This article was written exclusively for Investing.com
- Decades of peace: Russia’s economic rise led to a political gamble
- War in Ukraine changes global foreign relation dynamics
- Europe will arm, U.S. will increase its military budget
- A shaky stock market
- Defense stocks are roaring
In November 1989, the fall of the Berlin Wall marked the end of communism in eastern and central Europe. The Cold War officially ended at the Malta Summit, and Germany reunited in October 1990.
As the Cold War ended, a Russian KGB agent stationed in East Germany returned to Leningrad, which changed its name back to St. Petersburg. That agent was Vladimir Putin, today’s president of the Russian Federation who recently called the collapse of the Soviet empire “the greatest geopolitical catastrophe of the century.”
His actions over the last few years show he is on a path to return Russia to a more prominent force in the world. He has increased his sphere of influence—becoming an ally to Syria and Iran, the leading influential non-member of the international oil cartel, and most recently, China’s best friend in the world.
At the Beijing Winter Olympics, Putin and Chinese President Xi Jinping agreed to a $117 billion trade agreement and a “no-limits” deal for support. The Feb. 4 meeting between the two leaders was a watershed event that opened the door for Russia’s invasion of Ukraine less than one month later, on Feb. 24.
February 2022 will go down in history as the month that the world began to arm itself and tensions returned to Cold War levels.
Decades Of Peace: Russia’s Economic Rise Led To A Political Gamble
Before the 1917 Russian revolution, Vladimir Lenin living in exile wrote:
“There are decades when nothing happens, and there are weeks when decades happen.”
While the past three decades have not been totally quiet for Russia, given military actions in Crimea, Syria, and other areas, nothing matches the invasion of Ukraine, which made Lenin’s quote prophetic.
Putin does not consider Ukraine a country, but part of western Russia. Ukraine, the U.S., Europe, and their allies believe it is a sovereign country that has the right to determine its future. Russia has objected to NATO expansion in Europe. The disagreement reached a head when Russian troops invaded Ukraine, starting the first major war in Europe since the Second World War.
As Russia is a leading commodity producer, rising prices and the influx of U.S., European, Chinese and Asian businesses into Russia dramatically lifted the standard of living compared with the days of the U.S.S.R. The Russian participation in the international oil cartel’s production policy has made Putin a leading voice with Saudi Arabia on world oil prices. He enjoys domestic support as he improved living conditions, expanded the middle class, and increased Russia’s position on the world stage.
Putin has spent years cementing his leadership position by controlling the press, assembling a cadre of loyal mega-wealthy oligarchs, and eliminating any challenges to his leadership. Elections in Russia are like the exhibition hockey games the president plays where he scores seven or more goals, as no player is foolish enough to put up a defense.
Russia’s economic rise and Putin’s popularity and desire to continue to expand his country’s world position have led to a challenge of the West. The invasion of Ukraine is a massive gamble for the Russian leader, but he assumes that he has a partner in Beijing.
War In Ukraine Changes Global Foreign Relation Dynamics
Over a few short weeks, the world’s power dynamic has bifurcated into two blocks. China, Russia, North Korea, Iran, and other allied countries sit on one side of the ideological divide. The U.S., Europe, the U.K., Canada, Australia, South Korea, Japan, and other allied countries are on the other side.
China and Russia perceive weakness in the U.S. and Europe and have decided to make a move to shift the geopolitical landscape in their favor. In speeches in late 2021, the Russian leader said the West is destroying itself through woke politics. In 2021, China’s Xi drew distinctions between U.S. and Chinese culture.
Before the “no-limits” alliance for cooperation, the Chinese and Russian leaders ideologically weaponized cultural differences with the world’s leading economy and leader of the free world, the U.S.
Europe Will Arm, U.S. Will Increase Its Military Budget
The war in Ukraine is the first rejection of U.S. influence and has far-ranging consequences. The bifurcation of globalism is leading to an increase in military weaponization. The latest symptoms are Germany’s decision to strengthen its military and Japan’s move to upgrade its forces. Last week, North Korea tested a new ICBM, with the U.S. calling the test a “serious escalation.”
The bottom line is the bifurcation of the world into two ideological globalist spheres will cause a dramatic increase in military spending.
A Shaky Stock Market
Last week, the U.S. Bureau of Labor Statistics reported that the consumer price index in February rose by 7.9%, the biggest increase in four decades. The Biden administration blamed rising prices on Russia’s invasion of Ukraine. However, the war did not start until late February, so the actual impact on prices was not in the February data. Sanctions, export bans, and other economic events have not yet shown up in the CPI and PPI data. The war’s impact on the global economy will continue to cause prices to rise in the U.S. and Europe.
Meanwhile, Russia is a raw materials supermarket and China is the world’s leading consumer. The Feb. 4 agreement could make sanctions toothless, as Russia and China benefit from cooperation, and Russia will likely sell China its required commodities at discounted levels to world prices.
Rising inflation and the war are weighing on the U.S. stock market. The S&P 500, which broadly reflects the U.S. equity market, reached its latest all-time high on Jan. 5, at 4,818.62.
Source: Barchart
On Mar. 14, the index was at the 4,226.09 level, down 12.3% from the high. Stock market volatility has increased, and the trend has been bearish as the S&P 500 has made lower highs and lower lows since the record peak.
Defense Stocks Roaring
Equity investors have been moving towards a defensive posture. The geopolitical landscape is causing military spending to increase. Defense stocks stand to profit from the shift, and the leaders have outperformed the overall stock market in 2022.
Source: Barchart
General Dynamics (NYSE:GD) rose from $208.47 at the end of 2021 to $233.77 per share on Mar. 14, a 12.1% rise.
Source: Barchart
Northrop Grumman Corporation (NYSE:NOC) moved from $387.07 to $437.39 per share, or 13% higher, over the same period.
Source: Barchart
Raytheon Technologies Corporation (NYSE:RTX) rallied from $86.06 on Dec. 31, to $96.40 per share on Mar. 14, a 12% increase.
Markets reflect the economic and geopolitical landscapes. Companies that manufacture military equipment stand to profit from the increase in military spending as the defense contractors will see the benefits of increasing military budgets in the U.S., Europe, and other Western countries to counter the Chinese-Russian “no-limits” pledge for mutual support.
The Cold War ended when the Berlin Wall fell, but it is back in 2022. Defense stocks could be the most defensive tools for investors circumnavigating a treacherous stock market as inflation and war are a potent bearish cocktail for many equities.