The opinions expressed here are those of the author, an investment strategist for Panmure Liberum

By Joachim Klement

LONDON, July 14 (Reuters) - Western governments want to rearm, but they may be spending billions rebuilding the wrong arsenals. While tanks and missiles are still necessary, so are drones and algorithms. Ukraine may be well positioned to show the West what’s needed today.

At this past week’s NATO summit in Ankara, Turkey, U.S. President Donald Trump and Secretary of State Marco Rubio noted Ukraine’s ability to use drone technologies to strike Russian energy infrastructure, an “escalation” that they said could lead to a resolution of the conflict, now in its fifth year.

As Europe looks to rearm, both because of the large amount of traditional weaponry it has sent to Ukraine and because of Trump’s push to get NATO members to spend more on their own defence, the bloc could consider drawing on Ukrainian companies and military experts whose drone designs have been critical in Kyiv’s ability to withstand the multi-year onslaught.

According to the Ukraine Support Tracker by the Kiel Institute for the World Economy, European nations have sent military aid amounting to €213 billion ($242.6 billion) to Ukraine. U.S. military aid to Kyiv, meanwhile, has totalled €115 billion through the end of January 2026.

These sums are mostly not cash outlays but reflect the book value of inventories of "old-paradigm" weapons systems like artillery, tanks and missiles shipped to Ukraine.

European governments now face a strategic choice: simply refill these stocks or rethink what they buy next.

WHAT TO BUY?

The war in Ukraine as well as the U.S.-Israeli war with Iran have demonstrated that the future of warfare likely lies with drones, electronic warfare, and AI, rather than simply artillery and missiles.

In the short run, traditional weaponry is certainly still needed. Ukraine asked for a license to build U.S. Patriot missile interceptors specifically because these are still the best defence against Russia’s ballistic missiles.

But if warfare becomes smaller, cheaper and more nimble, Western powers will need to adapt.

It makes sense to use a Patriot interceptor to bring down a ballistic missile. But it clearly makes no economic sense to use a Patriot missile, which costs about $4 million, or a THAAD missile with a price tag of $12 million to $15 million, to shoot down an Iranian or Russian Shahed drone, which costs between $20,000 and $50,000.

Many European militaries may still be stuck in an outdated mindset, however. The Kiel Institute recently warned that spending on new-paradigm weapons like drones accounted for just 12% of total procurement spending in 2024-2025.

While Poland, one of the European Union members most at risk from any future Russian aggression, has been increasingly focusing on cutting-edge military technology, Germany and Britain have seen their share fall over time.

'DRONE DEAL'

Instead of simply ordering more expensive fighter jets and missile systems, NATO allies should perhaps first ask someone for help who has first-hand experience with 21st-century battlefield conditions: Ukraine.

While China and the U.S. possess the most sophisticated drones and the biggest drone industries, Ukraine is now the world’s largest manufacturer of military drones by volume – and its technology has proven itself on the battlefield.

Before Russia’s invasion in 2022, Ukraine had no substantial manufacturing sites for drones or other first-person view (FPV) vehicles — tiny, inexpensive camera-equipped drones piloted through a headset or screen.

But by the 2025 NATO summit, President Volodymyr Zelenskiy said the country had become capable of manufacturing 8 million drones per year.

Ukraine is increasingly offering "drone deals” to its allies. Kyiv provides support and expertise in the development of drones, radar systems and other electronics in exchange for conventional arms deliveries or investments in Ukrainian defence manufacturing.

Recently, the country said it aims to have such deals in place with seven NATO countries by the end of this year.

European countries, in particular smaller ones without an established military-industrial complex, are forging ahead.

Denmark was one of the first countries to sign a drone deal with Ukraine, and Copenhagen-headquartered MITS Industries will be offering "drones-as-a-service" to Western countries, meaning providing engineering assistance and data.

Similarly, Ukraine and Latvia have announced an investment in a joint drone factory on Latvian soil as part of their drone deal.

Meanwhile, Saab SAABb.ST and French drone manufacturer Parrot PARRO.PA are collaborating closely with Ukrainian companies to gain know-how that can help them challenge established players like Thales TCFP.PA or Leonardo LDOF.MI.

Many established defence contractors are increasingly developing new-paradigm weapons systems, but they may lag behind upstarts with specialist knowledge and could be hamstrung by their large size, bureaucracy and longer lead times. If these large legacy defence contractors don’t evolve rapidly, they risk being overtaken in specialised areas by the nimbler competition.

NEW PRIORITIES

The U.S. also needs to rearm after its multi-month conflict with Iran. America has used up between a quarter and a half of its existing stockpile of advanced weapons systems, like the Patriot RTX.N and THAAD LMT.N air defence systems, and the Center for Strategic and International Studies estimates that it will take between 25 and 51 months to replenish them.

While the U.S. may simply restock these systems, it is also clearly re-examining its military strategy – taking a page from Ukraine.

On July 1, the Department of Defense announced the consolidation of all Unmanned and Autonomous Systems as the country seeks to “rapidly accelerate the development, procurement, and fielding at scale of autonomous capabilities, which are essential to maintaining the United States' decisive military advantage.”

Large defence contractors globally would be well-advised to take note – and make sure they are speaking with Kyiv. Complacency in the face of a rapidly changing battlefield is one of the biggest risks they face today.

(The views expressed here are those of Joachim Klement, an investment strategist for Panmure Liberum.)

Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. Follow ROI on LinkedIn, and X.

And listen to the Morning Bid daily podcast on Apple, Spotify, or the Reuters app. Subscribe to hear Reuters journalists discuss the biggest news in markets and finance seven days a week.

($1 = 0.8780 euros)