Defense and Security Sector Opportunities in Eastern Europe: Geopolitical Risk and Equity Valuation Dynamics

The defense and security sector in Eastern Europe has emerged as a focal point for investors, driven by a confluence of geopolitical risks and strategic policy shifts. As regional tensions persist-exemplified by the Russia-Ukraine war and broader NATO-Russia standoffs-defense spending in the region has surged, reshaping equity valuations and industrial dynamics. This analysis explores how geopolitical risk is catalyzing investment opportunities, supported by empirical trends in military budgets, equity performance, and industrial restructuring.

Geopolitical Risk as a Catalyst for Defense Spending

Eastern European nations have recalibrated their defense priorities in response to acute security threats. By 2024, European NATO members had elevated defense spending to an average of 2.2% of GDP, with countries like Poland (4.2% of GDP) and the Baltic states (Estonia: 3.4%, Latvia: 3.3%, Lithuania: 3.1%) leading the charge, according to a PitchBook report. These figures reflect a deliberate pivot toward meeting NATO's aspirational 3.5% GDP target, accelerated by the Russia-Ukraine conflict. For instance, Poland has committed to raising its defense budget to 4.7% of GDP by 2025, supported by an off-budget fund established in 2022, according to Mordor Intelligence. Such fiscal commitments are not isolated; Romania, Hungary, and the Baltic states are similarly modernizing air defense systems, naval capabilities, and cyber infrastructure, as noted by A&O Shearman.

This spending surge is translating into tangible industrial activity. European aerospace and defense contractors, including Airbus, BAE Systems, and Leonardo, have seen order books grow by 15% in 2024, reaching €291 billion, according to Mordor Intelligence. The sector's resilience is further underscored by a 35% year-on-year increase in defense M&A activity in early 2025, as firms consolidate to meet surging demand, according to A&O Shearman.

Equity Valuation Trends and Market Dynamics

The equity valuations of defense firms in Eastern Europe and broader Europe have diverged from traditional benchmarks. European defense stocks traded at a 13% discount to their U.S. counterparts in 2025, reflecting both undervaluation relative to global peers and lingering structural challenges in the European defense industrial base, according to a Robeco report. However, this discount may present an opportunity, as geopolitical risks continue to drive demand for military hardware and services.

Public market performance has been robust: European defense indices outperformed broader equity markets in 2025, with companies benefiting from long-term government contracts and inflation-linked revenue streams, according to A&O Shearman. Private equity firms have also shown heightened interest, with defense deal activity in H1 2025 matching 2024 levels in value, despite a 32% decline in Q2 transactions, according to PitchBook. Valuation multiples rebounded in Q2 2025, with trailing enterprise value/EBITDA ratios expanding to 16.4× and enterprise value/revenue to 3.25×, signaling renewed investor confidence, per PitchBook.

Case Studies: Poland and Romania as Strategic Hubs

Poland's defense modernization program exemplifies the interplay between geopolitical risk and industrial investment. With a 2023 defense budget of $31.6 billion (a 75% increase from 2022), the country has prioritized artillery systems, air defense, and armored vehicles, according to Mordor Intelligence. Key contracts include a PLN 11 billion ($2.75 billion) deal for 155-mm artillery ammunition and a procurement agreement with MBDA for short-range air-defense systems, per Mordor Intelligence. These initiatives are bolstering domestic manufacturers while attracting foreign investment, as seen in partnerships with U.S. firms like Anduril for drone development, noted by A&O Shearman.

Romania's defense spending, meanwhile, has focused on upgrading air defense systems, with a €328 million contract awarded to Rheinmetall for modernizing Oerlikon GDF 103 systems, according to Mordor Intelligence. The country's commitment to NATO interoperability has spurred demand for advanced technologies, including cyber defense and unmanned systems, as reported by A&O Shearman. Such projects highlight how Eastern European markets are becoming critical nodes in the global defense supply chain.

Challenges and Long-Term Outlook

Despite the optimism, structural challenges persist. European defense firms lag behind U.S. counterparts in innovation and production speed, with European companies generating $133 billion in revenue in 2023 versus $317 billion for U.S. firms, according to Statista. Fragmentation across national markets and regulatory hurdles also constrain scalability. However, initiatives like the EU's "ReArm Europe" plan-allocating €800 billion for defense modernization-aim to address these gaps by fostering cross-border collaboration and industrial self-reliance, as highlighted by A&O Shearman.

For investors, the sector's attractiveness lies in its dual role as a geopolitical hedge and a beneficiary of sustained spending. While specific P/E ratios for Eastern European defense firms remain opaque, the broader sector's valuation multiples and revenue growth trajectories suggest a compelling risk-reward profile.

Conclusion

The defense and security sector in Eastern Europe is undergoing a transformation driven by geopolitical imperatives. As military budgets expand and industrial capacity is reoriented toward modernization, the region offers unique opportunities for investors willing to navigate its complexities. While challenges such as underinvestment and fragmentation remain, the alignment of strategic priorities and market dynamics positions the sector for long-term growth. For now, the interplay between risk and resilience continues to define this critical industry.