The FTSE 100 index closed out 2021 at 7,385 points, before rising to 7,611 points by 17 January. A week later, it had fallen to 7,297 points as fears of tightening monetary policy hit shares worldwide.

Then it rose to 7,672 points on 10 February, before collapsing to 7,207 points as Russia began its incursion into Ukraine. It’s now recovered to 7,413 points; and while more volatile than usual, passive investors have gained 0.4% in the first two months of the year.

But index gains mask larger potential gains among the best FTSE 100 stocks to watch in March 2022.

FTSE 100 defence stock

BAE Systems (LON: BA) shares have risen 22.5% to 735p, after reporting full-year results on 24 February, the same day Russia began its invasion of Ukraine. With group sales rising 5% to £21.3 billion in 2021, CEO Charles Woodburn believes it's ‘well positioned for sustained top line and margin growth in the coming years.’

And given the current crisis, defence spending could be set to escalate significantly. Germany has already committed to increasing its defence budget by €100 billion to more than 2% of GDP. The US had already voted to increase its defence budget by $25 billion to $740 billion, but a further increase now seems likely. And as weapons and defensive items pour from European nations into Ukraine, donor countries will need to increase defence spending this year to maintain equipment reserves.

BAE is the largest defence contractor in Europe, and its two largest customers are UN Permanent Security Council members, the US and UK. Sadly, even if Russia chooses to de-escalate, NATO member defence spending will almost certainly see significant rises in the near future, and BAE Systems will almost certainly be a significant recipient.

FTSE 100 stocks: mining volatility

Evraz (LON: EVR) shares began 2022 at 613p but have since collapsed 79% to 128p today. Despite nearly tripling its pre-tax profit to $4.2 billion last year, the miner has become a high-risk proposition as it warns of the potential impact of ‘economic uncertainty’ and the ‘risk of the imposition of sanctions.’ As Russia's second-largest steel company, it generates revenue by exporting the metal to predominantly NATO countries.

Moreover, Russian oligarch, Chelsea football club owner, and close friend to Russia’s Vladimir Putin, Roman Abramovich owns a 29% stake in the company. But while CFO Nikolay Ivanov has insisted ‘we have no plans to delist from the London Stock Exchange at the moment. We are not considering this option,’ the company is still planning a secondary listing in Moscow.

There’s a complex balance of risk for investors. On the one hand, despite its CFO’s protestations, the current political climate could see the miner delist from London shortly after its Moscow listing. However, the FTSE 100 stock’s dividend, already one of the largest in the index, could be higher than 50% of its current share price in 2022.

Polymetal International (LON: POLY) shares are down 87% to 265p from its August 2020 2,028p high. And they were worth 1,098p just before Russia’s incursion last week, and have fallen 76% since.

Like Evraz, the company has reported strong full-year results. FY21 gold equivalent production rose 2% year-over-year to 1,677 Koz1, and 24% year-over-year in Q4. And with FY revenue stable at $2.9 billion, CEO Vitaly Nesis reasons that ‘Polymetal beat production guidance, maintained solid safety track record, and paid record dividends… the Company remains on its path to consistent and significant long-term growth.’

However, the precious metal miner is also highly exposed to the Ukraine crisis. Norway’s Sovereign Wealth Fund, a top 10 shareholder, is selling all its Russian investments. As investors abandon Russian-linked stocks, Berenberg analyst Jonathan Guy believes ‘there is a wall of sellers and very few buyers… it’s a crazy market.’

Polymetal generates revenue selling gold to Russian banks, which then resell it on international markets. With many Russian banks now on the verge of collapse, Polymetal will be forced to rely on Russia’s central bank as its buyer of last resort. The bank has started buying domestic gold after a two-year hiatus and is sitting on a $153 billion 2,300 tonne pile, which accounts for roughly one-fifth of Russia’s financial reserves.

However, most of Russia’s reserves are in unusable foreign currency, leaving sales of its gold reserves as one of few avenues left to raise funds. But it might struggle to find a buyer; China has warned it will not undermine NATO-led sanctions.

Moreover, if Polymetal is perceived to be indirectly funding the Russian invasion of Ukraine, it could find itself delisted from the FTSE 100 and stranded at the Moscow equivalent. But any easement of current crisis could see this FTSE 100 stock soar.

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