NATO'S Accelerating Rearmament (2026) - Defence Spending, Russia & European Readiness

Given the way it shapes the current war, a lot of attention is rightly paid to the arms race between Russia and Ukraine.But will those two countries duel with their efforts to innovate and scale?Just a little bit further, or in some cases much further to the west, NATO has also been moving.And in the context of media reports suggesting some European leaders think a clash with Russia isn't entirely off the table, I think the burning question today is after years of the peace dividend and shifting geopolitical tides, how fast are things actually ramping up?After the new NATO spending targets were agreed in 2025, we expected there'd be a surge in investment.But now, with the release of new NATO data just a couple of weeks ago, we have a better idea of how countries are going at actually putting money on the table.

From those who are racing ahead of their defence spending targets, to those who apparently focused a bit more on a different kind of defence, with admittedly spectacular results.And so today, we're going to dig into NATO's largest rearmament effort since the end of the Cold War, and what that potentially means for Europe, Ukraine, and for Russia.To do that, we'll start with a look at how NATO defence spending looked back in 2022 and how things have ramped up since.That'll include cracking open the newly released numbers for 2026 to see both who's spending and what are they spending on.We'll then ask what the massive swing in spending, especially towards Europe, potentially means for the defence -industrial relationship between Europe and the United States, and what it potentially means from Moscow's perspective if the German and Polish militaries, for example, are building up, while their own armed forces continue to grind away in Ukraine.Finally, once I've thrown a barrage of charts at you, we'll close out with a couple of remaining questions.

Because when it comes to things like a hopefully once -in -a -generation military build -up, sometimes it's much as worth acknowledging the things we still don't know as the things we do.Before we get into it though, please let me welcome back a sponsor.

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Okay, so before we get to the 2026 data, I want to talk about NATO rearmament since 2022.Because really, I think you can see this falling into a couple of phases.The time between 2021 through the first couple of years of the war, you might describe as the closing days of the 2 % era, or alternatively, the slow motion oh shit moment.As you can see from the chart on the right there, back in 2021, most members of NATO were not hitting the 2 % spending guideline.Some had no intention of doing so in the near future.With the Russian invasion of 2022, there was a general understanding that things had changed and that might not be an acceptable approach anymore, but different countries still had very different expectations of how long the war would last, what the new security environment would look like, and as a result, very different spending plans.

Some members almost immediately went full steam ahead on massive rearmament, while others were content to move towards the 2 % marker.For many countries, part of the initial challenge in scaling up was political, but also industrial, even if additional defence spending was appropriate.there had to be something in the market to buy.And especially when you're talking about that 2022 -2023 era, the global market had basically seized up.Prices for things like energetics were spiking, order backlogs were growing.Some of the lines we're starting to see fulfill orders in 2026, for example, have their origin back in 22 or 23.

The net results of politics, uncertainty and supply constraints, and a dozen other factors besides, is that NATO defence spending didn't really take off in the first one to two years of the war in Ukraine.As time went on though, things did start to ramp up.Different countries might have answered the question, why rearm in slightly different ways, but a lot of the answers they came up with seemed to be pointing in the same direction.Across the NATO states, it became clear the war in Ukraine wouldn't likely end quickly, and there was a need to rebuild stocks and readiness.Equipment and munitions that had been sent to Ukraine would need to be replaced, and stocks built up to reflect the new security environment.Beyond that, different groups within the bloc also had their own reasons to push ahead.

For those nations on NATO's eastern flank, like the Baltics, part of the imperative was improved deterrence, and also changing what a potential escalation with Russia might look like.The old tripwire -based model, where NATO might expect Russian forces to overrun some or all of the Baltic states and then hopefully take them back later, might have made military sense to some, but wasn't particularly appealing to those who'd be in the potential occupation zone.For the United States, NATO rearmament was a pathway to burden shifting, with Washington emphasising the need for Europe to be able to handle more of its own defence, so the US military could pivot elsewhere.Aspirationally, to the Asia -Pacific, but in practice, I'm not sure I'd repaint over the desert camo just yet.Meanwhile, many European states saw a build -up as an opportunity not just for greater security, but also greater sovereignty and autonomy.A way to rebuild not just the continent's militaries, but its defense industry, to reduce reliance on other powers.

All of those factors were present earlier in the war, but the change in US administration provided an imperative to go much, much faster.The Hague Summit in mid -2005, throughout theold 2 % target and replaced it with two new ones.A new 3 .5 % target for core defence that nations had to meet by 2035 with the definition broadly similar to the old 2 % and the higher 5 % target which could also include up to 1 .5 percentage points worth of soft defence investment.Think hardening civilian infrastructure, military mobility, you get the idea.I'd argue that 1 .5 % soft defence spending target probably doesn't matter as much, because it captures a lot of stuff countries would likely be doing anyway, but the 3 .5 % core defence target, that was new, and the 2026 data we're looking at today would be the first time we saw some of the effects of that new target coming in.

Even before the summit, when these things were still being negotiated, we saw a couple of major actions taken.The SAFE, or Security Action for Europe program, saw the European Union create a pool of 150 billion euros worth of low -interest, long -maturity loans to help finance defense investment.There were also a range of other measures that collectively were meant to unlock defense investments of about 800 billion.That paired with major changes we were seeing on a national level, most particularly in Germany, where one of the OECD's least indebted but most disarmed economies decided to switch things up a bit.The so -called debt break on government borrowing was loosened, with a particular target on additional defense investment.Meaning, several years into the war in Ukraine, Europe was finally setting up a bit of a perfect storm for defense rearmament.

You had a combination of financing, reduced regulation and cooperation at the multinational level, while individual states also appeared to be mobilizing financial firepower to throw out the problem.Importantly, not every barrier to defence investment in places like the European Union was entirely addressed.There were still questions around encouraging private, not just public, investment in the defence sector.Questions around planning permissions, environmental regulations, transport requirements.So on one hand, it was clear that a lot was happening, but it was still an open question of how much would actually happen and how quickly.Now, courtesy of

most recent NATO data release, we have our answer, or at least our answer as it pertains to defence budgets.So let's start with those headline defence spending figures for the alliance in 2026 and how they compare to previous years.With the highly complex headline takeaway that I'm sure will shock all of you being that defence spending is going up.A lot.The chart you're seeing here shows defence spending as NATO defines it from 2021 through 2026 in nominal US dollar terms.What I've done is divide the chart into the United States in white and the rest of NATO in blue.

