The economics of war

Bianca Botes,
director Citadel Global

The United States (US) has committed to supply a staggering $5.6 billion in aid and arms to Ukraine to support the country in its defence against Russia. On Thursday the US government also approved up to $675 million in additional aid to Ukraine. When looking at numbers such as these, one will be naïve to think that this is a “free lunch”. As with everything, there will be a price to be paid by Ukraine and a dollar to be made by arms manufacturers.

Key themes for this week include:

  • Weapons, a booming industry
  • European Central Bank (ECB) hikes interest rate amid soaring inflation
  • South Africa surprises with trade deficit
  • United Kingdom (UK) unveils energy plan, bolstering the pound


War, violence, criminality; the three activities that drive the mega arms-industry on an annual basis. While the reasons behind these actions can be heavily debated, in war, whether we like to admit it or not, there is always a beneficiary.

According to the Stockholm International Peace Research Institute (SIPRI) – based on data that weapon-producing countries are willing to share – the financial value of the global arms trade equated to at least $118 billion in 2019, but this number is more than likely much higher. In 2020, the body pegged the industry at $531 billion, noting that while the rest of the world, and most industries, showed a contraction as a result of COVID-19, the top-100 arms companies saw an overall growth of 1.3%.

Financial results obtained by researchers from the SIPRI found that the sales of the top-100 arms manufacturers, which totalled the above $531 billion (€469 billion) in 2020, exceeded the economic output of Belgium. Nearly 54% of this can be attributed to the 41 US companies in SIPRI’s top 100. The main companies in the industry are US-based. Lockheed Martin, for example, sold more than $58 billion worth of weapons systems in 2020, a value exceeding the GDP of Lithuania.

In recent years, there has also been an increase in joint weapon manufacturing between countries. This raises concerns over the movement of these weapons, as European export regulations, alongside other countries, fall short on effectively controlling the export of weapons that are jointly produced, and, as a result, these weapons are often being supplied to countries considered “problematic”.

Since the Russian invasion of Ukraine, many countries have committed millions to arm Ukrainian soldiers against their Russian Invaders. The British Broadcasting Corporations recently released a snapshot of the biggest military aid donors to the Ukraine between 24 January and 3 August 2022. The top five contributing countries were:

  • United States: $25 billion
  • UK: $4.03 billion
  • Poland: $1.8 billion
  • Germany: $1.2 billion
  • Canada: $0.93 billion

When looking at historic data, the US is by far the biggest exporter of arms, with Saudi Arabia being the main recipient of these weapons between 2014 and 2018, receiving as much as 22% of the US exported weapons. It would also come as no surprise that transfers of arms to the Middle East grew 87% between 2009 and 2013, and then again between 2014 and 2018, according to amnesty international.

Now before you think that the biggest transfer of arms is of military grade ammunitions, the report by Amnesty International also contains worrisome numbers in terms of small arms and light weapons:

  • The Small Arms Survey estimates that there are more than one billion firearms in the world, the vast majority of which are in civilian hands.
  • There are about 21 firearms for every 100 residents in the United States, 53 in Yemen, 39 in Montenegro and Serbia, and 35 in Canada and Uruguay.
  • In 2017, Venezuela and El Salvador had the highest rates of violent deaths by firearm.
  • The Small Arms Survey estimates that within the next 50-year period, world production of military assault rifles, carbines, pistols, and light and heavy machine guns will range between 36 million and 46 million units.

While we will steer far away from speculating on whether or not the industry is actively or even passively driving conflict in various ways, we can, based on the financial values, conclude that war does, indeed, have many beneficiaries.


The ECB raised its main interest rates by 75 basis points on Thursday, following a 50 basis point rate hike in July. The hike met market expectations, and the main refinancing rate now stands at 1.25%, the marginal lending facility at 1.5%, and the deposit facility at 0.75%. Policymakers also said that interest rates will rise further over the next several meetings, as they aim to reduce demand and guard against the risk of a persistent upward shift in inflation expectations.

Retail sales in the UK increased by 0.5% on a like-for-like basis in August from a year ago, slowing from a 1.6% growth in July. Consumers have reigned in spending amid the surging cost of living. The data comes as Britons grapples with four-decade high inflation and the Bank of England (BoE) expects the economy to enter a recession by the end of 2022. Helen Dickinson, chief executive at the British Retail Consortium, said, “While inflation in retail prices is lower than general inflation at over 10%, this still represents a significant drop in sales volumes. For the first time in recent months, clothing sales were sluggish as summer events ended, and parents held back on back-to-school spending.”

The number of Americans filing new claims for unemployment benefits decreased by 6 000 to 222 000 in the week ending 3 September, from a downwardly revised 228 000 in the previous period, and well below market expectations of 240 000. The figure marks the lowest amount of weekly jobless claims since the final week of May 2022, highlighting a tight labour market and giving the Fed more space for aggressive interest rate hikes.

South African GDP shrank by 0.7% quarter-on-quarter in the three months to June, compared with market forecasts of a 0.8% contraction. Devastating floods in KwaZulu-Natal and intense power rationing had a negative impact on a number of industries, with manufacturing being the hardest hit. Other sharp declines were seen in agriculture, mining & quarrying. In addition, South Africa posted a current account deficit of R87 billion in the second quarter, compared to a surplus of R157 billion in the first quarter, and defying market estimates of a R100 billion surplus. It was the first current account shortfall since the second quarter of 2020.


