Middle East Peace Moves Set Off A Frantic Arms Race
By GILLIAN RICH
A peace deal doesn’t normally trigger an explosion in weapons sales for defense stocks, but this is 2020. A recent diplomatic breakthrough that’s shaking up Middle East geopolitics could send tens of billions of dollars in F-35 fighter jets, missiles and armed drones to the region.
Pumping the Mideast with some of the most advanced U.S. weapons would shift the balance of military power in the region. But U.S. allies there anticipate a counterweight: a major upgrade of Iran’s hardware from Russia and China. That could include an air-defense system that only stealth planes like the Lockheed Martin (LMT) F-35 can evade.
The Trump administration is pushing arms deals in its final weeks, and Congress appears unable to block them. President-elect Joe Biden and his pick for defense secretary, retired Gen. Lloyd Austin, are unlikely to totally abandon them either. That should help defense stocks weather stagnant military budgets in the U.S. and Europe as deficits explode amid the coronavirus pandemic.
The prospective buyers, mostly oil-exporting countries in the Persian Gulf region, are motivated enough that low crude prices won’t stop them from shelling out increasingly scarce cash.
“In spite of the drag in oil prices, the Gulf, led by the UAE, really wants to continue spending large sums of money on very high-end — especially aircraft and air modernization — long-range strike capabilities,” said Charles Perkins, director for U.S.-Israel Security Policy at the Jewish Institute for National Security of America (JINSA) think tank and lobbying firm.
And the Gulf states may have additional motivation after the Nov. 27 assassination of a top Iranian nuclear scientist, raising worries of regional tension ramping up further.
F-35 Fighter Jet Deal Highlights New Landscape
The Mideast has historically been a top market for defense stocks. From 2010 to 2019, $52 billion worth of U.S. weapons were imported by Saudi Arabia, the UAE, Israel, Qatar, Iraq and Egypt, according to Congressional Research Service data.
The latest arms race began when the United Arab Emirates, Bahrain and Sudan normalized relations with Israel in September. Then on Thursday, President Trump announced Morocco and Israel will restore diplomatic ties. And the U.S. is near a deal to sell drones to the North African country, sources told Reuters.
The UAE is getting a $23.4 billion U.S. weapons package. The centerpiece is the long-coveted F-35 stealth fighter, which counts Raytheon Technologies (RTX) and Northrop Grumman (NOC) as top suppliers.
Other Arab states want some of the action too. Even Qatar, which wasn’t part of the peace accords, has requested the F-35 fighter jet.
That’s just the beginning. By law, the U.S. must help Israel maintain its qualitative military edge in the region. So more weapons from U.S. defense stocks would likely be necessary for Israel to offset the UAE’s advances.
The policy doesn’t prevent sales of U.S. weapons to other Mideast countries. Instead, it usually means Israel gets a five-year head-start over other U.S. allies. Israel received its first F-35 fighter jet in December 2016, meaning a potential sales window will soon open.
And then there’s Saudi Arabia, the world’s top arms importer. Expectations for another diplomatic milestone rose after reports said Crown Prince Mohammed Bin Salman secretly met Israeli Prime Minister Benjamin Netanyahu Nov. 22.
Whether or not Saudi Arabia normalizes relations with Israel, the kingdom could see advanced weapons deals. The U.S. wants to support allies against Iran. Tehran has been responsible for multiple drone attacks on the kingdom’s oil facilities. The two sides are also fighting a proxy war in Yemen.
Biden Team’s Links To Defense Stocks
As the Mideast sees a flurry of diplomatic and military activity, Biden has started to assemble his national security staff. A key player will be Tony Blinken, who was a foreign policy advisor during the campaign and has been tapped to be secretary of state. Before the election, he said a Biden administration would “take a hard look” at the sale of F-35 fighter jets to the UAE.
Mark Cancian, a senior advisor at the Center for Strategic and International Studies, notes that Democrats tend to view arms sales through the lens of human rights, rather than employment and manufacturing policy.
But a “sort of center-left” national security team could mean some form of sales goes through, he says. And Biden’s pick for Pentagon chief keeps that view on track, he adds. In fact, Austin could bring the “perspective of the Gulf states to bear” since he previously was Central Command chief.
Some members of Biden’s team even have ties to defense stocks. Indeed, Austin is a Raytheon board member.
Still, the size of any deal could shrink, he notes. Offensive weapons like air-to-ground munitions are the most vulnerable, while defensive weapons like Raytheon Patriot missiles are less so.
The F-35 fighter jet, however, falls in between, Cancian says. Democrats will take a look at the sale. But a decision won’t likely be known for a while. He thinks the Biden administration will need six to eight months to set up a Middle East arms policy.
