Aid or Investment: How Is the War Between Russia and Ukraine Benefiting the United States Economy?
By David Kotoyan
Introduction
In February of 2022, the international community watched with grave concern as President Vladimir Putin authorized a comprehensive military assault on Ukraine. Two years into this relentless conflict, Russia's unsolicited military actions have disrupted established security frameworks in Europe and beyond, prompting a coalition of nations including the United States, United Kingdom, European Union, Australia, Canada, and Japan to implement over 16,500 sanctions targeting the Russian economy. Further key measures have included the freezing of approximately $350 billion, nearly half of Russia's foreign currency reserves, and immobilizing about 70% of the assets held by Russian financial institutions. The United States has led the international support for Ukraine, having already committed $74.3 billion in aid, with 62% earmarked for military support including logistics, weapons, and equipment. Another $60 billion is set to be administered following the recent U.S. House of Representatives vote. While it's not uncommon for a country to experience economic benefits as a result of war, the United States may be observing some of these economic advantages, despite not engaging in direct combat in the conflict zones of Ukraine and Russia.
Defense Industrial Base Dynamics
The U.S. Defense Industrial Base (DIB) comprises an intricate network of personnel, organizations, facilities, and resources dedicated to supplying the U.S. government—specifically through the Department of Defense (DOD)—with essential defense-related materials, products, and services. This complex network includes a diverse array of entities ranging from non-profit research centers and government-owned industrial sites to the “private” commercial sector. The commercial sector plays the main role in the DOD by virtue of its extensive resources, facilities, and overall considerable value of the products and services it delivers to the government. Unique within the broader U.S. economy, the defense industry operates primarily under a monopsony market condition, where the federal government is the sole purchaser of many defense contractors’ outputs. This raises the critical question: What conditions are truly necessary for the success of this industry? The answer largely depends on the government's continued and substantial procurement from these companies, which ultimately often coincides with ongoing wars or conflicts.
Historical Transformation and Current Structure
Historically, the landscape of the defense industry has undergone significant transformation. Thirty years ago, the commercial sector was composed of approximately 51 prime government contractors. However, the end of the Cold War precipitated a decline in defense expenditure, prompting a reassessment and consolidation of these contractors due to their heavy reliance on government spending. Today, the Department of Defense (DOD) works with five principal contractors, often referred to as the "Big Five": Lockheed Martin, Raytheon, Boeing, General Dynamics, and Northrop Grumman. These firms collectively secure about one-third of all annual DOD contract obligations in the U.S. Exemplified today, of the 78 major weapon systems outlined in the DOD’s fiscal year 2024 budget documents, 58—representing over 74%—are managed by at least one of the Big Five as a prime contractor. This consolidation has created a defense industry that is less innovative but also highly dependent on sustained or increasing defense spending to maintain profitability. Consequently, the structure of the DOD and its reliance on a few large contractors fosters an environment where the industry's viability is intrinsically linked to ongoing military engagement and conflict. This symbiotic relationship underscores a critical aspect: as long as there are threats or perceived threats requiring military responses, these contractors are positioned to benefit, thereby perpetuating a cycle where economic interests are potentially aligned with the continuation of international tensions and warfare.
Defense Spending and Conflict Dynamics
This trend of significant defense expenditure is illustrated by historical conflicts such as the Korean War, during which defense spending constituted 11% of the U.S. GDP, the Vietnam War at 8.6%, and the Cold War at 5.7%. In contrast, today's Department of Defense (DOD) funding is near a historical low relative to the size of the U.S. economy, with current defense spending amounting to merely 2.7% of GDP. This marked reduction began in 2011, coinciding with the U.S. withdrawals from Iraq and Afghanistan. Given this backdrop, the current U.S. engagement in the Russia-Ukraine conflict transcends simple humanitarian assistance. It also represents a strategic recalibration of defense investment.
