WASHINGTON — An ongoing diplomatic battle between Canada and Saudi Arabia is hitting American defense firm General Dynamics hard, to the tune of about $1.5 billion in missing payments for land vehicles sold to the kingdom.

During the company’s Oct. 23 quarterly earnings call, officials from General Dynamics revealed the roughly $1.5 billion in payments Saudi Arabia currently owes for a light armored vehicle contract run through General Dynamics Mission Systems–Canada.

More specifically, that figure stems from vehicles delivered to Saudi Arabia that have not been paid for, and the amount has grown quarter by quarter in the last year, according to General Dynamics filings. The number could grow as large as $2.6 billion given production that is already underway on vehicles not yet delivered, the company added.

In the quarterly earnings call, General Dynamics CEO Phebe Novakovic acknowledged that “the payments on our international program out of Canada have remained slow,” but stressed that “there no dispute on the fact that it is owed. It’s simply a question of timing, and we are still hopeful that we resolve that by the end of the year.”

Several industry analysts said that amount of delayed payments is unusual, with one analyst, speaking on condition of anonymity, saying the issue is having real impacts on the defense firm.

“It is doing great damage to GD. Most defense primes are up 30 to 60 percent year to date, while GD is only up 11 percent,” the analyst said. “This will be a nail-biter right to the very end.”

Technically Saudi Arabia doesn’t owe General Dynamics anything; military sales are run through the Canadian Commercial Corporation, which acts as a middle man. However, General Dynamics effectively is taking the hit, as CCC can’t pay for the vehicles if the kingdom doesn’t hand over the cash. Notably, the Canadian government last summer moved up its plans to buy its own light armored vehicles, or LAV, handing over a large advance payment to General Dynamics with that contract; while officially unrelated to the Saudi situation, this move was seen by many in Canada as CCC trying to do right by its industry partner.

Saudi Arabia has been a major customer of American-made high-end defense equipment throughout the years. Since the start of fiscal 2017, for example, Saudi Arabia submitted 14 foreign military sales requests for U.S. goods, worth an estimated $26.3 billion, a figure which does not capture lower level requests or direct commercial sales, nor weapons purchased from other nations.

According to a Canadian government report, Saudi Arabia was Canada’s largest non-U.S. defense export destination in 2018; the kingdom received approximately $1.3 billion in Canadian military exports that year, which makes up for 62 percent of Canada’s total military exports, excluding to the United States.

The LAV deal is the second of its kind signed between General Dynamics Land Systems-Canada and Saudi Arabia, with an estimated 1,400 LAVs going to Riyadh over the previous two decades. Those vehicles are equipped with a variety of weapon systems, ranging from 25mm cannons to 90mm guns.

Frozen relations

In 2014, Canada agreed to a roughly CA$14.8 billion (U.S. $11.3 billion) deal to sell to Saudi Arabia hundreds of the light armored vehicles; the exact quantities of the deal, along with many other aspects of the contract, remain secretive, but media reports suggest finalized deal may be for about 700 vehicles, with more than 200 already delivered. Despite some domestic opposition to Canadian arms sales to Saudi, the deal was upheld by the Trudeau government due to the impact on jobs.

But in August 2018, relations between Riyadh and Ottawa crumbled when Canadian officials issued statements of support for human rights activists that had been detained in Saudi Arabia. In a shockingly fast escalation, Saudi government officials quickly moved to kick out the Canadian ambassador and announced the suspension of any potential new business with Canadian firms, as well as recalling all Saudi students from Canadian universities.

That relationship remains “frozen,” said Thomas Juneau, a professor at the University of Ottawa who previously worked as an analyst with the Canadian Department of National Defence.

That’s important, he added, because of how Saudi Arabia views its defense expenditures. Certainly, there is a national defense aspect to it, but the kingdom also views large defense purchases as a key tool in creating diplomatic ties with nations.

If those diplomatic ties remain frozen, Juneau noted, spending “those billions doesn’t make sense anymore.” In fact, giving a Canadian firm all that money — and the roughly 3,000 jobs associated with it — could even be “counterproductive, to some extent,” he said.

“Given that context, it’s very, very likely to me that the main reason for that delay is the political context of Canadian-Saudi relations,” he added. “I have a very hard time conceiving of any other dominant reason why Saudi [Arabia] would be so late in the payments. It has to be because of the bilateral relationship context.”

Becca Wasser, a senior policy analyst at the think tank Rand, agreed the spat with Canada likely “pushed this payment lower on their [Saudi Arabia’s] list of priorities.” But she also noted that Saudi Arabia is well-known for its “already slow repayment practices — which have been exacerbated by some of its recent financial overstretch.”

Indeed, the kingdom has built a reputation for slow payments to foreign firms. In addition to General Dynamics, the Wall Street Journal revealed in January that American firm Bechtel was leading a consortium of firms to try to push Saudi Arabia to speed payments for construction work, while U.S.-based Boston Consulting Group was owed $125 million in back payments.

Aaron Mehta was deputy editor and senior Pentagon correspondent for Defense News, covering policy, strategy and acquisition at the highest levels of the Defense Department and its international partners.

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