What you can see is a jump from just under 1 .2 trillion US dollars in 2022 to a projection of just over 1 .8 trillion in 2026, a 50 % increase in four years.As you can probably also see for some of those reasons we mentioned earlier, including politics and needing industry to ramp up first, despite it being the oh shit moment of this whole saga, the smallest increase was actually between 2022 and 2023.while the jump from 2025 to 2026 was starting to push towards the $200 billion mark.If we take estimates that current and projected Russian defence spending is somewhere between the $170 and $220 billion per year mark, that would suggest that in very rough terms, the NATO alliance increased defence spending between 2025 and 2026 by about the entire Russian defence budget.And as you can see from this chart, most of the increase has been coming from the non -US members of the alliance.The US, with its globe -spanning military, is still a plurality of the overall spending here, increasing from just over $800 billion in 2021 to just over $1 trillion in 2026.

But while US spending dialed up by very roughly 20%, the rest of NATO more than doubled.If in 21, 22, and 23, US spending was more than twice the rest of the alliance combined in nominal terms, by 2026, the gap had been reduced to close to a quarter.U .S.spending had crept above that trillion mark, but the rest of the alliance in 2026 was now projected to spend almost as much as the United States had been just a couple of years ago.Of course, on this channel, we're not normally going to be happy to take a nominal figure, watch the line go up, and then declare that to be the end of the story.

As anyone watching this who has bought anything over the last couple of years might have noticed, prices haven't exactly stayed static.Given squeezes on supply chains and shortages, in some places, inflation has been even worse in the defense sector than it has been in the consumer economy more broadly.So even if you weren't seeing realignment, you would expect nations to have to continue to increase their defense budgets in nominal terms just to keep up with the rising cost of everything.That said, even once we make some adjustments and pull inflation out, it doesn't really change the story that much.

What you're seeing here now are the same figures as before, but with constant 2021 dollars.So inflation and exchange rate factors ripped out.What that shows is that in real terms, the alliance has jumped funding by about $300 billion 2021 US dollars over the last five years, from $1 .18 trillion in 2021, actually dropping slightly to $1 .15 trillion in 2022, thanks to a defense funding cut in the United States, spiking up to $1 .48 trillion in 2026.Just between 2025 and 2026, the jump was about $80 billion, again in 2021 dollar terms.Given that inflation has affected countries differently over that time, it does shift the relative balance between the United States and the rest of the alliance a little, but the overall pattern is the same.If the overall alliance in real terms dialed up spending by about 26 % between 21 and 26, the non -US allies increased by closer to 77%.

Of that $300 billion real -term increase, about $275 billion came from the non -US allies.If you're talking just over the last 12 months, the alliance as a whole increased spending by about 5 .5%, the non -US allies by closer to 11%.Part of what's going on here is that the combination of inflation and the chosen years really flattens out the US curve a bit.If in that base year of 2021, US defense spending was about $824 billion,according to this data, it had only increased to $850 billion in real terms by 2026. IfIf you instead start the clock in 2022, the U .

S.low point along this curve, their increases in subsequent years look greater.Expressed another way in real terms, a lot of the U .S.defense spending dial -up we saw around 2025 was really just undoing some of the real -term cuts for 2022 and 2023.Now, okay, that's probably got us a bit closer to a holistic picture, but we're still not done with the adjustments.

Especially when you're comparing NATO defence investments to countries like Russia, which is something we're going to be doing later this episode, you need to factor in purchasing power parity.You don't win wars with piles of money, you win wars with the weapons and personnel that money can buy.And in different countries, any given wheelbarrow of greenbacks is going to buy a different amount of people and weapons.In terms of actual buying power then, what we can do is take the military purchasing power parity multipliers, calculated by Robertson, and apply them to this NATO defence data.That's obviously not a perfect exercise, but I think at this level, it makes more sense than not doing it at all.After all, if MPP and cost advantages weren't a thing, the Ukrainian defence industrial complex arguably just wouldn't work at the scale it's currently working.

Some Ukrainian defense spending will be at essentially international market prices when they're buying things like Patriot interceptors from the United States, for example, but in other cases, purchasing power parity is super relevant.Think domestically manufactured artillery pieces or Ukraine's personnel costs.This is also part of the secret as to why some NATO countries have embraced the so -called Danish model.That's a system where often wealthier countries will put up funding to support the production of weapons in Ukraine.It allows countries like Denmark that might have relatively large amounts of money, but dismal MPPP, I think Denmark's is less than 1 from memory, to simply transfer that funding over to Ukraine, which has a multiplier north of 2, and very roughly more than double the buying power of that investment.With a few exceptions, mostly for relatively wealthy countries like Denmark or the Netherlands,

the vast majority of other alliance members, including the European states, are going to have higher multipliers than the United States.A big part of that is going to be personnel costs, with wages in Europe generally being lower, and personnel thus costing less.For some states, the advantage or disadvantage is going to be tiny, as in a couple of percentage points either way, in the case of countries like Germany or Sweden.But across the alliance as a whole, which remember includes some of your lower cost economies, your Turkeys, your Bulgarias, your Romanias, it makes a significant difference.So here are your earlier figures, adjusted for military purchasing power parity, which gives you numbers we can compare to the adjusted Russian ones later.Because a lot of the increase we've been seeing has taken place in countries with positive modifiers, it actually increases the slope of the curve.

Now you're jumping from about $1 .25 trillion in 2021 to north of $2 trillion in 2026.It also even further narrows the buying power gap between the two blocks.We still see the United States having an almost 2 to 1 buying power advantage in 2021, but by 2026, the gap has almost entirely closed.It also shows that, at least in nominal adjusted terms, there was more non -US NATO investment in 2026 than there was US investment in 24 or 25.Once again ripping out inflation, but keeping that purchasing power parity adjustment in place doesn't really change the broader picture that much.You still see broadly those same increases from 2022 through 2026, and in real buying power terms, non -US NATO investment in 2026 still looks very similar to US investment in 22 and 23.

