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Special Report: Hottest International Defense Markets

Mideast Buying Lifts Stagnant Global Market

Nov. 12, 2012 - 08:49AM   |  
By AARON MEHTA and ZACHARY FRYER-BIGGS   |   Comments
A Royal Saudi Air Force F-15 Eagle flies over training lanes during Exercise Friendship Two in southern Saudi Arabia on Feb. 28, 2011. Mideast defense spending remains a bright spot despite cutbacks in Western budgets.
A Royal Saudi Air Force F-15 Eagle flies over training lanes during Exercise Friendship Two in southern Saudi Arabia on Feb. 28, 2011. Mideast defense spending remains a bright spot despite cutbacks in Western budgets. (Sgt. Erica Knight / U.S. Army)
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The defense market may be slowing in some parts of the globe, with powerhouse players in Europe and the U.S. facing increasing budgetary pressures, but countries in the Mideast are still buying, and at record levels.

What have been noteworthy in the past year are efforts by smaller countries in the region to radically improve their arsenals, with deals rivaling those historically tied to the larger players, such as Saudi Arabia and Egypt.

For instance, U.S. aerospace companies have earned almost $1 billion from the Sultanate of Oman in the past 18 months, with the money going primarily to purchase a dozen new F-16 Fighter jets and to modernize an older F-16 squadron.

Oman sits across a narrow body of water from Iran and is one of a handful of countries with immediate proximity to that diplomatically troubled nation that is trying to ratchet up its military capability, said Guy Ben-Ari, deputy director of the Defense-Industrial Initiatives Group at the Center for Strategic and International Studies.

“Especially for the smaller [Arabian] Gulf states, they’re really trying to step up their military capabilities to act as both a deterrent toward Iran, but also to show their neighbors and the U.S. that they’re a good partner in the region that can bring relevant capabilities to the table,” Ben-Ari said.

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For Oman, the large purchases from U.S. firms are unusual given the country’s strong military ties to the U.K., especially when it comes to the Royal Air Force.

“The sultan has got a fair amount of money to spend, and he makes sure to spend it,” said James Worrall of the University of Leeds, an expert on Omani spending.

Oman plans out its spending in five-year cycles, with the latest cycle running from 2011-2015. Originally, the plan called for slightly reduced spending on defense. However, higher-than-expected gas prices this year have left the country with excess money, which Worrall said could easily be used on defense.

It’s part of a general theme in the region: As oil goes, so goes defense spending.

“It’s traditionally always been a good market, and by good, I mean there’s this perfect storm in that these governments have money, oil money, they have money to spend, and they’re in a very challenging security environment,” Ben-Ari said.

Since the 1980s, Oman’s average defense spending relative to gross domestic product has been in the double digits, the highest in the region. But in actual dollars, its spending pales in comparison with some of its neighbors.

Saudi Arabia, for instance, spent more than $46 billion on defense in 2011, according to statistics from the Stockholm International Peace Research Institute (SIPRI). That’s more than the combined defense budgets of neighbors Bahrain, Egypt, Iraq, Israel, Jordan, Kuwait, Lebanon, Oman and Syria.

An upcoming order with Oman for 12 Typhoons is expected in the next few months with BAE Systems.

Like Oman, Saudi Arabia has invested heavily in fighter jets. In early November, the Defense Department announced an agreement between Boeing and Saudi Arabia worth almost $4 billion to upgrade 68 F-15s to the F-15SA configuration. The work is part of a $30 billion deal arranged between Boeing and the Middle Eastern nation last December, the most expensive foreign arms deal in U.S. history.

The Saudi government will purchase 84 new F-15SA fighters, to be delivered in 2015.

The emphasis on aircraft upgrades, especially for the F-16 market, where both Oman and Iraq have made purchases in the last year, has led to fierce international competition. While American companies have done well in the Middle East, the U.K. defense industry has maintained a strong regional presence. British defense exports are generally dominated by air systems.

Missile Defense

One of the primary targets for future spending in a region marked by instability and technology advances is missile defense.

French defense companies have seen in the past particular success with sales of frigates and short-range air defense missiles to the Saudis.

France has been negotiating a modernization of the Thales Crotale air defense missile system, which includes a replacement with the Crotale new-generation weapon. That upgrade was estimated at 3 billion to 4 billion euros ($3.8 billion to $5.1 billion) a few months ago, a source briefed on the subject said. That compares to a 2.5 billion euro budget reported in latribune.com, the online publication.

All the countries in the gulf region take the ballistic missile threat seriously, an industry executive said.

“It’s a reasonable proposition that the Aster and VL [vertical launch] Mica are proposed to all these countries,” the executive said.

The Aster and VL Mica package has been offered to Qatar, the executive said. Part of the sales pitch is the compatible command-and-control architecture for the Aster and VL Mica, which makes it easier to integrate the high- and low-level weapons into a multi-tier missile shield.

European missile company MBDA makes the Mica and is part of the Franco-Italian Eurosam consortium, which makes the Aster missile used in the SAMP/T anti-ballistic missile system.

Saudi Arabia and the UAE have bought U.S. missile systems, leaving France to seek sales in Kuwait, Oman and Qatar.

Qatar is spending at least some of its missile defense budget on American designs. On Nov. 5, the Defense Security Cooperation Agency, the American entity that oversees foreign military sales, announced a $6.5 billion contract between Qatar and Lockheed Martin for Terminal High Altitude Area Defense (THAAD) missile systems and support.

That same day, DSCA announced a $1.1 billion deal with UAE for THAAD missiles and launchers.

Andrew Chuter in London and Pierre Tran in Paris contributed to this report.

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