Conflict and war: What is it good for?

Conflict and war: What is it good for?

London (CNN) -- The West is bombing terror group ISIS in Syria and Iraq, while Russia is engaged in a brittle stand-off in Eastern Ukraine. Bloodshed has dominated headlines through summer but, amid the misery, there is a winner: The defense industry.

Since ISIS launched its major offensive in June, capturing vast areas of Syria and Iraq, defense stocks have bounced. And while this is not new, modern warfare is dictating new twists to the economics of conflict.

American companies Lockheed Martin, Raytheon, General Dynamics and Northrop Grumman have enjoyed steadily rising stock prices since ISIS rose to prominence. British sector giant BAE Systems has also outperformed the market.

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The trend reflects the boom in defense stocks after the 1991 Gulf War and 9/11 attacks, when investors piled into companies they believed would benefit from the conflict.

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Now, with two high-profile conflicts that have dragged in the West, the sector is once again being seen as a good bet -- but for different reasons.

Ukraine's conflict with Russia -- one which is breeding a new Cold War with the West, as opposed to the airstrikes targeting ISIS -- is likely to bring the bigger economic boost, according to the International Security and Development Center's Tilman Bruck.

Bigger than bombs

In modern warfare it is not ammunition, bombs or missiles that drives the expenditure. The U.S. and its allies have stocks of weapons that can be used in bombing ISIS, and can be easily replenished, according to Bruck.

Rather, the last two decades has seen a shift in the West's participation in conflict to ones directed from a distance, as defense become more sophisticated.

Europe, according to Bruck, may no longer be capable of fighting against a "traditional" attack. He argues that since the end of the Cold War, focus has shifted from conflicts on Europe's doorstep to those in other regions, such as the Middle East or Africa.

The rising stocks are a reflection of investors' expectations Europe would invest in expensive high-tech defense structures, in the light of its worsening relationship with Russia, he said.

It is now obvious that we cannot take our security for granted. We will have to invest more in our defense and security.
Anders Fogh Rasmussen

"If we see defense companies stock raising, it's because the West is realizing it is not prepared for a war against Russia and its allies," Bruck said.

The Ukraine crisis was at the heart of discussions during a recent NATO summit in Wales, where the alliance's members agreed to increase their military spending.

"Russian aggression against Ukraine is a wake-up call, and I think this is exactly what has led capitals in NATO allied nations to reconsider defense investments," NATO's then-chief, Anders Fogh Rasmussen, told the summit.

"It is now obvious that we cannot take our security for granted," he warned. "We will have to invest more in our defense and security."

NATO treaties dictate each of the alliance's 28 member nations spend 2% of their GDP on defense, but few do. Relative stability in the Western world over the last two decades has meant economic priorities shifted away from military spending.

According to Rasmussen, Russia increased defense spending by 50% in the last five years, while NATO nations cut back on average 20%. Only Estonia, Greece, the U.S. and the UK met the 2% expenditure target in 2013.

But the escalating crisis on NATO's doorstep has prompted its member states to agree to boost their spending over the next decade. This, too, has helped push defense stocks up.

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"If NATO countries lived up to spending 2%, as they have committed on paper, that would be a major demand shift," Bruck said. The market, he added, may have priced this in.

Beyond defense

Defense companies aren't the only beneficiaries of warfare.

The estimated cost of rebuilding infrastructure in Iraq after the month-long war in 2003 reached $220.21 billion, according to a report by Stuart Bowen, the Special Inspector General for Iraq Reconstruction.

The U.S. taxpayers paid $60 billion towards the programs during the nine years after the war, the equivalent of around $15 million a day.

The money went into areas including security, infrastructure, essential services, governance and education. Billion-dollar contracts for the work on these projects were a lucrative business for many companies.

According to the Bowen report, engineering company Kellogg Brown& Root was awarded a no-bid contract with a $7 billion ceiling to restore and operate Iraq's oil infrastructure, the biggest reconstruction contract for Iraq's rebuilding.

Controversially, at the time of the award until its separation in 2006, KBR was a subsidiary of Halliburton -- a company whose former CEO Dick Cheney was the U.S. vice president at the time.

Black gold

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Oil companies often get a boost from conflict, as the price of petroleum tends to spike during warfare. Prices went up sharply in the aftermath of the 2003 war in Iraq: from $25 barrel in 2003 to a peak of over $140 in 2008.

However, the war with ISIS has yet to impact oil prices. ISIS is now running several refineries in Syria and Iraq but oil prices have fallen, as the terrorist group have not hit Iraq's far more important southern fields.

Experts say the disruption to the market is still too small to push prices up and the demand for oil in China and Europe is weakening, while production in the U.S. is on the rise.

Cyberwar threat

Cyberattacks are also becoming more prevalent as hackers spread propaganda from hotspots around the world.

ISIS has proved adept in social media and with its online campaigns. According to media reports, the terrorist group has also posted warning about a potential cyberattacks against the West in retaliation for the airstrikes.

The Syrian Electronic Army is perhaps the most prominent group known to actively use hacking attacks in support of conflict. The pro-Assad group has successfully hacked websites of major Western media, including the Financial Times and BBC. The attack was seen as an attempt to wrack havoc with media outlets.

Hackers from Russia have also been involved in several high-profile attacks. The FBI investigated a cyberattack against U.S. banks allegedly coming from Russia in August, while South Korea experienced attacks from IP addresses in China.

With the potential danger of cyberattacks increasing, governments are companies are pouring money into cybersecurity. Venture capital firms are expected to funnel $788 million into early-stage cybersecurity startups this year.

Criminal business booming

In the warzones, meanwhile, the bloody illegal economy is spreading.

ISIS is making at least a $1 million a day through its smuggling of oil. The U.S.-led airstrikes have targeted oil refineries and other assets in ISIS' control to cut their funding. But to fully disrupt the flow, the West must also target those who are willing to buy from ISIS, according to analysts. ISIS also attempts to raise money through ransoms, although the U.S. and the UK refuse to pay such demands.

Smuggling routes to Turkey -- which has now authorized the use of military force against terrorist organizations, including ISIS -- are central to ISIS' oil operations. Now, "tough questions" must be asked about the country's role, Bruck said.

Source: CNN