Having now presented them a couple of different ways, what I think these numbers are broadly good for is to demonstrate two broad trends.One, that spending is going up.And secondly, the gap between US and non -US NATO investment has closed significantly.What I think we really need to bring some of the implications home, though, is a valid strategic comparator.In general, military alliances and defense spending agreements are not going to be, you'd hope, just money -burning contracts.for the sake of it.

NATO's goal here isn't just to see who gets to stand on the top of the podium for lighting more hard currency on fire.The goal is meant to be security -driven, and especially for the European wing of the alliance, that means Russia.All the more so, considering we seem to constantly get news articles suggesting Russia might be considering poking the alliance.That said, if all that mattered were the economics, on paper, especially considering Russia is currently bogged down in Ukraine, that would be a monumentally stupid idea.Something akin to me deciding to roll up to Oleksandr Usyk and take a swing.What I've done here is go back to nominal USD figures and introduced SIPRI's estimates for Russia's official defense spending.

Their estimates only run out to 2025, so I've added a high -end estimate for 2026 that I'll link in the description.As you can see, in the context of the war in Ukraine, Russia has significantly dialed up its defense spending, which is now several times what it was back in 2021.But in nominal, on -paper terms, in 2025, it was still less than half of what the non -US NATO members were spending in 2023.However, in a big way, that is nowhere near the entire story.Russia has the benefit from being a single country, which means it doesn't have to duplicate functions across multiple states.It's able to focus its investment, standardize equipment, Significant amounts of expenditure are going to be secret and the defense sector can be effectively cross -subsidized using things like state -owned banks or having state -owned defense companies forced essentially to operate at low or negative profit margins.

For this comparison, some but not all of that gets pulled into the military purchasing power parity multiplier.That makes the picture look a bit different but perhaps less different than you might expect.In terms of the Robertson figures, Russia gets more than two times the bang for its buck on defense investment compared to the United States.And if you factor that in, in 2025, Russia was spending about as much on the military as the non -US NATO allies were spending back in 2021.What it notably doesn't do, however, is put Russia in a very different position.in terms of the balance of spending than it was back in 2022.

If in 2022 Russia had a bit less than half the buying power of the non -US NATO members and about a quarter of the United States, if the projections hold for 2026, it will still have about half the buying power of the non -US NATO allies and less than a quarter of the buying power of the alliance as a whole.Part of the story here, which I don't want to focus on too much because this episode is meant to be focused on the NATO side of the equation, is that using the Robertson methodology, Russia's military purchasing power parity advantage has actually decreased over time.In 2017, Robertson gave the Russian Federation about a three to one purchasing power parity advantage over the United States.If in nominal terms, the Russian Federation at the time was spending about 11 % of what the United States was, adjusted for MPPP, it was closer to 31%.By 2025, that assessed multiplier had fallen to 2 .16.There's a lot going on behind those numbers, but at first glance, that might sound strange.

Wouldn't, after all, a country that is engaged in a transition over to a wartime economy and more able to access economies of scale likely to increase, not decrease, its ability to source equipment and personnel cheaply?One element of what's going on here, though, might be that even though, yes, in some places Russia has been able to access economies of scale in production and repair, that might have been more than compensated for by wartime cost drivers.

Cost -wise, you can't really compare the Russian military of 2017, with its mixture of less well -paid contractors and barely paid conscripts, with the packages of signing bonuses, debt write -offs and death payments of 2025.

With payments sometimes reaching north of $70 ,000 for a year of service, Russia's personnel costs now are in some cases more expensive than many NATO countries.And while yes, the defence industry has been able to scale up, it hasn't always been a cheap exercise.You're talking about having to run additional and longer shifts, hiring additional workers who don't have the same level of training but now cost more.You have to eat the general inflationary pressures that have affected the Russian economy, the impacts of sanctions on the defence sector specifically, the high cost of borrowing and debt servicing, and the constant risk of Droney McDroneface deciding to give your factory a new skylight right in the middle of a production shift.In economic and budgetary terms then, Russia is still able to dial up, but it has to pedal harder for each increase.And that's broadly meant that even when you don't factor Ukrainian spending into the equation at all, in terms of relative balance, Russia's wartime levels of spending have sometimes struggled to keep up with the peacetime increases we've seen across NATO.

But let's now jump back to those NATO figures, because there's a lot more unpacking to do here.Starting with a pretty simple but relevant question, once you get below that top level, who within the alliance is actually driving these increases?We've already established that most of the increases come from the non -US NATO members slowly catching up to US defence spending levels.And you can see that illustrated on this chart here.And I've also marked three different spending targets.The red line is the original 2%.

The orange is the new 3 .5 % core defence spending, which is the most like -for -like comparison with this data.And the blue line up the top there is the holistic 5 % figure, which would also include spending that isn't included in these totals.What that shows is that as blocks, the non -US NATO members crossed the 2 % threshold in 2025, but neither the United States nor those other allies have hit the new 3 .5 % target yet.Perhaps not surprising, given that target ranges out to 2035.In percentage of GDP terms, US defense spending in 25 and 26 is actually lower than it was back in 20 and 21.That's because despite increases in the headline US defense budget, it hasn't kept pace with the overall rate of US economic growth.

If you build a shit ton of new data centers, but not a commensurate number of new navy warships, you get what you see on the chart there.But if we focus on that blue bar and start breaking it apart, you'll see that within the alliance, different countries have increased their defense spending at very different rates.and I'd break them into a couple of categories.Category 1, who you can see illustrated on this chart here, are the high net contributors, those who in percentage of GDP terms are spending more than the United States.By the 2026 figures, those countries are Lithuania, Estonia, Latvia, Poland, Greece, Denmark, Sweden, and Norway.With most of those nations, including potentially Denmark, already hitting the new 3 .5 % target figure, and countries like Estonia and Lithuania actually already hitting the 5 % target based on core defense spending alone.

Meaning if you do factor in the other items they're able to count for that category, they're probably well above it.As you can probably gather looking at those list of countries, there does appear to be a bit of a strong proximity effect happening here.A lot of these countries are either very close and potentially threatened by Russia, as in the case of the Baltics or Poland.Close to another nation they feel a reason to be worried about, in the case of Greece.

