Washington Shelves Ukraine Peace for Iran War, Triggering European Defense Revaluation

The United States has delayed the next round of trilateral talks with Ukraine and Russia due to the escalating war in the Middle East, President Volodymyr Zelensky said on Tuesday. A Ukrainian official familiar with the negotiations told the Kyiv Independent that the trilateral meeting did not take place primarily because of the U.S. side, confirming a fundamental reshuffling of American foreign policy priorities that markets are only beginning to price in.

Trump has always been more amenable to the neoconservative view of Iran than of Russia, according to Foreign Policy. If anything, an extended American embroilment in the Middle East might make him even more interested in reaching a deal with Russia to end the war in Ukraine. But that calculation assumes diplomatic capacity the administration no longer has. Special Envoy Steve Witkoff may have time on his hands now that negotiations with Iran are indefinitely suspended, but other key players in the State and Defense Departments will be busy managing the domestic and global ripple effects of President Trump’s Middle East war.

The immediate consequence is a Ukraine conflict that grinds on without a clear diplomatic horizon, with both Russia and Ukraine likely to choose continued war, gambling on battlefield gains as the better path to security. The secondary effect is more durable: European governments, watching Washington’s attention span fracture across two theaters, are accelerating plans to fund and equip their own militaries without American underwriting.

Iran War Drains U.S. Diplomatic Bandwidth

On 28 February 2026, Israel and the United States launched surprise airstrikes on multiple sites and cities across Iran, killing Supreme Leader Ali Khamenei and numerous other Iranian officials. Iran responded with missile and drone strikes against Israel, US bases, and US-allied countries in the region. The escalation consumed the entirety of Washington’s crisis management apparatus. U.S. special envoy Steve Witkoff said the trilateral Ukraine talks would be shifted until some time next week, adding “we’re seeing signs that both sides are weary and tired”—a statement that reflected hope more than strategy.

The conflict’s effect on global oil prices and supplies will give Russia’s flagging economy new life and could decrease Moscow’s interest in negotiations, according to Responsible Statecraft. Economic pain was never likely to be the reason Russian President Vladimir Putin decided to end the war, but with the conflict in the Middle East scrambling oil exports and triggering sharp increases in prices and demand for Russian oil, the Trump administration has lost any economic leverage that it might have had. Oil has topped $100 a barrel following disruptions to Middle East shipments, with Europe and Asia competing for non-Russian supply.

The diplomatic damage may be more lasting than the economic shock. Twice now, in June 2025 and last week, the United States has attacked Iran during negotiations, per Responsible Statecraft. Some participants of the most recent round of diplomacy have suggested that the talks were a sham, meant as a distraction while the United States and Israel prepared for war. At this point, it is not clear that either Kyiv or Moscow trusts that Washington can deliver on a deal or make good on its security promises to each side. For its part, Russia may fear that any guarantees from the United States on Ukraine’s neutrality or NATO expansion will be as empty as those verbal promises offered to Iran.

NATO Pressured to Fund Autonomous Defense

The result is not European abandonment of Ukraine but European acceleration toward autonomous defense capacity. At the 2025 NATO Summit in The Hague, Allies made a commitment to investing 5% of Gross Domestic Product annually on core defence requirements and defence- and security-related spending by 2035, allocating at least 3.5% of GDP annually based on the agreed definition of NATO defence expenditure by 2035. Core defense spending has doubled since 2019 and, under NATO’s new 3.5 percent benchmark for 2035, could reach about €800 billion by 2030—roughly 2.9 percent of GDP, per McKinsey.

In 2024, defence investments grew at an exceptional rate, increasing by 42% compared to 2023 and reaching a record high of €106 billion, data from the European Council show. The data indicates that the rising trend will continue in 2025, when defence investment is projected to reach nearly €130 billion. Spending on defence equipment procurement increased by 39% compared to 2023, with procurement expenditure reaching €88 billion in 2024.

The procurement surge is reshaping European industrial policy. Germany’s new military procurement plan shows 154 major defense purchases planned through 2026, with only 8% going to U.S. suppliers—a dramatic shift from recent years when Berlin was one of Washington’s biggest defense buyers. European defense budgets hit 343 billion euros in 2024, up 19% in a single year and 37% since 2021. Defense investments surged 42% to 106 billion euros, with procurement alone topping 88 billion euros.

Defense Contractors Revalued as Rearmament Accelerates

Markets are repricing European defense contractors to reflect a decade-long spending commitment rather than a cyclical bump. Rheinmetall has seen an approximate +1,464.7% increase in stock price since February 2022, while Saab has experienced a +777.8% increase during the same period, per Defense Domain. The STOXX Europe Targeted Defence Index rose 14% year to date as of 30 January 2026, with the Goldman Sachs Europe Defense basket up 18%.

Rheinmetall AG recorded consolidated sales of €9.9 billion for the 2025 fiscal year, representing a 29% increase over the €7.7 billion reported in the previous year, according to Defense Security Monitor. Operating profit for the period rose 33% to reach €1.8 billion, up from €1.4 billion in 2024. The Group’s backlog reached a record high of €63.8 billion at year-end, a 36% increase from the €46.9 billion recorded at the close of 2024.

NATO Europe equipment expenditure is estimated to grow at around 15% CAGR to $340bn by 2030, translating into multi-year increases in procurement of aircraft, missiles, air defense systems, armored vehicles, munitions, and ISR capabilities, per Gabelli Funds. By 2035, EU NATO members will allocate 3.5% GDP to core defense plus 1.5% to defense-related activities, generating €254 billion in additional annual spending.

Energy Volatility Extends, Geopolitical Risk Premium Reprices

The Iran conflict introduces a second energy shock to Europe in four years, compounding the volatility from the Ukraine war. Since the beginning of the conflict, gas prices have risen by 50% and oil prices by 27%, European Commission President Ursula von der Leyen said on Wednesday. Ten days of war have already cost European taxpayers an additional €3 billion in fossil fuels imports.

Brent crude, the global oil benchmark, has retreated from the near-$120 per barrel seen earlier in the week, as the International Energy Agency agreed on Wednesday to release a record 400 million barrels of oil from its emergency reserves, CNBC reports. European natural gas prices, as measured by the Dutch TTF futures benchmark, also pulled back from a three-year high of 63.77 euros per megawatt-hour and were last seen under 50 euros per MWh on Wednesday.

A scenario in which energy supply normalizes after four weeks could drive eurozone inflation from its current level of 1.9% to 2.5% by the second quarter, according to CNBC. Meanwhile, inflation could hit 3% in the U.K. and the U.S.—enough to delay, but not derail, further Federal Reserve and Bank of England rate cuts. The prolonged Ukraine conflict ensures that European energy markets remain structurally vulnerable to geopolitical shocks, with residential electricity and gas prices in the EU remaining above the levels seen before Russia’s invasion of Ukraine, though prices have largely stabilised as of 2026 compared to the highly volatile years of the energy crisis.

Commodities markets are repricing geopolitical risk as a permanent factor rather than a transient shock. Commodities with low-risk betas generate 9.05% higher annual risk-adjusted returns than those with high-risk betas, per research in the Journal of Futures Markets. Prices of key commodities, such as oil and natural gas, frequently include a “geopolitical surcharge,” while gold sees a “fear premium” during periods of heightened uncertainty.