment to paying for its own defense is creating an important new market for weapons sales. It may even have important follow-on effects. In General Dynamics' case, Congress recently authorized funds for upgrading 81 Strykers with 30 mm cannon, and General Dynamics has been encouraging the Pentagon to proceed with plans to upgrade as many as 1,000 more Strykers to the new configuration.
The fact that Lithuania is about to get an all-Stryker force, and all equipped with the upgrades -- which we do not yet have ourselves -- will argue forcefully for getting the job done here at home as well.