Or they're the relatively wealthy Scandinavian countries that aren't exactly members of the Team Russia fan club, Denmark, Norway and Sweden.

Category 2 then is your next tier down, with most of them being in the 2 .5 to 2 .9 % range.

That's the US at 3 .17, the Turks at 2 .85, Germany at about 2 .7, followed by Finland, the Netherlands and United Kingdom.

Then you've got countries that have done at least a little bit more than the 2 % minimum, from Romania at 2 .43 down to Italy and Portugal at 2 .1 each.Noting the category also includes nuclear power France at 2 .22, but I still think they're worth distinguishing from the technically 2 % gang.These are all countries that technically hit the 2 % target, although sometimes not by much, and occasionally with a bit of budgetary creativity.Belgium and Spain's data, for example, is pretty close to them spending 2%, and not a euro more.There is one country technically below 2 % on current projections, which is Slovenia, but for political reasons they're a bit of a special case.

As the NATO data notes, Slovenia only got its new government in June, and the NATO datais that now they're in place, they'll go about actually reprogramming and adjusting expenditure to hit the relevant targets.

So essentially you have a situation where all the member states are now saying they're at least hitting the 2 % target, but once you go beyond that, there's a big difference between those who are pretty much sitting at the 2 % level, those that are working their way up towards the 3 .5 % marker, and those that are already there or in some cases far beyond it.With many years left though between now and the 2035 goal, we should expect significant change to come.In raw euro terms, the big one to watch is probably Germany.Defence spending there is expected to be about 109 billion euros in 2027, growing to 183 billion euros a year in 2030.For a sense of scale there, that's in very roughly the same ballpark as the increase we saw in Russian defence spending between 2023 and 2025.The United States also might be on the cusp of a major increase, but there are still major political question marks around it.

Between a $1 .15 trillion base defense appropriation, $350 billion in reconciliation, and a $67 billion package partly to fund the war in Iran, the Trump administration has reportedly requested about $1 .56 trillion in defense spending from the U .S.Congress.If all of that actually eventuated, it would have massive impacts on these charts in 2027.The gap between the European allies and the United States would widen again as the U .S.

number spiked.However, there is all the difference in the world between the White House requesting funding and Congress actually approving it.We've seen doubts raised over at least some of those three elements and a number of political maneuvers being attempted, so we'll see.Given that uncertainty then, let's park discussion of 2027 and beyond for a moment and get back to 2026.We know now how much is being spent and by whom, so let's turn to the question of what they're spending it on.Because spending money is easy.

I'm sure many of us know people who are absolutely fantastic at it.It's spending money effectively that can often trip governments and people up.And when it comes to assessing the progress of a rearmament effort, one of the key questions is probably how much countries are actually spending on, you know, armaments.For NATO, wanting countries to spend money on munitions and equipment specifically is actually nothing new.Everyone talks about the old NATO 2 % spending target, but less often talked about is that way back at the Riga summit in 2006, NATO actually agreed to different targets.2 % of GDP towards defence, and 20 % of defence towards the development and acquisition of equipment.

Especially now, from a point of view of the strategic balance, the equipment spending category matters for a couple of reasons.All else being equal, it affects how quickly countries are going to be able to handle technological changeover, embracing the drone era for example.It can have impacts on the country's defence industrial base, and we've all seen how important that can be to sustaining a country's ability to deter an if necessary fight.And also, as a secondary factor, it's also one of the harder categories to fudge.You could argue back and forth, for example, over whether a new bridge in a certain part of the country is a military mobility project or just an infrastructure program dressed up as one.But when a country starts buying fighter jets or artillery shells, hopefully there's no intended civilian purpose there.

And one of the interesting trends we've seen play out since the Russian invasion of 2022 is that within NATO, it's not just that defense spending as a whole has increased, it's that the percentage of that going to equipment has also dialed up.Mostly.If you go back to the pre -Crimea budget era, the non -US NATO allies were spending about 19 % of their budget on new equipment, just below the 20 % target, while for the United States, it was around 26%.In 2022, the US was at 28%, the rest of NATO, 26%.But from there, the US percentage remained fairly constant, 28 to 30 % depending on the year, while the non -US percentage continued to dial up, to 26, then 28, then 31, and in 2026, 33%.overshooting the original Rika target by a casual 13 percentage points.

If we take those percentages,apply them to the defence budgets disclosed by NATO, we get this chart here.For this one, I've extended the timeline all the way back to Crimea in 2014, with the figures being the nominal US dollar expenditure on equipment specifically for the given year.In 2014, that was about $170 billion US dollars for the United States, and $54 billion for the rest of the Allies combined.In 2021, $236 billion for the United States, about $90 billion for the rest of the alliance.But after more than a bit of a time delay, look at what starts to happen in 2024.

Non -US equipment spending increases by about $36 billion from 2023 to 2024, another $60 billion from 2024 to 2025, and then $55 billion again from 2025 to 2026.End result, if as recently as 2020, the United States was spending about three times as much as the rest of the alliance combined on the equipment category, by 2026, it was now getting closer and closer to parity.$290 billion to $260 billion.Now, if you applied purchasing power parity here, the numbers would probably even up even more, but I'd warn against doing that when you're looking at specific categories.Military purchasing power parity is calculated on defense spending as a whole, which means it might be inappropriate to apply to individual categories.If you're a country that mostly imports your equipment at market prices from the United States, for example, but has very cheap personnel, then you might actually have a pretty bad multiplier on your equipment spending, but a fantastic one on your personnel spend.

Alternatively, if you're a country in Europe that makes a lot of your own equipment, it might be a different story.At a macro level though, the takeaways here are fairly clear.The non -US NATO allies are now in the ballpark of spending as much on equipment in a single year as they used to spend in half a decade, and the alliance as a whole spends more than twice as much on equipment as the Russians do on their entire defence budget, at least on paper.This chart here gives you the national level stories that sit behind that broader observation.Poland is the clear outlier here, spending more than 55 % of their budget on equipmentBut other eastern flank states tend to be pretty high as well.

