Despite diplomatic spats, U.S. arms firms trust in Mideast

LONDON/DUBAI Mon Nov 18, 2013 6:07am EST

Boeing Chairman James McNerney and Boeing Commercial Airplanes Chief Executive Ray Conner (R) speak with a visitor during the Dubai Airshow November 18, 2013. REUTERS/Caren Firouz

Boeing Chairman James McNerney and Boeing Commercial Airplanes Chief Executive Ray Conner (R) speak with a visitor during the Dubai Airshow November 18, 2013.

Credit: Reuters/Caren Firouz

LONDON/DUBAI (Reuters) - For U.S. arms firms flocking to the Dubai Airshow this week, the Middle East has never been more important - the second fastest growing market after Asia as western defense spending shrinks.

But they face an awkward reality: an apparently ever-growing gap between Washington and its closest regional allies.

Lockheed Martin (LMT.N), Boeing (BA.N), Northrop Grumman (NOC.N) and other big companies are expanding in the Gulf, with executives openly pinning their hopes on the region.

Lockheed founded an international division earlier this year, and Northrop last month named a former senior U.S. Air Force official as its new chief executive for the United Arab Emirates (UAE). Most of the companies sent chief executives or other senior executives to the Dubai Airshow, with many also visiting other countries in the region on the same trip.

"Across the globe, we're seeing tougher and tougher competition," Boeing defense chief Dennis Muilenburg told reporters on Sunday. "The fact that U.S. and European defense budgets are down is creating more competition in other markets."

But successful defense business, he said, was heavily dependent on good government to government relations.

Last month, Saudi intelligence chief Prince Bandar bin Sultan told European diplomats the kingdom was hoping to make a "major shift" away from the United States, a source familiar with Saudi policy says. Relations with Egypt's rulers have deteriorated since Washington cut back military aid, while long-term ally Turkey signaled it would likely buy a Chinese rather than U.S. or European missile defense system.

"You're certainly seeing a growing sense of frustration on the part of some of our regional allies," said Michael Eisenstadt, a former U.S. defense official now head of the military and security program at the Washington Institute For Near East Policy. "I think that will carry across in some ways when it comes to defense sales."

The most likely beneficiaries of that, he said, would be European defense firms - primary British and French, both already major regional suppliers.

Several Gulf nations have long deliberately split their major defense purchases between western states, buying French Mirage and Rafale jets as well as the BAE Systems-led (BAES.L) Eurofighter Typhoon.

Both Britain and France have stepped up their military presence and links with the Gulf in the last few years, a move seen in part aimed at reassuring local states.

The UAE is expected to order up to 60 Rafale or Typhoons, defense sources say, although it is also seen likely to top up its forces with up to 25 Lockheed Martin F-16 jets.

POST "ARAB SPRING" DIFFERENCES

U.S. officials have taken a more active role in promoting arms sales under the Obama administration, anxious to encourage greater military burden-sharing with allies.

For now, the order book for U.S. equipment still seems strong. The U.S. Defense Security Corporation Agency (DSCA) records multiple planned deals including a $4 billion munitions contract with UAE, a similar $6.8 billion deal with Saudi along with $1.2 billion to support the Royal Saudi Air Force.

UAE recently signed a multibillion dollar order to buy Lockheed's longer-range missile defense system, while negotiations are underway to buy tilt-rotor V-22 Ospreys.

Other potential deals could come with a major redevelopment of the Saudi navy.

Three top U.S. officials - the Pentagon's policy chief, the head of the DSCA and the State Department official in charge of foreign arms sales - all travelled to the region last month. U.S. government attendance at the Dubai show includes multiple senior military and State Department officials. The aircraft carrier USS Harry S Truman is also making a port call.

Frustration with Washington, however, has been building, with U.S. support for Israel, the invasion of Iraq and ongoing Afghan war often producing both grassroots and elite resentment.

Many of the governments in the region, particularly Saudi Arabia - the world's highest per capita purchaser of weaponry - were furious at the speed with which Washington abandoned Egypt's Hosni Mubarak and counterparts in Tunisia and Yemen.

Saudi, Qatar and the UAE say the Obama administration could also have been much more assertive in trying to oust Syrian President Bashar al-Assad, either through weapons transfers to the rebels or airstrikes.

Recent apparent success in talks with Iran has caused particular unhappiness amongst those countries that feel themselves most directly threatened by any nuclear program.

With Washington shifting its focus to Asia and no longer able to maintain two permanent aircraft carriers near the Gulf, some analysts say Gulf states feel increasingly abandoned - particularly with the U.S. nearing energy independence.

TURKEY, EGYPT TO BUY ELSEWHERE?

Rival suppliers are unquestionably circling.

One senior industry executive said he worried less about the U.S.- Saudi relationship than the situation in Egypt, especially given rapid action by European, Russian and Arab countries to provide aid after Washington halted its assistance payments.

In September, Turkey shocked the United States and its NATO allies by announcing a $3.4 billion decision to buy the Chinese FD-2000 air and missile defense system. Many U.S. officials and analysts believe Ankara will eventually change its mind - Turkey says a final decision could take six months.

A Chinese system, NATO officials worry, might work poorly with existing alliance systems and might potentially raise the risk of cyber attack or data theft. Some defense experts suggest going through with it could jeopardize Turkey's desire to purchase U.S. F-35 Joint Strike Fighters.

The bottom line, some analysts and officials say, is that with so many countries in the region already operating U.S. or NATO-compliant European systems, switching costs too much.

"If you start introducing Chinese or Russian systems it has the potential to weaken your entire defense architecture," said Eisenstadt at the Washington Institute.

Egypt in particular, he said, had already learned to its cost the difficulties of converting its originally largely Soviet-equipped military to one based on U.S. equipment. It might be reluctant to go through the process again, he said.

The quality of training provided with U.S. weaponry - as well as the chance to work closer with a superpower - remains well above that of most competitors, U.S. officials add.

"Although at the geopolitical level the relationships ... are strained ... our military-military relations continue to bear fruit," said one on condition of anonymity. "My impression is that you'll see more not less sales."

Maintaining that, however, could be the challenge.

"At the moment, they probably can't be rid of us even if they want to," says Ari Ratner, a former Obama administration State Department appointee and now fellow at the Truman National Security Foundation. "But if you start looking forward say 20 years, the trends are impossible to ignore and things could look very different."

(Writing by Peter Apps; Editing by Mark Potter)

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