Impact of Russia-Ukraine Conflict on U.S. Defense Industry
With the escalation of U.S. support for Ukraine, the American defense industry has seen substantial growth. Federal Reserve data indicates that industrial production in the U.S. aerospace and defense sector has surged by 17.5% since the onset of Russia's invasion of Ukraine. While there are assertions that U.S. aid simply dissipates into what some perceive as rampant corruption in Ukraine, studies reveal a different narrative: 90% of the aid allocated to Ukraine does not actually leave the U.S. Instead, these funds are retained domestically, where leading defense contractors have channeled tens of billions of dollars into developing over 100 new industrial manufacturing facilities. This expansion has not only created thousands of jobs across at least 38 states but has also ensured that vital subcomponents are sourced from every state, reinforcing the defense supply chain nationwide. The Biden administration has reported that out of the $60.7 billion allocated for Ukraine in a $95 billion supplemental defense bill, 64% will circulate back to the U.S. defense industrial base. This reinvestment is significant, potentially boosting the U.S. industrial defense base by approximately 0.5% of the annual gross domestic product over several years
The war has also significantly bolstered the business of the US Department of Defense and its contractors as European nations, who, concerned by the regional instability, are keen to strengthen their military capabilities. According to the State Department, the U.S. secured over $80 billion in major arms transactions in the fiscal year, with approximately $50 billion directed towards European allies—a figure more than quintuple the historical average. Poland has committed roughly $30 billion for Apache helicopters, High Mobility Artillery Rocket Systems (HIMARS), and M1A1 Abrams tanks. Meanwhile, Germany has invested $8.5 billion in Chinook helicopters and associated equipment, and the Czech Republic has allocated $5.6 billion for F-35 jets and munitions. This surge in defense procurement reflects a deepening of military and strategic ties between the U.S. and its European partners, driven by the urgent need for enhanced security measures in light of Russia’s aggression.
In addition to the surge in the defense sector, the United States has experienced a significant increase in demand for natural gas. The disruption of Russian gas supplies has sharply escalated energy prices and inflation in Europe consequently enhancing European demand for U.S. liquefied natural gas (LNG). Last year, the U.S. ascended to the position of the world's largest LNG exporter, with projections indicating that its LNG exports could nearly double by 2030 based on already-approved projects. Approximately two-thirds of these exports are destined for Europe. Currently, five new LNG projects are under development in the U.S., representing a total investment of around $100 billion. This expansion in LNG exports not only diversifies the U.S. energy portfolio but also positions the country as a key player in the global energy market, particularly at a time when European nations are urgently seeking reliable alternatives to Russian gas. The strategic growth in this sector evidently supports U.S. energy firms but also has broader economic implications, contributing significantly to job creation and infrastructure development across the nation.
Complex Economic Impact
While the United States defense industry has indeed benefited from the Ukraine conflict, it is challenging to assert definitively that this has bolstered the U.S. economy as a whole. The process for these funds to impact the economy is lengthy and complex. Congress must first authorize the replenishment of Pentagon inventories, followed by the Pentagon negotiating and signing contracts for new equipment. Moreover, foreign sales of major weapons systems are subject to lengthy timelines and are occasionally subject to cancellation. For instance, Poland, with an annual military budget of $16 billion, has placed orders totaling $30 billion with the United States. Although the European governments are paying for their orders, a significant portion of the spending is either directly or indirectly sourced from U.S. taxpayers, contributing further to the national deficit. Jason Furman, an economist at Harvard University, has expressed concerns about military spending displacing other governmental expenditures. He points to historical precedents, such as the Vietnam War in the 1960s, which contributed to an overheated U.S. economy and subsequent high inflation. While there is evidence that the U.S. defense industry has seen significant growth due to the conflict in Ukraine, assessing the overall benefit to the U.S. economy remains complex. The defense sector's expansion provides a short-term boost and strategic positioning on the global stage, but the long-term economic impacts are nuanced and multifaceted.
Works Cited
Fairless, Tom. “How War in Europe Boosts the U.S. Economy.” WSJ, 18 Feb. 2024, https://www.wsj.com/economy/ukraine-war-europe-american-economy-654ca41b.
“How Much Aid Has the U.S. Sent Ukraine? Here Are Six Charts.” Council on Foreign Relations, https://www.cfr.org/article/how-much-aid-has-us-sent-ukraine-here-are-six-charts. Accessed 23 Apr. 2024.
Nicastro, Luke A. The U.S. Defense Industrial Base: Background and Issues for Congress.
What Are the Sanctions on Russia and Have They Affected Its Economy? 27 Jan. 2022. www.bbc.com, https://www.bbc.com/news/world-europe-60125659.
Nicastro, Luke A. The U.S. Defense Industrial Base: Background and Issues for Congress.
https://crsreports.congress.gov/product/pdf/R/R47751
Jeffrey A. Sonnenfeld and Steven Tian. “What the U.S. Has to Gain from Supporting Ukraine.” Yale Insights, 15 Feb. 2024, https://insights.som.yale.edu/insights/what-the-us-has-to-gain-from-supporting-ukraine.