The Baltics are all between 40 and 48%.Hungary and Romania are in the high 30s, the UK is at 37, France is at 34, and even numbers that might not seem impressive by themselves, like Belgium at 27%, just behind the United States, hit a little different if you remember that a decade ago, Belgium was spending closer to 4 .7%.Still not the wooden spoon for that year, which instead went to Slovenia at just over 1%.In terms of which of these numbers is actually moving the figures at alliance -wide level though, we've talked about Poland in the past, but in terms of the sheer amount of cash being committed, we have to go back to Berlin.And perhaps a sign of just how much the times have changed, you now have a situation where Germany is announcing grand scale rearmament and most of the continent appears to be cheering.After years of sparse, slow and complex procurement, so much so they got their own episode early in the war in Ukraine, major German procurement announcements have started to come one after the other.

Infantry fighting vehicles, air defense systems, logistics vehicles, you name it.The Germans have started putting contract after contract into the pipeline, and the numbers show it.In 2016, so two years after the little green men vacationed in Crimea, the German defense budget was missing that 20 % equipment spend Riga target slightly, coming in at 12 .21%.In 2022, with Russia actively invading Ukraine, things had improved slightly, but we're still short of the Riga target at 17 .2%.In 2024, though, as industrial and political momentum began to shift, it hit 21%.In 2025, 25%, with the projection for 2026 being north of 32%.

And because of the way math works, a much larger defence budget, coupled with a much larger share of it being spent on equipment, we get this chart here.In nominal terms, the German military equipment spend of about $47 billion US equivalent in 2026 is in the realm of 10 times what it was in thedecade ago and more than twice what it was two years ago.Now, sure, that's still only about 16 % of the US total, but think about the scope of the spending here.The German military doesn't have to pay for and maintain a nuclear triad.They're not in the business of global power projection with nuclear carriers and submarines.

Their spending is generally going to be focused on a smaller force and a much narrower range of capabilities.And so if you keep in mind that more limited scope and the trend we're seeing, these are the kind of numbers where, over a few years, you'd expect to see significant transformation.Now, of course, there are swings and roundabouts here, some of which we'll get back to later on.Concerns around inflation or uncertain long term programs, for example.But overall, the trend is there.After a relatively slow start in 2022 and 2023, NATO defence budgets are starting to climb and a lot of that is being ploughed directly into rearmament.

In terms of what all that extra spending is meant to deliver, in some ways, we're still pretty early in the process.A lot of this funding is going to contract equipment that hasn't yet been delivered or to build up industrial capacity that hasn't yet come online.In terms of things we can measure though, especially in terms of European defence readiness, there are a couple of indicators we can look to.For one, something that's clearly happening is force enlargement.Between 2025 and 2026, NATO as a whole added just shy of 120 ,000 active duty personnel.Poland was the leading contributor there with an additional 25 ,000.

The United States with 24 ,000.The Turks with 19 ,000.Then you have Romania at 10 ,000.Canada and Italy at 6 ,000 each.Then the rest of the alliance totaling 26 ,600.These figures obviously don't count reservists.

And because they only cover the 25 to 26 period, they don't capture some of the other major infusions NATO has had since 2022.In particular, the addition of Sweden and Finland.Another area that's clearly progressing with momentum behind it is European long -range strike capability.Perhaps unsurprisingly given what nations have seen the Russians and Ukrainians able to do to each other with these kind of weapons, the NATO commitment to long -range precisionstrike over the next decade totals something like 50 billion.The UK is expected to lead that initiative and as we'll talk about in a bit, it's likely made up of multiple weapon systems.

That gets us to another area where the situation is a bit more mixed and one I want to dive into in detail.The mixed story is the command structure, the organization.NATO forces have always traditionally been commanded by an American and the US military serves as a kind of connective tissue for the alliance.Most of the personnel and equipment in a given scenario might be European, but some of the key capabilities, the intelligence, some of the key assets are likely to be American.Some analysts have identified that as a potential challenge if you hypothetically have a scenario where many of the NATO allies want to act in a given way, but the United States is reluctant.In this area, we have seen some changes.

Within NATO, all three Joint Force Commands will now be run by Europeans, for example.One by Britain, one by Italy, and the final one by Germany and Poland collectively.But the Supreme Allied Commander is likely to remain an American, and a lot of the organization's focus appears to be on trying to keep the United States in, rather than preparing for a universe in which it might be out.Where I'd argue we are seeing a lot more preparation, in a way that might not be as obvious and is much more slow burn compared to the above, is the non -US NATO members using this rearmament process as an opportunity to reinvigorate their own defence industrial base, and critically, reduce the number of cases where, practically speaking, they don't have any alternative to buying from the United States.To be clear, it's not like US defence firms are exactly struggling for sales at the moment.Global defence orders are booming, and a lot of order books are more backlogged than a Victorian -era sewer.

But what I'd argue we're seeing is a lot of the NATO states using the surge in defense spending to focus closer to home and try and build up local or regional alternatives to many American products.Often not with the intention of entirely replacing American imports, but making sure there's always an alternative to them.There is still, for example, an enormous amount of European interest in the Patriot system.Demand is greatly outstripping demand.we've seen the Germans set up a production facility on their soil, and there have been recent talks about a potential Pac -3 missile maintenance facility in Europe.The difference is, going forward, something like Patriot might still be a very valid choice for a European government, but it's not necessarily the default or only choice.

The Franco -Italian SampTNG has been a major beneficiary of all of this additional spending and is expected at some point to be tested in Ukraine against ballistic targets.That development and testing and production ramp -up might not have been possible, especially not on this timeline, if we hadn't seen the uptick we have in investment since 2022.Another example of Alliance diversification would be potential challenges to Tomahawk.At the moment, if you're a European NATO member and want a ground -launched cruise missile with a lot of reach and a bit of bang, your default option is probably to go to the United States and buy Typhon with the Tomahawk.That's what Germany's doing.But with this increasing European appetite for long -range strike, it's likely going forward, there are going to be one or more European alternatives available.

MBDA, for example, is already pushing a ground -launched version of the French naval cruise missile that entered service in 2017.

