The Global Arms Race Is on — and Stronger Than Ever

There’s no question that economic sanctions have had an impact on Russia. 

Economic growth is anemic there and inflation is a persistent problem even as it cools elsewhere in the world — registering double-digit increases despite a central bank interest rate of 13%.

Still, to its credit, Russia has found enough workarounds to keep things growing. 

Vladimir Putin’s meeting with Kim Jong Un is an act of desperation for sure. 

But it’s also a reminder that there’s a quiet alliance of bad actors in the world — one that includes China, Iran, and Belarus — as well as unsavory middlemen like the UAE who are willing to help Russia skirt sanctions if it means enriching themselves.

Russia also dipped out of a grain deal that was safeguarding Ukrainian wheat exports. And it's been bombing Ukrainian ports and targeting commercial ships in the Black Sea. 

As a result, Ukraine’s wheat exports have tumbled by 40%, while Russia is set to export 49 million tonnes of wheat this year, a nearly 50% increase from pre-invasion levels.

Russia has also been able to rely on its energy exports for revenue, and there it’s teamed up with Saudi Arabia to keep a tight lid on oil production and push prices higher.

But most dispiritingly, Russia has been able to acquire key technology, components, and resources to bolster its war effort.

Indeed, the missiles that have killed or injured nearly 30,000 Ukrainian civilians since the start of the war — and kill or maim hundreds more on a weekly basis — are coming from somewhere.

And in fact, Russia’s military production has not only held water — it’s actually climbed over prewar levels.

The rate at which Russia is producing tanks has doubled from 100 to 200 a year.

And the country is now on pace to manufacture 2 million artillery shells a year. 

That’s also double its prewar capacity. And it’s more ammo than is being produced in the United States and Europe.

The silver lining, at least, is that’s still not enough to keep the war machine running, as the country fired about 10 million rounds of artillery last year — 5x more than what it’s producing.

Another bit of good news is that the United States is ahead of schedule on its effort to ramp up munitions production. 

The Pentagon’s original goal was to build 85,000 155 mm artillery rounds a month by FY2028. However, it’s currently on pace to reach 100,000 per month by FY25 and at least 57,000 a month by spring 2024.

That’s thanks in large part to efforts made by companies like General Dynamics (NYSE: GD) and Lockheed Martin (NYSE: LMT), which are also benefiting from the Pentagon’s renewed commitment.

See, the military-industrial base shrank in the decades after the Cold War as demand fell. However, the United States and its Western allies have since come to realize that it was a mistake to let their defense manufacturing atrophy. 

So they’re reversing course.

Indeed, the FY24 defense budget (which totals $858 billion) includes $1.5 billion to increase the Army’s production capacity for the 155 mm shell. It also allocates another $18 billion to growing the industrial base over the next 15 years to get to that 100,000-per-month production target.

Again, General Dynamics makes 155 mm artillery shells, as well as key propellant and propulsion chemicals like ball powder propellants and artillery propelling charges.

It makes shells at its Ordnance and Tactical Systems facility in Wilkes-Barre, Pennsylvania, and it fills them at a government facility in Iowa.

Beyond that, the Army is collaborating with GD on another manufacturing facility in Garland, Texas.

Lockheed Martin and RTX (NYSE: RTX), meanwhile, are set to build a Javelin plant in Poland. 

The Javelin anti-tank missile was widely lauded for its effectiveness in neutralizing Russian armor battalions at the war’s outset.

Now everybody wants them. 

Lockheed Martin also builds Black Hawk helicopters in Poland. It assembles F-35s in Italy and Japan. And it recently announced a deal that will see Rheinmetall manufacture fuselages for the stealth fighters in Germany.

So there’s a massive build-out going on, and investors should act accordingly.

However, if you really want to profit from the most advanced military and defense technology, you should check out Secret Stock Files.

I cover all the most cutting-edge stuff there.

Fight on,

Jason Simpkins

@OCSimpkins on Twitter

Jason Simpkins is Assistant Managing Editor of the Outsider Club and Investment Director of Wall Street's Proving Ground, a financial advisory focused on security companies and defense contractors. For more on Jason, check out his editor's page. 

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