Iran Upgrade Makes Case For F-35 Fighter Jet
A U.N. embargo on arms sales to Iran expired in October. U.S. defense stocks can’t supply Iran. But Secretary of State Mike Pompeo has warned that Tehran could buy high-end non-stealth fighters like Russia’s Su-30SM and China’s J-10. Tanks and submarines are also seen as acquisition priorities.
Meanwhile, the U.S. Navy has warned for decades that it won’t be able to safely deploy an aircraft carrier to the Persian Gulf if Iran acquires long-range anti-ship missiles.
Iran has quietly partnered with China on the development of anti-ship missiles, according to the Middle East Institute. China has developed anti-ship missiles that have made U.S. carriers increasingly vulnerable. And Iran’s Revolutionary Guard Corps practiced launching missiles at a model of a U.S. carrier recently.
But it’s Iran’s interest in Russia’s S-400 air-defense system that may be spurring regional demand for the F-35 fighter jet.
Russian Ambassador to Iran Levan Dzhagaryan has noted that the Kremlin “does not have any problem” providing Iran with the S-400, which can shoot down top-of-the-line fighters, except for stealth planes like the F-35.
UAE Eyes Big F-35 Fighter Jet Fleet
The UAE’s weapons package includes up to 50 F-35 fighter jets worth $10.4 billion, 18 MQ-9B drones for $3 billion, and $10 billion of air-to-air and air-to-ground weapons.
To put it into perspective, a deal for 50 F-35s would give the UAE the same number that Israel currently has on order. The MQ-9B Reapers from General Atomics would mark the second-largest sale of U.S. drones to a single country. And the ordnance amounts to more than 14,000 bombs and munitions.
The State Department cleared the UAE deal for congressional approval in early November. Opponents to the sale tried to block it in Congress, but the Senate defeated bipartisan resolutions on Wednesday.
Meanwhile, Israel’s biggest concern about the UAE getting the F-35 isn’t a threat from the current government in power, JINSA’s Perkins says. Rather, the major worry is another Arab Spring that topples governments in the region. In that case, Israel wants to be ready to protect itself.
“The Israeli concern generally, as far as it’s reflected in qualitative edge, is more about a precedent being set,” Perkins said. “Once a certain level of capability is introduced into the region, it opens up the argument for other countries to say, ‘Well, what about us?’ And that’s Israel’s concern.”
Israel Weighs Aircraft, Missiles
Netanyahu at first drew a hard stance in public against the F-35 fighter jet sale to the UAE. But he reportedly was more open to the deal in private, and analysts speculated Israel was actually angling for a big U.S. weapons package of its own.
Israel is weighing an order for 50 more F-35s against buying upgraded Boeing (BA) F-15EX jets instead. It also wants tanker capabilities like the Boeing KC-46 tanker despite budget and schedule woes for that aircraft. And the V-22 is reportedly on the wish list at well. Boeing and Textron’s (TXT) Bell Helicopter make the tilt-rotor aircraft.
There were even rumors of the U.S. selling Lockheed’s F-22, another stealth fighter, to Israel. But as of yet there are no plans to restart the production line, which ended in 2012.
The real advantage Israel could negotiate is boosting cooperative work with the U.S. on existing and new emerging technologies.
Israel is working with U.S. companies to modernize missile defense systems like David’s Sling and the Iron Dome (both built with Raytheon.) Perkins also sees future cooperation on technologies like directed energy, hypersonic weapons, drones, space satellites and cybersecurity.
Saudi Arabia’s Wish List ‘Close To Endless’
Saudi Arabia was the world’s largest arms importer in 2015-2019, and a boon for defense stocks. Imports of major arms soared 130% vs. the previous five-year period, the Stockholm International Peace Research Institute calculated this year. The U.S. accounted for 73% of Saudi arms imports.
According to data from the Security Assistance Monitor, the U.S. has delivered over $34 billion in arms to Saudi Arabia since 2002. And in 2017, the U.S. and Saudis agreed to a massive deal that included four Lockheed Littoral Combat Ships and its THAAD missile-defense system, among other things.
The Saudis already have a sophisticated air force with modernized Boeing F-15s but would still want the F-35 and more long-range strike missiles, Perkins says.
“The Saudi wishlist is probably close to endless. The question, however, is, what can they absorb? Where do they base it?” he said.
He urges caution about linking more U.S. weapons to Saudi Arabia normalizing relations with Israel. The U.S. sales program stands “on its own merits” due to the Iranian threat, he says.
That could help other Mideast arms sales go through. Indeed, while the UAE deal hit some skepticism on Capitol Hill, Perkins doesn’t see a major shift in policy under a Biden administration.
“Historically, both Democrat and Republican administrations have been very supportive of our partners’ defense needs,” he said.
Originally published in Investor’s Business Daily