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The battle for the Middle Eastern arms market is heating up

by Ace Damon
The battle for the Middle Eastern arms market is heating up

The flow of foreign weapons to the Arabian peninsula began 150 years ago. As European armies adopted modern breech-loading rifles, a stock of antiquated weapons was in excess of requirements. The rivalries between the Arab tribes created a market ready for the aging of weapons. Since then, a combination of the region's chronic instability and oil wealth continues to fuel arms sales. Most of them still come from the West. Now, the quicksand of geopolitics has left an opening for others.

At the Dubai air show last November, Viktor Kladov of Rostec, a state-owned company that handles exports from Russian defense companies, told The Economist that Russian arms exports to the Middle East apparently reached a historic US high. $ 13.7 billion in 2018. As an unusual sincerity in his industry, Kladov attributed this to Russia's willingness to sell most things to most people. Europeans and Americans may indeed be embarrassed to send weapons to places with mixed human rights records. The war in Syria, said Kladov, was a chance to "show" Russian weapons. Chinese companies, equally unrestricted, are also approaching. And countries in the Middle East want to develop their own defense industries. The battle for the world's fastest growing arms market may be about to heat up.

Powers of war

The major Western defense companies rely primarily on their domestic markets for sales and profits. Exports represent less than a third of the revenue of Lockheed Martin, the largest arms manufacturer in the world. But the global export market is large – and growing. The Stockholm International Peace Research Institute (SIPRI), a research institute, estimates an estimated $ 100 billion in 2018. Overseas revenues help smooth the slowdown in domestic defense budgets and support the massive investments needed to big projects.

A growing share of these revenues comes from the Middle East. In 2014-18, the region received one third of the world's arms exports, second only to Asia-Pacific, according to SIPRI (see graph). Countries imported 87% more weapons in that period than in the previous five years. In 2018, Saudi Arabia spent $ 68 billion on military equipment, more than anyone except the U.S. and China. The United Arab Emirates (UAE) was the seventh largest spender in 2014-18; tiny Qatar and Oman were in the top 20.

America's large arms manufacturers, whose domestic market accounts for 36% of global defense spending, dominate the sector. All but eight of the world's 20 largest defense companies in sales are American. America's industry accounted for 36% of global exports in 2014-18, says SIPRI. Middle Eastern countries captured more than half of American exports in that period, in addition to 60% of British exports, 44% of French and 25% of German. In 2018, the Middle East contributed $ 3.6 billion, or about 7%, to Lockheed Martin's revenues. Raytheon, the fourth largest producer, made 15% of its total sales in the region (including North Africa), which were worth approximately $ 4 billion.

Most of the money in the Middle East goes to airpower. Buying, arming and maintaining fighter jets is an expensive business, accounting for almost two-thirds of global exports in the past decade. Saudi Arabia has assembled the eighth largest fleet of fighter jets in the world. A contract signed in 2011 for 84 new F-15 fighters and upgrades for 70 existing aircraft is worth $ 24 billion for Boeing and its suppliers, which include Raytheon and BAE Systems of Great Britain. BAE sold 72 Typhoon jets to the desert kingdom in 2007, in a deal worth about $ 7 billion (which the company wants to expand). Saudi Arabia acquired anti-missile systems from Lockheed Martin and Raytheon.

But there are some things that American companies don't sell – or can't – sell. International arms treaties to which the United States is a signatory to ballistic missile export parties, as well as certain cruise missiles and armed drones. China, which has stayed away from these agreements, does not face such restrictions. Once limited to supplying revolutionary weapons to the communist revolutionary movements, it has become one of the largest arms exporters in the world.

The dragon flies

Strategic rivals such as India (the world's second largest arms importer, behind Saudi Arabia), will not touch Chinese products. But China's arms manufacturers are making inroads in Africa and the Middle East, especially with armed drones. While not as advanced as the Americans, they can be just as effective – in 2018, the UAE used a Chinese drone to kill a Houthi rebel leader in neighboring Yemen, where it is fighting an insurgency in a coalition led by Saudi Arabia. . And they cost an extra room.

Peter Navarro, commercial consultant to President Donald Trump, complained that the Wing Loong II, made by the Chengdu Aircraft Industry Group, is a "clear dismantling" of the Predator drone, built by America's General Atomics (GA). Rainbow CH-4 drones, developed by China Aerospace Science and Technology Corporation, look a lot like GA's smaller Reaper. Trump tried to ease export restrictions on American models. However, points out Pieter Wezeman, from SIPRI, the agreements allow the Chinese to build relationships in the region, paving the way for future sales of other systems. Qatar already has Chinese-made ballistic missiles.

Russia, with declining domestic sales since 2016, also covets more Middle Eastern customs. Like the Chinese kit, part of its technology has a low price and has no restrictions. While much of it is no match for the best European or American equipment, "it is good enough", summarizes one industry member.

Russian companies have yet to enter the lucrative Gulf market; in Dubai, the affable Mr. Kladov seemed more interested in displaying non-military kits, such as a wine storage system made of military-grade materials and an airboat for Kalashnikov passengers. But they are supplying more deadly products to Egypt, temporarily denying American weapons after a military coup in 2013, as well as to Syria and Iraq. The Russian government says it is in talks to sell Sukhoi's SU-35 fighter jets to the United Arab Emirates (although Emirati airmen prefer and probably get America's most sophisticated F-35s). The Saudis are discussing the acquisition of the S400 anti-aircraft missile systems manufactured by Russia's Almaz-Antey. The United States would be offended if the kingdom turned to Russia. When Turkey (NATO's ally) agreed to buy the S400s, the US responded by refusing to sell them F-35s.

Chinese and Russian companies also appear to benefit from an arms embargo that some northern European countries have imposed on Saudi Arabia for its conduct in the war in Yemen and the murder of a dissident journalist. Germany has banned weapons manufactured or co-developed by German companies, or containing German components, from going to the Saudis. Canada's government is under pressure at home to block a $ 11 billion contract to supply Saudi Arabia with armored vehicles manufactured by General Dynamics. Britain has suspended new export licenses for equipment that could be used by the Saudi-led coalition in Yemen. BAE's £ 5 billion ($ 6.5 billion) deal to sell more typhoons may be at risk.

The latest threat to Western dominance may come from the importers themselves. Major defense contracts involve joint ventures with local companies. This, says Lucie Béraud-Sudreau, from the International Institute for Strategic Studies, another think tank, allows customers to develop weapons themselves. Australia, Pakistan, South Korea and Turkey have developed local defense industries from the ground up, notes Strategy &, a consultancy, partly for compensation, but also because of policies to help domestic suppliers.

At the Dubai show, the United Arab Emirates presented Edge, a consortium of 25 defense companies. Military Industries of Saudi Arabia (SAMI), another national group, was created in 2017. The Saudis want to track half of their spending on weapons by 2030, up 2% in 2017. They are recruiting foreign executives and experts. China built a drone factory there; SAMI is run by a German. It will take a while for local companies to rival Western giants. But the days when the West could sell the sheikhs' outdated muskets are not returning. ■

This article appeared in the Business section of the print edition, under the heading "From muskets to missiles"

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