The mini cruise missile and affordable effective categories have plenty of European entries, some of which we've already seen appear in Ukraine.As the old E -3 AWACS aircraft age out, NATO's long been looking for a replacement.Just a couple of years ago, Boeing's E -7 Wedgetail was a bit of a shoe -in, an aircraft that would have ensured NATO cross compatibility with other forces like Australia and of course the United States.With the changing political and industrial climate, though, and the United States Air Force appearing to prevaricate on the E7 just a couple weeks ago, it was announced the alliance will instead embark on the procurement of a Swedish system.Want a cheap guided rocket kit, ideally suited to letting aircraft shoot down multiple drones at affordable prices?Well, for that, the default answer has been the American APKWS2.

Those have seen service with the United States against Iranian drones, been sent to Ukraine where they've been used against the Russian derivatives of Iranian drones, and the munitions have also been an international sales success.albeit sometimes stretching the definition of affordable a bit.A recent US foreign military sale approval for 10 ,000 APKWS kits, plus training and supporting equipment to Saudi Arabia, had an estimated total cost of $1 .96 billion, or nearly $200 ,000 per rocket.In US procurement, without many of those other components, they tend to come in at tens of thousands per rocket.Some NATO allies like the United Kingdom have already bought the system, but now there's also a potential European competitor.With the French, who went through a lot of micas shooting down drones in the Gulf, now showing off their own guided rocket integrated with Rafale.

In that case, a 68mm rocket with the CUAS role front of mind, and a time from contract award to initial capability of only 8 months.And I bring these examples up because I think the expectation is this trend should continue.A focus on developing and fielding domestic or regional alternatives to make sure there are competitors in the system.And one reason I think we should expect that development cycle to be relatively quick by recent historical standards is the cooperation with Ukraine.A number of NATO states have already established joint production agreements with the Ukrainians.On one hand, building up factories and turning out supplies in NATO states is a form of military assistance to Ukraine.

It gives the Ukrainians a way to access the wider European workforce and technical base, and also production facilities that are hopefully less likely to be hit by Russian missiles.But from the NATO states' perspective, there are clearly other incentives at play here.They're getting a front row view to the development of Ukrainian systems and TTPs, and also training up their own workforces.And we've already seen a couple of ways in which that cooperation might manifest.You could say the United Kingdom is ahead of some other countries when it comes to interceptor drones, for example, simply by virtue of setting up a facility to produce octopus interceptors for the Ukrainians.A similar case could be made for the Germans, with loitering munitions and one -way attack drones.

My basic premise here is that it isn't just a case of more money being shoveled into the defence industrial fireplace, it's that the war in Ukraine and recent political environment have also provided a bit of a catalystfor the old dog that is European military industry to learn a couple of new tricks, with the Ukrainians in this case functioning as the pretty fast working teachers.And as a result, as time goes on, we should expect NATO buyers not just to have access to more materiel as industry dials up, but also more options in terms of the capabilities they can go for.So those are the numbers and some of the trends, let's move into the so what.Starting with the bear in the room, strategically speaking, what does all this potentially mean for Russia?Now, when it comes to the probability of an actual direct military conflict between Russia and at least some of the NATO states, different analysts will come to markedly different answers.

But for the purpose of this section, let's take the Russians at their word and assume that from their perspective, the military balance between Russia and NATO is a relevant factor.We've seen Russian figures consistently use the language to imply that Russia is already de facto at war with all of NATO.But whether you buy into at least part of the Russian characterization of the relationship, or those analysts that predict that Russia might be tempted to try some sort of limited escalation in the future, how attractive that kind of proposition might be perceived in Moscow, and how it would end if it was attempted, does relate to the balance of conventional military power between Russia and at least parts of NATO.And in that respect, I'd argue the years since February 2022, and especially the last year or so, have been absolutely disastrous.At the highest level, where you're talking about headline defense investment, the basic problem from a Russian perspective is this.Russia is a country with relatively fewer resources currently burning a lot of those resources in a conventional war trying to keep up or get ahead of a much richer block of countries that aren't at war.

The Russians have to hire enough personnel not just to enlarge the force but also to replace losses.They have to build enough equipment and munitions not just to build up their reserves and modernize but also to keep up with attrition.Now with wartime spending measures and partial mobilization the Russians have absolutely been able to do that in some categories.On paper NATO's gained about150 ,000 active duty personnel since 2022.The Russians have authorized an increase in strength of about 400 ,000.

But because of the way those increases have been accomplished, they're arguably not equally sustainable.Moscow probably wouldn't want, for example, to continue paying wartime enlistment bonuses during peacetime.And a lot of the people that have been pulled into the Russian military, like the Ukrainian one, in order to make up the numbers, probably aren't the kind of people you'd like to keep around long term.You have a lot of blokes who are much older, or who might have chronic health problems.The kind of manpower that makes sense as a temporary wartime measure, but isn't ideal for a peacetime military.A lot of officers and enlisted personnel are also kept in the Russian military by the stop -loss arrangements they've had in place since late 2022.

And presumably those also can't last forever.Essentially because one side's expansion is the product of emergency wartime measures, and the other a steady peacetime build -up, all else being equal over time, you'd expect one to be much more sustainable than the other.You could make a similar argument for a lot of military equipment categories.A lot of current NATO investment is being directed at current or planned next generation equipment.Most are targeting between the late 2020s and early 2030s for their modernization cycles to be at least mostly complete.And that allows a lot of room for focus on the latest and greatest, even if it's going to take time to stand up production and get things rolled out.

Russia, however, in many cases, despite dialing up spending, has had to pull back on its modernization plans.The absolute requirement has been for equipment they can produce, maintain and field now, not expensive nice -to -have stuff that might be available in a couple of years.How many T -14 Armatas have you seen this war?What percentage of Russian main battle tanks have you seen fitted with active protection systems?In some cases, Russian troop transport has evolved from BMP to Bahanka rather than Boomerang.And despite announcing the mass production of the Koalitsiya self -propelled gun back in, I believe, 2023, Military Balance 2026 assessed they'd accumulated from memory somewhere between, I think, 8 and 12.

of them.Russia has made massive strides in some areas, like drone technology or ballistic missile production, but a lot of military modernisation has been partly put on hold, and the system that's been put in place in many cases leveraged an asset, the old Soviet military inheritance, that in some equipment categories just really doesn't exist in the same way anymore.Meaning if Russia wanted to maintain the balance, it would either have to make up the difference in quantity, or find a way to modernize in an equivalent way itself.Which gets back to the basic math of those charts we showed earlier.In purchasing power parity terms, over the last couple of years, Russia has been able to maintain or even improve the ratio between its investment and those of the NATO allies.But the only way it's done that is by going over to a wartime budget.

