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Israel Banks on 10 More Years of US Aid

Promised Funding Pact To Cover Commercial Debt

Mar. 30, 2014 - 03:45AM   |  
By BARBARA OPALL-ROME   |   Comments
US Defense Secretary Chuck Hagel, left, meets Israeli Defense Minister Moshe Ya'alon, who arrived at the Pentagon via V-22 Osprey during a June visit to Washington. A proposed new US aid agreement would make funds available to Israel to begin buying V-22s.
US Defense Secretary Chuck Hagel, left, meets Israeli Defense Minister Moshe Ya'alon, who arrived at the Pentagon via V-22 Osprey during a June visit to Washington. A proposed new US aid agreement would make funds available to Israel to begin buying V-22s. (Ariel Hermoni / Israel Ministry of Defense)
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TEL AVIV — Despite misgivings over US President Barack Obama’s Mideast agenda and deep-rooted doubts about his ability to prevent a nuclear-armed Iran, the Israeli government is taking the US president at his word that it can expect another decade of military aid.

In fact, it’s banking on it.

After many months of internal debate and bureaucratic resistance from the Israeli Treasury, Defense Minister Moshe Ya’alon has government approval to take on more than $2 billion in commercial debt for near-term buys of V-22 tilt-rotor aircraft and other Pentagon-approved weaponry.

Under a US-approved deferred payment plan (DPP), Israel would pay only interest and fees over the course of the current agreement set to expire in September 2018. Principal will be covered by the new Obama-pledged package that would extend annual foreign military financing (FMF) aid through 2028, US and Israeli sources say.

During his visit here last March, Obama committed to talks aimed at extending US military assistance beyond the current 10-year, $30 billion agreement signed in 2007 under the administration of President George W. Bush.

In a joint news conference in Jerusalem with Israeli Prime Minister Benjamin Netanyahu, Obama said at the time that a follow-on aid agreement was “part of our long-term commitment to Israel’s security.”

Under the existing agreement, annual FMF grant aid to Israel grew from $2.4 billion to $3.1 billion, minus subsequent recissions of some $155 million due to the US government-mandated sequester.

Bilateral talks on extended aid are still preliminary, US and Israeli sources stress, and a finalized deal is unlikely by the time Obama leaves the White House in January 2017.

But given Obama’s backing and overwhelming congressional support for its “principal strategic partner” in the region, Israel can count on follow-on funding, said Danny Ayalon, a former Israeli ambassador to the US.

While US economic conditions and a host of other factors will ultimately determine actual amounts of aid to come, Ayalon said it is reasonable to expect the follow-on agreement to preserve or possibly exceed current levels, with incremental boosts in the out-years.

Prospective DPP financing was not Israel’s first choice, officials and experts here say, but a compromise after Washington rejected earlier requests for US government-guaranteed bridge loans until the follow-on aid deal kicked in.

US sources explained that regulations proscribe government-guaranteed loans based on future FMF agreements that are not yet in place. The DPP plan approved for Israel, said one Washington source, comes as close as procedurally possible to accommodating the Israeli request.

“According to our lawyers, this is not a government-guaranteed loan. The contractor is due payment by the US government through the [Pentagon-administered] Foreign Military Sales [FMS] program … and we are doing our best to facilitate deferred payment arrangements,” the Washington source said.

He acknowledged that the arrangement required “a leap of faith” by all parties — not only the Israeli government — that a future bilateral 10-year military aid pact will materialize.

That “leap of faith” sparked extensive internal debate in Israel among financial officials, oversight authorities and political skeptics. The high risk inherent in shouldering deferred debt to be repaid from a prospective, yet amorphous, future agreement continues to concern many here, sources here say.

However, after Washington agreed to provide a letter of intent to support DPP purchases with prospective future FMF funding, Israel’s Ministry of Defense prevailed in pushing the plan through the Israeli government.

Full Faith

A straight-talking former Israel Defense Forces chief of staff, Ya’alon is a prominent yet pragmatic hawk in Netanyahu’s coalition government. His repeated criticism of the US-led drive toward an Israeli-Palestinian peace deal and the perceived waning of US influence in regional and world affairs has sparked friction with Washington.

