Analysis: Unrest clouds outlook for arms sales to Mideast

WASHINGTON (Reuters) - Massive unrest spreading across the Middle East could put the brakes on billions of dollars of arms sales the U.S. government is negotiating with countries in that region, at least in the short term.

That could spell bad news for Lockheed Martin Corp, Boeing and other U.S. weapons makers at a time when they are counting on foreign sales to help offset flatter defense budgets at home and declines in European arms outlays.

Pentagon officials say there is no formal "hold" on military sales to the Middle East as a result of escalating protests in Egypt, but analysts say they doubt Washington will be rushing to sign many new arms deals in the current climate.

For U.S. companies that means some big-ticket foreign sales that have already been approved by Congress and the Pentagon may not show up in their 2011 order books as expected.

Rob Stallard, an analyst with RBC Capital Markets, said underlying demand to modernize militaries across the Middle East will not disappear, and could even increase, as a result of the turmoil, but the current outlook for sales to the region was clearly more uncertain.

"This was the one area of growth that these defense companies could point to," Stallard said, noting the forecast for flat or declining U.S. and European defense budgets. "If you take this away as well, what are you left with?"

Egypt's President Hosni Mubarak, 82, on Tuesday said he would not run for the presidency again, but would serve out his term, prompting angry reactions from more than a million protesters demanding an end to his authoritarian rule.

The turmoil has been spreading across the Arab world. Tunisia's president left the country last month, Jordan's king appointed a new prime minister after protests, and Yemen's president announced on Wednesday he would not seek to extend his presidency when his term expires in 2013.

ARAB COUNTRIES, ISRAEL BIG BUYERS OF US ARMS

Arab countries and Israel have been big buyers of U.S. warplanes, missile defense equipment and other equipment in recent years, and the U.S. government in September announced another massive arms deal with Saudi Arabia that could be worth up to $60 billion.

The United States signed arms transfer agreements worth $47.3 billion with Saudi Arabia, the United Arab Emirates, Egypt, Iraq and other countries in the region from 2006 through 2009, according to the Congressional Research Service.

Egypt alone is expected to receive $1.3 billion in foreign military aid from the United States this year.

U.S. legislation bans assistance to any country whose elected head of state is deposed by a military coup, but President Barack Obama and U.S. lawmakers have said they expect to continue supporting Egypt through its "time of change."

Howard Berman, the top Democrat on the House Foreign Affairs Committee, said Washington would continue its military and civilian aid to Egypt as long as its "military plays a constructive role in bringing about a democratic transition."

But Stallard said many arms deals not yet finalized could slip into 2012 or beyond given that "governments in the region are likely to be less focused on buying missiles than putting down domestic revolts."

Potential arms sales could also be scaled back, one congressional aide said, citing Saudi Arabia's actions in the early 1990s after the first Gulf war.

U.S. FACES TOUGH BALANCING ACT

Loren Thompson with the Lexington Institute, said the U.S. government faced an increasingly tough balancing act when it came to military sales to its Middle East allies.

"On one hand it has to be careful it doesn't sell weapons to a country that might later misuse them. On the other, it can't send a message to long-term allies that they are skeptical about their long-term survivability," he said.

In the far term, he said Middle East unrest and rising concerns about China's military buildup could help insulate the U.S. defense budget against deep cuts proposed by newly elected Tea Party deficit hawks in Congress.

Concerns about Iran and its nuclear ambitions would also not disappear, and should continue to fuel demand for weapons from its neighbors, said one former State Department official.

Joel Johnson with the Virginia-based Teal Group said it was too early to predict the fate of U.S. arms sales to Egypt and others, but agreed that some delays were likely.

"Until the dust settles, the U.S. government is not going to be enthusiastic about announcing new arms sales to the Middle East to Congress," Johnson said, adding: "We may be talking about 10 days or we may be talking about 10 months. We just don't know what's going to happen."

The Obama administration might also have a tougher time winning approval for arms sales from U.S. lawmakers to a region marked by so much instability, Stallard said.

Pentagon spokesman Major Chris Perrine said there was no hold on arms sales to Egypt due to the current situation, but some potential sales to Egypt were already put on hold by Congress in 2010 before the recent unrest began.

He had no immediate details on which sales were affected.

(Reporting by Andrea Shalal-Esa, editing by Maureen Bavdek)