From a financial sustainability standpoint, this is not a level they're going to want to maintain forever.Even with war -in -the -Middle -East -tier oil prices, the Russian budget isn't in fantastic shape.They've had to cancel multiple bond auctions due to a lack of demand at acceptable interest rates, and now look to be pursuing, shall we say, alternative financial measures.By contrast, for the NATO states, this is still meant to be the start of the ramp -up.If you adjust the figures so every NATO state was already at the 3 .5 % target that they recently agreed, this is what the chart would look like instead.If Russia wanted to maintain the investment ratio with that, you'd be talking about percentage of GDP expenditure akin to North Korea or the old Soviet Union.

And especially in the latter case, we know how that film ended.The big takeaway here is that in terms of its economy and military industry, Russia was wealthy enough and efficient enough to potentially maintain what Moscow would consider an acceptable strategic balance with the European allies as long as they stayed at peace dividend spending levels.If these new NATO trends and targets hold though, the math just ain't mathing.Of course, when we've seen media coverage of analysts warning against potential military clashes between Russia and NATO, they don't tend to involve an all -out military brawl.Instead, the scenario is often some limited Russian military action on NATO's airspace.potentially against the Baltic states or Poland, with the assumption often being that Russia calculates they can achieve at least local superiority temporarily, act and achieve some objective or seize some key terrain, basically dare or intimidate most of NATO against intervening and push them towards negotiations instead, and somehow end the scenario with both more than when they started, while also very publicly undermining the promise of what Article 5 is meant to represent.

Because if a NATO member lights the beacons, and the alliance doesn't treat an attack on one as an attack on all, then the fundamental promise that underpins alliances like NATO and their deterrence value is basically dead.Now, I think there are reasons to be sceptical about Moscow attempting that kind of scenario, but let's take it at face value for a moment and ask what they would need to potentially pull it off.Russia would presumably need to be militarily powerful enough to rapidly defeat and achieve its objectives locally, which would mean at least being able to overcome whatever battlegroups were present in the Baltic states, Poland, or whatever the target area was.Then, Russia would need to be able to control the military escalation, perhaps appealing to Washington and saying, hey, you don't really want to fight a war over this, do you?then have the strength and coercive position necessary to de -escalate the conflict reliably on acceptable terms, while keeping the likely costs and risks of the whole thing low enough for it to be worth launching in the first place.Basically, you'd want to be able to win a short, sharp local war, keep it a short, sharp local war, and then successfully terminate that conflict as cheaply and successfully as possible.

One reason planners might be interested in studying or thinking about that kind of scenario is it doesn't really call for the Russian military to be strong enough to go head to head with the United States or fund the dome with all of NATO.The key metrics are local military capability, political will, and control of the escalation and de -escalation process.From a Russian perspective, NATO rearmament, especially European NATO rearmament, kind of stuffs up the entire equation.With that, as I said,said, coming back to three points.A stronger eastern flank, the democratisation of escalation, and an increased risk to the Russian interior.

What you could argue though is the way NATO rearmament has been playing out since 2022 is making that scenario more and more difficult for the Russians.And there's a couple of reasons I say that.The eastern flank hardening, the democratisation of escalation options, and the opening of the Russian interior to targeting.That first point is basically that the military strength of the NATO alliance on the eastern flank has grown faster than the military strength of the alliance overall.Some of the biggest spenders in proportional terms have been the Baltic states.The country to add the most personnel has been Poland.

The addition of Finland and Sweden transformed the strategic geography of the area.And we've also seen major NATO states introduce additional forces into the region that would presumably get caught up in any escalation and potentially serve a tripwire function.It's unlikely, for example, that 45th Panzer Brigade, the permanent German brigade in Lithuania, would be able to stop an all -out Russian attack.But it all but guarantees that in order to successfully attack Lithuania, the Russians would have to kill Germans.Something which, from Moscow's perspective, might increase the odds of Berlin becoming seriously involved if they would attempt something in the area.The introduction of additional military assets also makes potential grey zone warfare more difficult.

You could potentially send in the little green men with their Kalashnikovs and RPGs, for example, arguing they're just members of the local Russian minority trying to defend themselves against the evil and oppressive NATO.But if, as Moscow, you deny any knowledge of their operation and insist they're not Russian troops, well, now those totally not Russians have a Panzer Brigade -sized problem to deal with.Basically, the stronger the defenses in the area, the more overt you'd expect Russia to have to be in order to have any chance of military success.The theory that Russia could also try and take an objective and then negotiate from a position of strength also doesn't work if militarily they're never able to take an objective in the first place.That's part of the reason why the Baltic states have been much more interested in the prospect of successfully defending their territory.rather than reclaiming it later after it's initially overrun and why you can imagine Poland would probably much rather fight its battles on the eastern border or in the Baltic states rather than at the gates of Warsaw.

The stronger NATO forces on the flank are in relative terms, the more likely that kind of stonewall scenario becomes and the less likely any Russian plan becomes to successfully escalation manage itself to victory.Factor two is what I called the democratization of escalation.Remember, in most of these scenarios that people imagine up or talk about, Russia doesn't actually want complete military escalation.They want to achieve a particular objective and then successfully de -escalate the situation in a way that advantages them.The problem with many of these eastern flank states building up though from a Russian perspective is now they have the ability to choose to escalate the conflict as well.And because they presumably would have so much more to lose, they might be much more likely to pull the trigger on that escalation than another power further away.

Estonia now having its own medium -range air defence system, for example, means that if Russian jets are attacking or violating Baltic airspace, if push came to shove, Estonia wouldn't have to ask someone else to blap the Russian jet for them, they could pull the trigger themselves.A NATO state with the access to its own long -range weapons wouldn't have to ask someone else to launch potentially escalatory strikes into Russia if attacked.If they needed to, they could take that step themselves.Alliance dynamics would almost certainly still be very much front of mind, but as we've seen with Ukraine, even when you are highly reliant on allied support, having capabilities of your own still gives you a greater degree of strategic autonomy.And from Moscow's perspective, the more actors involved who have the right to flip the board, the more likely it might be the board gets flipped.Similarly, Russia doesn't have to worry about just discouraging the United States from launching long -range missile strikes into Russia proper.