The Dow Jones Industrial Average shed over 200 points on Thursday, while the S&P 500 and the Nasdaq lost 0.7% and 0.9% respectively. Investors are digesting hawkish remarks from US Federal Reserve (Fed) Chair, Jerome Powell, and ECB President, Christine Lagarde. During a session at the Cato Institute, Powell reiterated that the Fed would do what it takes to tame inflation, curbing any speculation of an imminent policy pivot. In Europe, the ECB delivered a record 75 basis point rate hike, with Lagarde providing a similar view regarding the need to tame price growth while pointing to a darkening growth outlook for the euro zone. These hawkish comments by two of the world’s most influential central banks rapidly sparked a global equity selloff, with technology and other growth stocks among the biggest losers.

The UK’s FTSE 100 erased earlier gains and traded more than 0.5% lower on Thursday, as sentiment in Europe cooled after the ECB hiked interest rates. In addition, the new UK Prime Minister, Liz Truss, announced that the government would cap domestic energy prices for households at £2 500 while limiting them for businesses, in an attempt to ease the ongoing cost-of-living crisis. Among single stocks, Associated British Foods tanked nearly 9% after the company signalled a lower profit forecast for next year.

European stocks extended their losing streak into Thursday, with the DAX underperforming its peers and shedding nearly 1.5%. Meanwhile, the regional STOXX 600 traded nearly 0.2% lower. Market volatility is set to continue amid wariness and uncertainty regarding the ongoing energy crisis, a poor economic outlook, and prospects that rising borrowing costs will negatively affect growth.

The JSE FTSE All Share Index gained on Thursday afternoon, as investors were digesting the latest ECB decision and hawkish remarks from Fed Chair, Jerome Powell. Resource shares continued to provide the main support, followed by financials. The index, however, remains in the red for the month, having shed nearly 4%.


Metal prices rebounded this week, but remained negative on a monthly basis, with steel, platinum, gold, silver, and copper all trading largely higher. The best performer, by far, was platinum, adding 5.86% on a weekly basis at the time of writing, following monthly losses, as hawkish central bank policy continues to dampen demand for metals. On a yearly basis, all metals, except for titanium and lithium, remain in negative terrain. From an exchange perspective, The London Metals Exchange Index bottomed around 3 650 points, down roughly 35% from its March peak and closing in on its lowest level since February 2021, amid lingering concerns about weak global demand. Persistent coronavirus-induced restrictions in top consumer, China, and a worsening energy crisis in Europe are impacting demand, especially from the manufacturing sector. However, concerns about supply disruptions should offer some support in the medium term, as smelters have been forced to curb output on the back of soaring natural gas and power prices, which have been exacerbated by the war in Ukraine and are making production unprofitable.

Brent Crude futures rose to the $89 per barrel level on Thursday, rebounding slightly after tumbling more than 5% in the previous session, as investors weighed on supply concerns against signs of a persistently sharper economic slowdown. President Vladimir Putin said Russia would immediately stop oil supply to countries that support the G7’s initiative to cap prices on Russian oil exports or the EU’s plan to place a ceiling on Russian natural gas sales. Brent prices remain close to the seven-month low of $87 hit earlier in the session, as aggressive monetary tightening and COVID lockdowns in China further weighed on demand.


The US Dollar Index approached 110 on Thursday, as the Fed Chair reiterated that the Central Bank is strongly committed to bring inflation down. Markets are currently betting on another 75 basis point rate hike when the Fed meets later in the month. At the same time, the US economy is seen to be in a better shape to handle a recession compared to other major economies.

The euro extended losses to trade below $0.99 on Thursday, as investors are getting increasingly concerned about the economic outlook in the euro area, despite ECB pledges to continue to raise interest rates to tackle inflation. President Lagarde stated that the ECB is still far away from the rate that will help return inflation to 2% target. ECB’s downside scenario sees a recession in 2023, however, the baseline scenario avoids the prospect at this stage. The euro has been under heavy pressure in the recent weeks, trading below parity since mid-August.

The British pound rebounded to above $1.15, after touching its lowest level since 1985 earlier this month, on the news that new Prime Minister, Liz Truss, has put an energy plan in place to tackle soaring energy costs and help the energy sector. Energy bills will be frozen at an average of £2 500 per annum for two years starting from 1 October and there will be an equivalent guarantee for businesses. The plan will also remove a ban on drilling for shale gas. The sterling, however, remains under pressure amid a challenging economic outlook.

The South African rand remains well above the R17.00/$ mark, touching on its lowest since August 2020, as investors seek the safety of the dollar amid rising global recession risks prompted by the worsening energy crisis and expectations of further monetary policy tightening. Meanwhile, recent domestic inflation data raised prospects of further interest rate hikes. Domestic data, indicating an economic contraction in the second quarter coupled with an unexpected trade deficit, also weighed on the currency.

The rand is trading at R17.40/$, R17.51/€ and R20.15/£.

Written by Citadel Global Director, Bianca Botes.

Citadel Global offers holistic treasury management services, including advice on currency risk management and hedging strategies, assistance in maintaining regulatory compliance, and foreign exchange execution and administration.