published Mar 4, 2018, 1:43:53 AM, by Glen Carey
(Bloomberg) —
Saudi Arabia aims to build a defense industry at breakneck speed, and it’s ready to look beyond its traditional Western allies for help.

The oil-rich kingdom has long been a favorite customer of arms sellers, especially American ones. President Donald Trump announced $110 billion in deals during his trip there last year. Now, 32 year-old Crown Prince Mohammed bin Salman wants to make weapons at home, and he’s set an ambitious goal: Half of Saudi procurement is supposed to be done locally by 2030, from about 2 percent today.

The Saudis will need partners — which means opportunities for Western companies, who were energetically exploring them at an arms fair in Riyadh this week. But there’s a potential catch. For joint ventures to work, U.S. and European governments may have to sign off on transfers of technology.

‘Other Partners’

In case they’re reluctant to do so, the Saudis are making it clear that they have other options. They’re already planning to buy the Russian S-400 air-defense system, under a deal that would let them manufacture related products at home. The prospect of more such agreements is likely to alarm American policy makers, who worry about losing ground to Russia and China in the Middle East.

“We will very carefully evaluate what our partners can bring to the table,” Andreas Schwer, head of Saudi Arabian Military Industries or SAMI, said in an interview Tuesday at the Riyadh fair.

“We won’t hesitate to go to second-tier suppliers or other potential partners, if they have full governmental support and no restrictions,” said Schwer, previously an executive at German defense group Rheinmetall AG. Saudi Arabia “could end up with other partners,” and with less U.S. involvement than some people would like, he said.

Filling the Gaps

One of those people just delivered a warning to Congress on precisely this issue.

Russia and China are seeking “to fill in perceived gaps in U.S. interest by increasing defense cooperation and sales of their equipment to our regional partners,” General Joseph Votel, the head of U.S. Central Command, told the House Armed Services Committee on Feb. 27.

Russia’s influence in the Middle East has soared since 2015, when its military intervention in Syria swung the civil war in President Bashar al-Assad’s favor. China’s economic role in the region is expanding, as it signs deals with Iran and seeks to get involved in rebuilding Syria.

Unlike America, the Saudis have cordial ties with China and Russia. The former is one of its best oil customers, and the latter increasingly its partner in regulating world oil output.

Both countries are competing with a U.S.-backed group, headed by Westinghouse Electric Co., to win nuclear-power contracts in the kingdom. And both have expressed interest in getting a piece of the action when the Saudis put a stake in Aramco up for sale. (So has Trump, who tweeted that the oil giant’s IPO should be in New York.)

‘Many Have Reconsidered’

To be sure, Saudi-U.S. ties have deeper roots. They stretch back to before World War II. And Trump has assured Saudi leaders that he’s keen to sign more defense deals.

But close relations have been accompanied by skepticism on the American side about Saudi military capabilities. Doubts have been fueled by the kingdom’s struggle to defeat poorly equipped rebels in Yemen, over three years of war that have taken a heavy civilian toll. Some members of Congress have opposed weapons deals with the Saudis, and transfers of nuclear technology.

One longtime U.S. ally in the neighborhood has already angered Washington by switching arms suppliers.

NATO member Turkey is buying the S-400 from Russia. During a visit last month, Secretary of State Rex Tillerson made his opposition clear.

America has been “advising countries around the world” that they could fall afoul of U.S. sanctions by going ahead with arms purchases from Russia, Tillerson said. “Many have reconsidered.”

‘Special Arrangements’

For now, American companies are in pole position in a lucrative market.

Saudi Arabia has earmarked 210 billion riyals ($56 billion) for military spending in 2018, the biggest budget item. Raytheon Co. is among the firms set to help build the domestic industry, and estimates it will earn $7 billion of revenue from localization of Saudi defense projects over five to seven years.

SAMI will let its joint-venture partners retain “operational leadership” and the top executive jobs, Schwer said.

Still, export controls could be a hurdle for some American companies, and they may have to win over their own country’s politicians, according to John Bottimore, an executive at the U.S. unit of BAE Systems Plc.

“We’ve got to work with our government to understand what can and can’t be transferred, or what can be transferred under certain types of special arrangements,” said Bottimore, who’s vice president of international business development. “That is probably the biggest challenge from the U.S. side.”

To contact the reporter on this story: Glen Carey in Riyadh at gcarey8@bloomberg.net To contact the editors responsible for this story: Alaa Shahine at asalha@bloomberg.net Ben Holland, Larry Liebert

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