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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