Falling oil prices are hitting Middle Eastern defense budgets, but surplus funds accumulated in previous years should cushion the region’s biggest spenders for some time.

Four of the 12 Organization of the Petroleum Exporting Countries (OPEC) — Kuwait, Saudi Arabia, the United Arab Emirates and Qatar — are expected to keep their defense budgets intact due to excess revenue from the oil price boom since 2005.

"All GCC countries have reserve funds developed from the excess when oil prices were peaking and developed rainy day funds. Russia also splits it between rainy day funds, for when the oil prices drop, and national wealth funds," said Nicholas Redman, senior fellow for geopolitical risk and economic security at the International Institute for Strategic Studies.

Iran and Iraq, however, will be harder hit because they need higher prices to maintain their budgets, according to Washington- based Capital Alpha Partners.

"The expectations now are for oil prices to stay at the $60 to $80 price range for a considerable amount of time, so for budgets that have a break-even of around $105 to $110, that's a problem," Redman said.

According to a United Nations report, Iran needs a price of $140 per barrel to balance its budget, whereas Saudi Arabia needs $90.70, Qatar $77.60, and the United Arab Emirates $73.30.

Iranian President Hassan Rouhani on Dec. 7 said his government has to cautiously adjust its budget for 2015.

"The price of Brent [crude] has fallen from $110 to less than $70, a decline little before seen," Rouhani said in a speech to Parliament, according to the semi-official Iranian Students' News Agency. "It's necessary for next year's budget to be adjusted with caution."

Mahdi Zadehali, international relations expert at the Iranian Ministry of Foreign Affairs, told Defense News his government may have to rely on tax revenues to balance its spending.

"With the current situation of the oil price drop to around the $70, it changes everything; Iran may be shifting from oil revenue to tax money," he said.

Zadehali added that the war against Islamic State extremists does not consume much of Iran's defense spending, with most of the budget focused on national security.

"The Arab Suppliers Group in OPEC and Russia hold the key to stop the slump," he said.

Zadehali said Saudi Arabia may be instigating the slump for political reasons. "They may be using it to strengthen their global strategic position.

"Iran's problem is different. During the last three years, Iran was faced with sanctions banning money transfers, blocking the country from the international financial system. Iran has huge financial assets of around $100 billion frozen around the world; if the nuclear negotiations are successful, these funds would be released," he said.

The compound annual growth rate of the region's defense spending will grow about 3.48 percent from 2015-2019, according to a report by Nicole Auger, who covers Middle East defense spending for Forecast International. The figure for 2010-2014 was 8.45 percent, she said. Some of this decline is tied to the anticipated fall in oil prices, she said.

"For Saudi Arabia, Qatar, Kuwait and the UAE, this trend will only serve as a nuisance that they can comfortably withstand for a few years, so I do not expect there to be any significant changes in their defense spending tendencies," she said.

"I also don't see a major change in Iran and Iraq's defense spending trends, even though I agree they stand to be the most hurt. Due to other regional and internal fractures, I believe they will have to maintain their defense spending levels as a caution," she said.

"For the smaller defense market nations, the drop in oil price will likely result in continued defense spending growth but at a more gradual pace. For these nations, security is still their main concern, and if they aren't able to rely as heavily on nations like Saudi Arabia and the UAE, like Iraq, they may look to other nations for help."

According to a Capital Alpha Partners report, the oil price slump could give the US additional defense responsibilities in the region.

"If internal turmoil increases in oil producing states, it could place further demands on the US budget," the report read.

"Iraq's government expenditures are being clipped by lower oil, and that bears directly on its ability to contain and roll back [the Islamic State group]. The same goes for Iran.

"Current and possibly new contingencies could place more demands on the US military," the report states.

The US is going to remain engaged in the Middle East, suggesting a bigger role for ground forces, Capital Alpha predicted in its report.

"It remains to be seen how much damage is done to US domestic energy production from oil at or below $60-$65/barrel, but if a result is that US dependence increases on imports, then it's fair to assume that defense plans could be impacted with that laying out over 2016-18. The consensus has been that ground forces could be a bill payer for air, space and naval modernization, but if the Middle East becomes more important or more unstable, that consensus could change," the report reads.

"Middle East defense modernization plans might be altered and that could matter to General Dynamics, armored vehicles, and Raytheon and Lockheed Martin missile defense," according to the report.

It added that Boeing's hopes to extend production of the F/A-18 and F-15 could be affected by reduced resources for gulf states, which are likely buyers. ■

Email: amustafa@defensenews.com.

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