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* Arms race seen amid South China Sea tension
* SE Asian nations seeking to expand surveillance
* Contest for deals worth hundreds of millions
By Tim Hepher and Peter Apps
SINGAPORE/LONDON, Feb 10 (Reuters) - Vietnam is opening up to Western defence firms as tensions in the South China Sea trigger subdued yet growing warnings of a regional arms race, defence executives and security analysts said on Friday.
The Communist-ruled country is one of several Southeast Asian nations seeking to expand surveillance and maritime patrol capabilities, sparking fierce competition for regional deals estimated to be worth up to several hundred million dollars.
“Vietnam is opening to Western suppliers, which was not the case two or three years ago,” said Marie-Laure Bourgeois, vice-president for South and Southeast Asia at France’s Thales , Europe’s largest defence electronics supplier.
“There has been a revival of tensions recently in the South China Sea and this is increasing demand for surveillance systems. Countries in the region want to ensure they have enough awareness of what is happening at sea and in the air.”
Vietnam is locked in a complex set of territorial disputes with China and four other parties - Brunei, Malaysia, the Philippines and Taiwan - over waters giving access to untapped oil and gas reserves and valuable fishing grounds.
China’s claims, the broadest, cover all of the Spratly and Paracel islands and most of the South China Sea.
Concern over an accidental confrontation or even hostilities spiked in May when Vietnam and China exchanged fresh accusations of sovereignty violations. The issue has come off the boil but the region is bustling with deals from sonars to submarines.
“(Southeast Asian) states are boosting their military capabilities because they can afford to and as part of a hedging strategy both against China and each other,” said Nigel Inkster, former deputy chief of Britain’s Secret Intelligence Service, known as MI6.
“Though Southeast Asians don’t like to hear it, there is an arms race going on in the region,” said Inkster, now head of trans-national threats and political risk at London’s International Institute for Strategic Studies.
Half the globe’s oil tanker traffic passes through the disputed area, underpinning demand for surveillance systems expected to be on display at next week’s Singapore Air Show.
Vietnam has traditionally bought Russian hardware including a recent purchase of six Kilo-class submarines but is emerging as a market for other suppliers “as insurance against China”, said James Hardy, Asia-Pacific Editor for Jane’s Defence Weekly.
Israel is seen as front-runner to win the Vietnam contract Thales was bidding for, but other possible deals lie ahead.
“There are discussions with the Vietnam authorities which are no longer just buying Russian equipment. We have participated in discussions on radar and are still in some discussions,” Bourgeois said on the eve of the Feb. 14-19 air show.
Israel and Vietnam have stepped up bilateral contacts of late, but any defence deals are months away, a source at Israel Aerospace Industries told Reuters, when asked about the comments.
On Thursday, the Israeli company announced a $150 million contract to supply radar to an unidentified Asian country.
Assistant U.S. Secretary of State Kurt Campbell said in Hanoi last week Vietnam needed to improve its human rights record before moving ahead with closer military ties.
“Growing tensions coupled with the wealth of Southeast Asia make it a very attractive market for defence companies, especially where the U.S. precludes itself,” said defence consultant Alexandra Ashbourne-Walmsley.
In late December, China’s Vice President Xi Jinping, widely expected to take over as top leader from late 2012, called for better relations with Vietnam, saying the two countries should properly handle their differences and do more to build trust.
Still, Western diplomats and defence executives said ahead of the air show that uncertainty and overlapping disputes had pushed up defence budgets and buying interest across the region.
The lessons of Iran’s threat to close the Hormuz Strait are also not lost on a region hosting similar trade choke points.
“Vietnam would like to improve its links with the USA and other Western powers and is investing a lot in the development of some high-quality diplomatic resources,” Inkster said.
“Whether the situation in Southeast Asia amounts to a new Cold War is not clear; but there are plenty of tensions which could boil over.” (Addtional reporting by John Ruwitch and Dan Williams; Editing by Robert Birsel and Andrew Heavens)