They also have to worry about discouraging the likes of Poland.The point is, as these NATO states rearm, the risks for Russia and any potential escalation go up, and the probability of success goes down.There are more forces on the eastern flank you have to overcome, more weapons that can reach into the Russian interior and hit valuable targets, and more actors with access to those weapons systems who can individually make the choice to cause an escalation.Now, history shows that something being a stupidly risky long shot doesn't prevent national leaders trying it.But the longer this rearmament process plays out while Russia is still grinding in Ukraine, the worse the odds arguably become.If you did want to do a detailed analysis of some specific scenario, you would need to take more factors into account.

Rather than just comparing the net rate of Russian vs NATO build -up, for example, you might want to consider what role would the United States potentially play.Also, in any scenario you come up with, what is Ukraine doing?None of the charts and figures I presented this episode have included the Ukrainians.Obviously a bit of an omission, given they currently have the largest army in Europe other than Russia, a very good handle on drone warfare, and a deep magazine of long -range strike weapons.But I think the broad investment trend here is hard to escape.The NATO states, even just the European NATO states, are ramping up spending at a rate that Russia just can't afford to match long term.

Full stop.And they're doing it at a time where a lot of the investments Russia is making are being ploughed straight back into the war in Ukraine, rather than invested in forced modernisation.If that trend continues to hold, by the time the war in Ukraine ultimately ends, Russia might find itself facing a very different military balance on the NATO flank than it did just a handful of years ago.As we get towards the end though, I think it's worth acknowledging a couple of question marks that still hover over this whole process.Sure, if everything continues as currently planned, line will continue to go up, that will eventually turn into capability, and over time, the balance will look worse and worse from Russia's perspective, even if you don't include the United States in the equation.But before you go drawing a straight line projection like that, I'd raise at least four risks.

The first is that for the countries involved, the planned increases in defence spending just don't prove to be fiscally or politically sustainable.Many NATO economies are on the wealthier side globally, but it's not always the case.this hasn't been a bumpy period.Some have been facing issues relating to trade wars, energy crises, structural deficits, challenging demographics, the list goes on.The fiscal scope probably is there for a lot of states to make the 3 .5 % target, but not without trade -offs.And whether states decide to consistently make those trade -offs at the expense of other spending priorities or debt reduction, time will tell.

The second question is whether all of this additional investment will go into producing the right kind of militaries.A lot of the investments we've seen being made so far have been in conventional and recognisable major platforms, armoured vehicles, artillery, combat aircraft and major warships, you get the idea.Especially if force enlargement is a priority and you're trying to undo decades of underinvestment, that might make sense.But the war in Ukraine has repeatedly highlighted the danger of over -investing in old -style weapon systems that, while still useful, need to operate on a battlefield shaped by new ones.Investment in multi -million dollar tanks and armoured vehicles, for example, might not be tremendously efficient if you don't have a plan for dealing with the opponent's drones and don't have a plan to field drones of your own.As another salient example, if you build up a modern fighter fleet or a top -tier artillery force or fill your country with advanced air defense systems, but then you don't allocate the funding to actually stockpile enough munitions for those platforms, you might end up with a force that's going to look very impressive at an air show or on the parade ground, but be largely combat ineffective as soon as the magazines run dry.

Risk three, something even Russian state media has highlighted on occasion, is the risk of inflation.Especially near the start of the war in Ukraine, now compounded by the conflict in the Middle East, we saw a lot of price spikes in military markets.Energetics and a lot of critical inputs were in short supply, supply chains were not in fantastic shape, a lot of customers wanted their product yesterday, which does tend to drive up the price, and companies that needed margins to support reinvestment and rebuilding lines charged accordingly.As much as some price increases are understandable though,unconstrained cost growth is a threat.If you triple the amount you're spending on shells, but over the same time period the cost per shell also triples, you aren't actually buying more rounds.

And if the goal is to maximize deterrence and keep the public on side, nations might be interested in making sure they're maximizing readiness, not just shareholder value.That gets you to the final question in all of this, the role of the United States.Washington has made clear over the last couple of years that they want to see the European NATO states investing more in defense, and by and large, they are.Washington also made clear they wanted European militaries that were better suited to facing off against Russia with less US support.And over time, on these trends, they'll get it.The risk currently in all of this, though, is timing.

Money committed in 2025 or 2026 might not turn into capability for years.And while, as we covered, several of the NATO states are developing alternatives to critically needed US systems and capabilities, they're not there yet.So the question becomes, will the United States continue to play its critical role in Europe long enough for those European investments to bear fruit?But leaving aside those important questions at a zoomed out level, the trend is now pretty clear.If in 2022 the question was, will NATO rearm?And in 2024, how hard and when?

As of 2026, we're starting to see the major movements.Contracts are being signed and orders made, even though in many cases, the equipment is still going to be a number of years off.If things continue on trend, noting that's never really a safe assumption in international affairs, we should expect over time to see a net shift in the military and defence industrial balance, both in terms of the balance between NATO and Russia, and also the dynamics within NATO itself.There is still, obviously, a lot to be determined.Will these budgets hold?Will some of these major programs succeed?

And what shape will the Russian military and economy be in when the drones finally fall silent in Ukraine?That question, however, and how the Russian military might handle the rebuilding challenge balanced against a re -armored Europe,I think, is ultimately a question for another episode.And okay, channel update to close out.Now, I know this one was data heavy, but after years of tracking NATO expenditure as soon as the data dropped, I knew I was going to have to mince some charts and talk about it.It's worth noting that within all these aggregate totals, there are obviously plenty of interesting national stories and the occasional scandal, and we might have some opportunities to unpick some of those in the coming weeks and months.

In the meantime though, I hope you enjoyed the episode.In terms of other updates as I continue to recover, Patrons, there should be a small update live for you around the time this one goes live, and for those of you on the Praerin Gaming channel, Terra Invicta is currently live, but don't worry, the other titles will be returning again soon.I think that's everything to say for the moment, so just thank you once again all of you for your ongoing engagement and support, and with any luck, I hope to see you again next week.