Backers of a defence-focused multilateral development bank (MDB) hope to improve Europe’s military sector by plugging the gaps in financing for both buyers and suppliers.
An initiative to establish the Defence, Security and Resilience (DSR) Bank was officially launched last week by Nato’s former head of innovation, Rob Murray.
It is backed by a coalition of high-level figures in the military and finance world, including Mircea Geoană, former deputy Secretary-General of Nato, and economist and founder of the Centre for Economic Security Rebecca Harding.
The aim, Murray says, is to build an institution from the ground up with the benefits of an MDB, including decentralised risk to lower the cost of borrowing and government backing enabling more generous tenors to borrowers, but with a charter specifically aimed at defence production and procurement.
Russia’s invasion of Ukraine in 2022, coupled with US President Donald Trump’s urges for Nato members to increase defence spending to 5% of GDP, has made increasing access to finance for defence a common topic of discussion. However, issues over mandates are currently limiting the support MDBs are able to provide to conflict zones, Murray tells GTR.
“I’m not aware of any multilateral-financed pure-play defence in Ukraine. The EIB has been under huge pressure to do this, but they face challenges, as do all existing multilaterals,” he says.
“One is that to really do proper defence spending – we’re talking about armaments, weapon systems, ammunition, stuff people don’t like talking about – would require a charter change to their mandate.
“These charters are international treaties. You can’t just open them up and slip in one sentence; if you open it up, you open the whole thing up. And nobody wants to do that.”
The other problem is technical. Defence lending is relatively untested by MDBs, and the large number of parts involved in production make supply chains hard to trace. This makes the quantitative risk hard to model.
“As a result,” Murray says, “they don’t know what might happen to their triple-A credit rating,” which would affect their entire pre-existing portfolio.
National institutions do not face the same challenges – earlier this month the UK’s export finance bank, UKEF, financed a £1.6bn facility backing the purchase of air defence missiles in Ukraine, for instance – but Murray argues that their balance sheets are not large enough to meet growing demand.
Individual government-backed financial institutions also inherit their country’s credit rating, meaning they are not all able to borrow at the triple-A rates that Murray hopes the DSR Bank could achieve.
Financing production
Murray sees the DSR Bank as an essential component of keeping Europe safe in what he describes as a war.
“Europe is at war,” he says. “Whilst it’s not palatable, perhaps, to say it, and politically it’s hard to say it, at the moment we have a war raging in Ukraine and we have war activity around other parts of Europe as well.
“It’s not bombs dropping on London or Paris or Berlin, but it’s energy infrastructure being targeted. It’s cyber activity being engaged. It’s chemical weapons attacks on the streets of Salisbury.”
Recent developments have shown that European nations are willing to spend to make defence a priority. European Commission president Ursula von der Leyden announced an €800bn defence package last week, and in late February UK Prime Minister Kier Starmer slashed foreign aid to increase the country’s defence budget.
But despite the uptick in funding, Murray believes an MDB is necessary to facilitate production.
“We know what happens when we throw a ton of money at a problem and we don’t have the supply side sorted out, like with Covid,” he says. “We just create inflation. You’re not necessarily going to get more weapons and armaments for Europe to be able to deter Russia, you’re simply going to get more expensive weapons and armaments.
“So whilst all this money is being committed and potentially going to flood this market demand side part of the equation, we’ve got to help the supply side, because if that production capacity is not there, then this is simply going to be an inflationary activity.”
A defence-focused MDB could also encourage supply chain finance in the sector, including deep-tier programmes, where banks lend not only to tier-one suppliers but also the providers of their inputs down the chain, Harding suggests.
Lenders have historically been cautious about deep-tier supply chain finance, in part due to technical and legal challenges, but Harding says an MDB could provide a guarantee for such facilities that reduce the risk for the issuing bank.
“Not all multilateral banks have this at the beginning, but we’re making sure that [DSR Bank] has the mechanism to do direct guarantees to financial institutions that are working within the defence and security supply chain,” she tells GTR.
Harding sits on the senior management team for DSR Bank, and her Centre for Economic Security is providing the trade finance infrastructure that will underpin the bank’s work, including the development of an accreditation system to create a security and resilience fund.
This will act as a funding escalator feeding into the DSR Bank, Harding says.
The DSR Bank is planning to operate with an initial balance sheet of £100bn, with involved nations to invest £20bn into the bank as upfront cash, with the remaining 80% callable.
Although no country has yet announced to pledge funds to the institution, Murray says he hopes to have a charter agreed in time for June’s NATO summit in The Hague.
It is not yet known how capital would be divided up, as the “final configuration of shareholder nations” is not yet known, but it will be in line with the size and health of shareholder nations’ economies, Murray says.
The DSR Bank is currently in “high-level talks” with leaders across the EU, UK and US, and held briefings with the European Commission last week. UK foreign secretary David Lammy has also shown himself open to the idea, announcing his support for multilateral defence funding earlier this week.
“It’s great that defence spending is going to be ramping up,” Murray says. “But if we don’t have the architecture in place to help deal with it, which is what the DSR is trying to do, then there’s a really strong risk that we hit inflationary activity by mistake.”
