Mideast arms boom gives BAE $792M boost

April 16, 2012 at 12:52 PM
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RIYADH, Saudi Arabia, April 16 (UPI) -- Britain's defense titan BAE Systems could get a $792.16 million boost from the revision of a contract for 72 Eurofighter jets amid forecasts the Middle East and North Africa will increase defense spending in 2012.

BAE said the change centers on upgrading the capabilities of the final batch of 48 Typhoon aircraft to be built for the kingdom under a $7.21 billion contract signed in 2007. This includes the addition of new missile and radar technology to the final Typhoons included in the agreement.

The first squadron of 24 jets has been delivered to the Saudi air force.

Negotiations for other contract changes are under way, including having BAE establish a maintenance facility for the jets in Saudi Arabia, part of the kingdom's drive to build a domestic defense industry.

A Saudi decree finalized in December authorizes the release of $2.4 billion for advanced technology over and above the terms of the 2007 Typhoon contract.

Some defense sources say Riyadh might increase its Typhoon order by another 48 aircraft.

The kingdom, along with the neighboring United Arab Emirates, is engaged in beefing up its air force's offensive capability, particularly to counter Iran's expanding ballistic missile forces and alleged quest for nuclear weapons.

The Saudi moves reflect expectations of a significant increase in defense spending in the Middle East and North Africa, amid the region's ingoing political tensions that include upheavals in North Africa and the confrontation between Iran and the United States in the Persian Gulf.

The International Institute for Strategic Studies, a leading London think tank, observed in its recently published "Military Balance 2012" that this is largely driven by high oil prices.

These are at least partly the result of Western economic sanctions against Iran for its refusal to abandon its uranium enrichment program, a key element in any effort to acquire nuclear weapons, and Tehran's threat to close the Strait of Hormuz, the only maritime gateway to the gulf and a strategic oil artery.

Defense spending in the MENA region stayed fairly high in 2010, at 5.01 percent of regional gross domestic product, slightly down from the 5.09 percent recorded in 2009.

But while the region's defense spending has fallen steadily from 6.48 percent of GDP in 2001, it's still the top global spender on defense as a percentage of GDP.

That puts it ahead of the United States with 4.77 percent, Russia at 2.84 percent, South and Central Asia at 1.94 percent and sub-Saharan Africa at 1.58 percent.

"Oil exporting states made up nearly 75 percent of total regional defense expenditure and in 2011 their collective spending rose to $95.57 billion from $87.97 billion, a nominal increase of 8.6 percent," the report explained.

"Adjusting for inflation, this amounted to a … real-term increase of 0.08 percent.

"By contrast, although defense outlays by oil importers rose by 4.9 percent in nominal terms to $32.07 billion, this corresponds to a 3.16 percent real decline in expenditure," the report said.

Within the region, Saudi Arabia remains the leading military defense buyer, spending a total of $45.17 billion on defense in 2010, ahead of the United Arab Emirates with $16.057 billion and Israel with $14.043 billion.

Israel's military purchasing power is enhanced by the $3 billion a year in military aid it gets from the United States, along with significant loans and grants.

Middle Eastern demand for arms is a lifesaver for Western defense contractors grappling with shrinking defense budgets. For the United States and Europe, and Russia as well, boosting military exports has become essential to maintaining production lines as military budgets are cut because of global recession.

The add-on deal BAE's negotiating with Saudi Arabia underlines how arms sales have become critical tools of foreign policy for these industrialized states.

The $60 billion U.S. arms package for Saudi Arabia unveiled by U.S. President Barack Obama's administration in 2010 is a case in point, with major contracts for Lockheed Martin, Boeing, Raytheon and the like that will compensate for downsized orders from the U.S. military.

Even so, there's still deep gloom within the industry, particularly in Europe, that these austerity drives will inevitably mean production cuts and major layoffs.

"The trouble is that everyone's exporting," lamented Robin Southwell, chief U.K. executive with EADS, the European defense and aerospace group.

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