Arab Rearmament & US MIC Price Gouging

Sorry for not posting on either of my blogs for almost a week now and being slow on responding to the emails. I’ve been rediscovering the pleasures of old-fashioned book reading after purchasing a Kindle. I’m very happy with it. When faced between the choice of surfing the interwebs or reading a paper book, the former has been winning almost all the time in the past two years (see here for why h/t Oscar). The Kindle has somewhat rebalanced the equation.

Never fear. I’ve got a whole lot of post ideas in the chute, which will be forthcoming in the days ahead. But for now, I want to draw attention to an interesting dynamic in the Persian Gulf region. The rich Arab oil states – the UAE, Iraq, and now Saudi Arabia – are buying huge American arms packages. What the media has failed to cover is that the sales are at what are almost certainly massively overinflated prices.

Under the threat of Iranian missile attacks in the event of war, the UAE “concluded a $3.3bn Patriot missiles arms deal with the US” in December 2008 and is now looking for a $9bn deal for more air defense and Black Hawk helicopters. As a major oil export hub, this is much in its interests.

Then, coinciding with the US withdrawal of most troops from Iraq, the country concluded a $13bn deal to purchase American arms and military equipment, including “18 F-16 Falcon fighter jets as part of a $3 billion program that also includes aircraft training and maintenance”. Two years ago, Romania bought 48 F-16s for $4.5bn (half new, half used and modernized). That comes out at $95mn for each plane, whose current unit cost is now about $45mn. Iraq is now buying 18 F-16’s for $3bn, or $170mn for each. Anyone care to guess what percentage of that are kickbacks to Iraqi officials?

But if you think that’s impressive price gouging, take a look at the recent $60bn deal with Saudi Arabia. A modernized F-15 for the USAF costs about $60mn, including spares & support. About double that for export customers. So 84 F-15’s are $10.1bn. 70 upgrades to existing Saudi F-15’s. Let’s be generous and say it costs $80mn per plane, or 2/3 the cost of a new one. That’s $5.6bn. The unit cost of a Black Hawk helicopter is $14mn and of an Apache is $15.4mn. Let’s assume it’s around $30mn for export customers. In that case, 72 Black Hawks and 70 Apaches cost 4.3bn. All together, that’s around $20bn.

Of the $60bn deal, half of that will go just for the 84 F-15’s. That’s a cool $360mn for each one. That’s more than twice the unit cost of the fifth-generation F-22 Raptor! More even than its prospective export cost, which is about $250mn!

(Furthermore, note that the F-15’s are “monkey model” exports: due to Israeli concerns, “advanced sensors on the new Saudi F-15s will have technology built in to prevent them being used against their Israeli equivalents.”)

So in effect, the Saudis are paying $60bn for a package whose stand export price should be about $20bn. Massive profits to the US MIC (which will help it remain in the black despite Gates’ planned procurement cuts for budget reasons). Brilliant!

It’s not as if both Iraq or Saudi Arabia couldn’t have gotten better deals by shopping around elsewhere. A quick Internet search would show that there are plenty of fourth-generation planes available for well under $100mn per unit. For instance, since 2005, Venezuela has bought 24 Sukhoi-30MK’s, modernized 4.5+ generation fighters, for $1.6bn, after the US refused to supply F-16 spares to Chavez. (The whole $4bn package also included 50+ helicopters and missile defense systems). And I very much doubt that the US reputation for good after-sales maintenance can explain this big of a chasm.

So there must be ulterior forces at work, though as in the case of Iceland’s mercenary army, I can’t say which. Simple corruption on the part of Iraqi and Saudi officials? The influence of an occupying power? (The US, with its heavy military and intelligence presence in the Middle East, can easily pressure its client states, and what better way than to get their oil rich members to subsidize its MIC?). Rational calculation of national interests, i.e. maintaining good relations with the US? Discuss.

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  • Yalensis

    Thanks for the new posts, Anatoly! Quick question, maybe you can clarify: I am assuming the other countries which purchase these weapons have to pay for the transactions in U.S. dollars? Also, do they have to take out loans to afford these prices?

    • AK

      Yes, I’m pretty sure they’re in $. They’re buying from the US.
      Re-loans. Doubt it, since these states have lots of oil reserves. (The other two main recipients of US military equipment in the M. East, Israel and Egypt, get yearly military aid to the tune of $1.5-2bn each per year).

  • Giuseppe Flavio

    Hello Anatoly,
    I’ve read a brief discussion in the ACIG forum about this purchase. One contributor asked why F-15 instead of F-35 and got this answer Well, this F-15 purchase is just politics – trying not to upset the US with the Eurofighter purchase, plus helping a friend in need – economic crisis and all – the US industry needs orders now, while the F-35 is not ready yet, and even after it’s ready, it will be a few years before nations outside the program get them. from RoAF member. I’ve to add that RoAF is someone that knows what he is talking about.

  • Isaac

    Possibly just arming themselves for the fallout from a coming Israeli-US joint offensive against Iranian Nuclear facilities?

  • A few years ago, while Wall St. was going through some stressful times, I read speculation that the US government was forcing Saudis to buy US stocks. If I’m not mistaken, Citibank was one of those stocks?

    If the US government could do that, it could definitely sell them some overpriced aircraft too. And people wonder why these kings and emirs are so unpopular at home.

  • Just a quick qualifier; often the maintenance package costs as much as the equipment being purchased, since it can greatly extend the life of the product and protect the buyer against having to replace it prematurely due to failure. A few years ago when I was visiting a foreign country, some South Korean navy types stopped by the ship I was on and wanted to copy the maintenance manuals for our LM-2500 Gas Turbine engines. I’m not an engineeer, so I asked the Chief Engineer, and he said absolutely not – the Koreans were just trying to get for free what we paid double for, since we bought the engines and the maintenance package. General Electric will sell an LM-2500 to just about anybody who has the money – it’s the world’s most widely-exported gas turbine. But if you buy it without the maintenance package and smoke it a week later because you missed a critical fluid-level check: too bad, so sad. So buying the maintenance package will tend to nearly double the cost. Many countries just buy the product and trust their technicians and engineers to figure it out before it goes up in flames. Often they do, which is why the Phoenix missile on the Iranian F-14 Tomcat is still a threat even though nobody else has either the plane or the misile.

    In the case of Iraq, this might also be a case of the U.S. just trying to recover as much as possible of the money it blew in that benighted country under some auspices of legitimacy. The Iraqi government, still heavily U.S. influenced and guided, would gladly go along.

  • Israeli government officials confirmed today that they will go ahead with plans to “buy” a number of F-35 stealth fighter jets from US military contractor Lockheed Martin.

  • Pingback: Saudska Arabija načrtuje 60 milijard $ vreden nakup orožja v ZDA : Jinov svet()

  • kurt

    Nice article. I checked maintenance and pilot training don’t seem to add up to that figure, however, considering these countries you have to take very low technology education among the loyalists into account. Yes, they do have technology savvy people, but like in most countries such people prefer enterprises over militaries. If your country is a Middle Eastern oil exporting low population density tyranny, even more so. Perhaps this packages include teaching a lots of migrants to run these weapon systems. Iran, Israel and Egypt are rather different and I guess they buy at different prices.
    Still the thesis of friends of different kinds seems right and this way few people realize the protection money paid. Good research.