Something, of which Polish politicians have been warning since at least 2008, became reality on February 24: on this day, Russia launched its attack on Ukraine. After it had initially tried to conquer the capital Kiev, since recently the Russian army has focused its activity on the Eastern part of Ukraine, with the apparent objective to create a land corridor between the Crimean Peninsula and Russia. There are speculations that Putin wants to end the “Special Military Operation” against Ukraine until the annual Russian Victory Day on May 9. However, despite the superiority of its army, Russia has not made any significant military advances in Eastern Ukraine yet.
Several scenarios are possible for Ukraine after the fighting stops, which will happen sooner or later. In our view, the country will most likely be forced into a kind of neutrality but will not become a member of EU and NATO. On the other hand, due to the current conflict NATO will probably further strengthen its eastern border including a significant presence of the US army in countries such as Poland and the Baltics. In our view, given the experience from Germany during the Cold War, this could positively impact the GDP in regions, where these troops are/will be located. In 1985, >240,000 US soldiers served in military bases in Western Germany and this created 16,500 jobs for Germans. Also, it is estimated that they spent 40% of their salaries in local German shops or restaurants and not just on American products https://www.sueddeutsche.de/politik/amerikanische-streitkraefte-welche-bedeutung-us-truppen-in-deutschland-haben-1.4035390
The above shows that military bases can indeed be a significant economic factor, especially in regions with a weak industrial base. In Poland, there are currently c. 9,000 US soldiers, which are mainly based in relatively poor parts of the country e.g. the South-East. https://forsal.pl/swiat/bezpieczenstwo/artykuly/8386335,wojska-usa-w-polsce-obecnie-nad-wisla-przebywa-ok-9-tys-amerykanskich-zolnierzy.html In the Baltic countries, where between 6% and 27% of the population are Russians, there are in total >3,000 NATO troops. We expect that in the whole CEE region the number of NATO soldiers will significantly increase in the next three years. Apart from Poland and the Baltic countries, Romania will particularly benefit from this, in our view.
While the stronger permanent presence of NATO troops in CEE will likely positively impact the demand for local goods and services, the economies of the respective countries should also benefit from joint (R&D) projects with NATO partners. In addition, as all NATO countries will grow their military spending to at least 2% of GDP in the short term, there will be higher demand for military equipment and technology. Thus, we expect that such listed companies as e.g. VIGO Photonics S.A. www.vigo.com.pl (Market cap EUR 104.5m), Protektor S.A. www.protektorsa.pl (EUR 13m) and Lubawa S.A. www.lubawa.com.pl (EUR 81.6m) will be among the biggest winners. Moreover, we believe that especially the public sector and the armed forces will invest much more in IT security as cyber attacks will become a growing threat. This should be positive for e.g. Comp S.A. www.comp.com.pl (Market cap EUR 61.6m), Asseco Poland S.A. www.asseco.pl (EUR 1.4bn) and Passus S.A. www.passus.com (EUR 17.3m). Additionally, retailers such as Pepco Group NV www.pepcogroup.eu (EUR 5.2bn) and Jeronimo Martins SGPS, S.A. www.jeronimomartins.com (EUR 12.5bn) could benefit from increased purchasing power in regions with military bases.