European Defense Sector Outlook 2025: Post-Putin Geopolitical Scenarios
Introduction
European defense spending has surged to Cold War levels amid Russia’s 2022 invasion of Ukraine and heightened geopolitical tensions. NATO allies and even traditionally neutral states have reversed decades of “peace dividend” cuts in order to rearm and reinforce deterrence. As of 2024, military expenditure in Europe jumped 17% to $693 billion, with every European country (except Malta) increasing its defense budget. Defense contractors across the continent – from Sweden’s Saab to Britain’s BAE Systems – are enjoying record order backlogs, and European defense stock indices have outperformed broader markets. Institutional investors once wary of arms makers for ESG reasons are now reconsidering these exclusions as defense is viewed as vital to security.
Looking ahead to a post-Putin era, Europe’s defense outlook will be shaped by what replaces Vladimir Putin’s regime in Moscow. This report analyzes three plausible scenarios and their implications for the European defense sector, focusing on both NATO and non-NATO countries (notably Sweden, Finland, Turkey, Switzerland, and Austria) from an investment perspective. The scenarios considered are:
Scenario 1 – Continued Authoritarian Regime, Sustained Russian Threat: A hardline leadership in Moscow (whether Putin or a like-minded successor) persists with aggressive, anti-Western policies, keeping Russia a formidable threat.
Scenario 2 – Chaotic Transition in Russia, Unpredictable Outcomes: A destabilized or fragmented Russia (e.g. internal power struggles or state fracture) creates an uncertain security environment with diffuse risks.
Scenario 3 – Stabilization and Normalization: A reformist or pragmatic post-Putin government de-escalates tensions, leading to a gradual normalization of Russian foreign policy and reduced threat perception.
For each scenario, we assess European defense spending trends, procurement and industrial capacity, and financial flows (public equity, ETFs, private equity, venture capital). We then provide detailed investor guidance – including portfolio strategy, stock/fund allocation principles, ESG considerations, and potential exit signals to manage risk – tailored to each geopolitical outcome. The goal is to equip institutional and high-net-worth investors with a forward-looking framework to navigate Europe’s defense sector in 2025 and beyond under varying post-Putin trajectories.
