Explained: As the war in Ukraine rages on, will 2023 be the year of defence companies?

The war in Ukraine will soon mark one year, and there appears no possibility of Russia ceasing its offensive anytime soon. Since the beginning of the war, Ukrainian President Volodymyr Zelensky has appealed to international governments to send weapons and military equipment to further enable his country retaliate against Russian attacks. Recently, Germany and the United States (US) became the latest countries in the West to supply battle tanks to Kyiv, after initially being reluctant to do so.

It has been observed that since the beginning of the war on February 24, 2022, there has been an upward trend in global military spending as several countries are increasing their military budgets. An increase in spending would mean more money for defence companies- particularly from the US. 

As Russia's offensive in Ukraine rages on, will 2023 be the year of defence companies?

United States: Defence companies post higher net sales

A report by the news agency Reuters on Monday (January 23) said that American defence companies were set to post higher sales in the fourth quarter bolstered by easing supply chain bottlenecks and increased defence outlays as the Pentagon and allies stepped up spending to aid Ukraine. Two defence companies — Lockheed Martin and Raytheon Technologies — reported their fourth-quarter earnings on Tuesday. Lockheed Martin reported fourth quarter 2022 net sales of $19.0 billion, compared to $17.7 billion in the fourth quarter of 2021, a report by Cision PR Newswire said. 

On the other hand, Raytheon Technologies, an aerospace and defence company, beat analysts' expectations as it fed off a strong travel demand worldwide which boosted demand for its jet engine, parts and services. According to data from Refinitiv, Raytheon reported an adjusted net income of $1.27 per share in the quarter that ended December 31, above analysts' average estimate of $1.24 per share. The company's net sales were up 6.2% at $18.09 billion, but missed analysts' average estimate of $18.15 billion. A report by Reuters on Tuesday said that Raytheon's missiles and defence unit sales were up 6.2% to $4.1 billion in the fourth quarter. 

Another American company Northrop Grumman reported a fourth-quarter sales growth of 16% year-over-year to $10.03 billion, beating the consensus of $9.66 billion, a report by Benzinga on Wednesday said. 

Defence budgets booming worldwide 

Many countries assisting Ukraine, have replenished their military equipment sent to the war-torn country and now are working towards increasing their own defence budgets. 

Japan, which supplied bulletproof vests, helmets, medical kits and other supplies to Ukraine last year, will boost its defence budget for 2023. In December last year, the government unveiled a record $863 billion (114.4 trillion yen) budget amid rising threats from North Korea and China. The budget would include the purchase of US-made Tomahawks and other long-range cruise missiles that can hit targets in China or North Korea, a report by Al-Jazeera said. The government would also buy standoff missiles for launch from warplanes from Norway and from Lockheed Martin.

French President Emmanuel Macron announced last week that his government would boost military spending by more than one-third in the coming years. On January 20, Macron said the planned budget from 2024-2030 would adapt the military to the possibility of high-intensity conflicts, made all the more urgent since the start of the war in Ukraine, Al-Jazeera reported. The budget for the period will stand at $447 billion, up from $320 in 2019-2025. France, which has supplied Ukraine with rocket launchers and Crotale air defence systems, recently announced that it would supply battle tanks to the war-hit country. 

Germany, which announced the supply of Leopard-2 tanks to Ukraine, approved its defence budget last year. Germany's core defence spending for 2023 would amount to $55.4 billion, a 0.6% nominal decrease from 2022. Since the beginning of the Russian offensive in Ukraine, there has been an intense debate in Berlin over the state of the German military and the role it should play in Europe. Just three days after the war began, chancellor Olaf Scholz proclaimed “a change of era” for the country's defence policy, according to The Christian Science Monitor.  

Who is the biggest winner in the Ukraine war?

The United States has emerged as one of the biggest supporters of Ukraine in terms of the provision of military equipment. And one cannot deny the fact Ukraine would not have been able to fight back against Russia without weapons supplied by the US. And therefore, the American arms industry is the biggest winner.

However, Washington has also faced criticism. In November last year, European officials hit out at the Joe Biden administration for profiting from the war. Speaking to POLITICO, one such official said, "The fact is, if you look at it soberly, the country that is most profiting from this war (in Ukraine) is the US because they are selling more gas and at higher prices, and because they are selling more weapons."

A month before the war, a likely opportunity surfaced for Western arms companies

Just a month before the Russian offensive started, top Western arms companies were briefing investors about a likely boost to their profits. George J. Hayes from Raytheon said during a call, "We just have to look to last week where we saw the drone attack in the UAE … And of course, the tensions in eastern Europe, the tensions in the South China Sea, all of those things are putting pressure on some of the defence spending over there. So I fully expect we’re going to see some benefit from it," the Conversation reported in March 2022. 

So it's clear: the military-industrial complex is thriving once again as the world looks at prospects of more long-drawn wars, now over Ukraine and possibly soon over Taiwan. If the 49% increase in military sales by the US to foreign countries is anything to go by, 2023 will be the year of American defence companies.

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