He was widely quoted as blasting US Secretary of State John Kerry for his “inexplicably obsessed” pursuit of a deal unworthy of “the paper it was printed on.”

This month, he was forced to apologize for comments delivered in a closed lecture here suggesting that Israel could not depend on Obama’s pledged use of all options in preventing a nuclear-armed Iran.

Ya’alon sought to clarify his remarks in a March 20 telephone conversation with US Defense Secretary Chuck Hagel, who “expressed deep concern about the minister’s comments on US policy toward Iran,” according to Rear Adm. John Kirby, Pentagon press secretary.

Ya’alon’s office declined to discuss fallout from his latest remarks or DPP details.

But a senior aide insisted the minister has full faith in White House and congressional commitments to continued funding support.

“Relations between the US and Israel are intimate and deep, based on common values and interests, … Bilateral cooperation at all levels is a cornerstone of Israel’s national security,” Ya’alon said in a March 26 statement.

Washington’s commitment to Israel’s security is “unquestionable,” Ya’alon said. He added that he fully expects continuation of the “successful cooperation between defense industries and defense establishments.”

Translating Offer into Firm Orders

The DPP formula, officials and experts say, will free up FMF funds to initiate procurement of V-22s, an anchor part of a package offered by Hagel during his visit here last April.

At that time, Hagel announced that Washington “would make available to Israel a set of advanced new military capabilities” to augment Israel’s qualitative military edge.

But with most of Israel’s FMF funding through 2018 earmarked for F-35 fighter jets, airlifters, heavy troop carriers and other equipment, Hagel’s April 2013 announcement was criticized here as premature and lacking in substance.

Since then, the two sides have engaged in intensive coordination with defense companies, military services and multiple departments at the Pentagon, US State Department and MoD.

Assuming the DPP plan is finalized in coming months, sources from both countries said Israel could become the first export customer for the V-22, with a signed FMS contract by September.

While the two sides are still working on price, delivery and specific capabilities to be included in the package, the procurement could mean more than $1 billion for prime contractors Bell-Boeing and a host of other US companies.

Moreover, a US industry source here said it could catalyze future sales to Japan, Italy and the United Arab Emirates.

In a Jan. 4 notification to Congress, the Defense Security Cooperation Agency estimated the prospective package at $1.13 billion, which includes six V-22 Block C tilt-rotor aircraft, associated equipment, spare parts, training and logistics support.

Depending on how the DPP is scheduled, it also may free up funds for other elements of Hagel‘s proposed package. They include the retrofit of active electronically scanned array radars into F-15I fighters and a variety of air-to-ground weapons, including small diameter bombs and the AGM-88E advanced anti-radiation guided missile.

Mutual Benefit

Aside from the cardinal distinction that a prospective DPP deal presumes a still-nonexistent follow-on aid package, US and Israeli sources note that similar schemes have been used in the past to mutual benefit. With active involvement by Lockheed Martin, Israel used this method to fund Pentagon-administered FMS purchases of the company’s F-16I and F-35I fighters.

When employed — usually in combination with an arcane Pentagon process called cash flow financing that allows Israel to tap into future-year FMF funding — it facilitates high-value export orders for US defense contractors and expedited responses to urgent Israeli requirements.

In those earlier cases, Lockheed helped MoD secure $1 billion in deferred commercial debt under favorable terms to supplement F-16I-earmarked funding to come from Israel’s Pentagon-managed FMF account. With permission from Washington and Lockheed, the debt was extended by another few years to secure Lockheed’s first F-35 export contract managed under FMS.

Principal on the extended loan should be fully paid by the end of the year, US and Israeli sources said.

Lockheed is expected to play a pivotal role in the new DPP scheme, which government and industry sources here say will facilitate follow-on procurement of Israel’s second squadron of F-35Is. Details of Lockheed’s involvement were unclear as of March 28.

Larisa Cioaca, a media relations manager at Lockheed’s corporate headquarters in Bethesda, Md., declined comment. ■


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