Monday, October 18, 2010
Defense News October 18, 2010 Israel, Russia in $400M UAV Deal By BARBARA OPALL-ROME
TEL AVIV — In the largest-ever defense trade deal between Russia and Israel, state-owned Israel Aerospace Industries (IAI) will provide UAVs, supporting technology and production know-how in a multiyear contract estimated by both sides to be worth $400 million.
Signed October 12, the deal begins by sending to Russia kits for final assembly of medium-range Searcher and short-range I-Bird UAVs, along with production infrastructure. Within three years, Russia aims to develop full indigenous production capabilities to make UAVs for its own forces and export customers.
“The main aim of our project is to develop a center of competence of world-class unmanned vehicles manufactured in Russia,” said Andrey Reus, director-general of JSC OPK Oboronprom, a group of state-affiliated companies that includes the Khazan helicopter production facility and the MC Joint Engine-Building Corporation.
“In cooperation with one of the acknowledged leaders in this field — I A I — we expect to become a true player in this market within the shortest possible time,” Reus said. “Within the framework of this mutually advantageous cooperation with Israeli partners, we shall be able to get access to new technological decisions and modern [production] concepts.” He said the company would gradually replace imported components with domestic ones.
Reus and IAI Chief Executive Itzhak Nissan signed the deal in Israel, with visiting Russian Industry and Trade Minister Viktor Khristenko serving as Moscow’s senior government witness.
The deal follows a broad-based military cooperation agreement signed in Moscow last month between Russian Defense Minister Anatoly Serdyukov and his Israeli counterpart, Ehud Barak. Russian analysts said at the time that the agreement would allow Russia to tap further into Israel’s defense technology in exchange for a promise of not supplying arms to Israel’s foes in the Middle East.
The UAV deal also is a follow-on to a 2008 sale of Searcher UAVs. Worth an estimated $50 million, the sale provoked concern in Washington and within some Israeli government agencies about the qualitative upgrade to Russian combat capabilities and their eventual export to countries that threaten U.S. and Israeli interests. At the time, MoD officials argued that the Searcher has been operational for nearly two decades, and that the benefits of cooperation with Moscow far outweighed the risk associated with transfer of Searcher-related systems and know-how.
“The Israelis have their own legitimate concerns, as do we with regard to advanced technology sales to the Russians,” a Pentagon official said earlier this year. “Neither of our countries would want to see Israeli technology come back and bite us.” In her visit here in June, Michele Flournoy, U.S. defense undersecretary for policy, said Israel has been “very transparent” with Washington about its desire to boost cooperation with Moscow.
“I’m not aware of any case where they wanted to sell something that we would object to,” Flournoy told reporters here.
The subject is expected to be a prominent agenda item when U.S. and Israeli officials meet next month in Washington for semi-annual political-military talks, said sources from both sides.
Backed by Bank Guarantees
In an October 13 notification to the Tel Aviv Stock Exchange, IAI reported that it would receive some 70 percent of the payment up front, with the balance to be made in installments as the company delivers products and services. To offset the risk of political, business-oriented or other upsets to the planned agreement, IAI will provide bank guarantees against initial payments.
“Amounts of guarantees will decrease as deliveries are fulfilled, in accordance with the financial value of each delivery,” the company stated in its financial notice.
In a conference late last year, IAI’s chief executive said the company extended an aggregate of some $2.5 billion in bank guarantees on customer advances to off set self-incurred or externally imposed risks.
“It’s a never-ending circle,” Nissan told conference participants. “The banks won’t give you [guarantees] if you don’t show your ability to deliver … and you can’t secure customers without them.” The most egregious example of politically generated, externally imposed risks of contract liability involved the 2000 termination of a $1 billion-plus Israeli deal to provide Phalcon aerial early warning aircraft to China. Washington pressed hard on the Israeli government to back away on the deal, fearing the advanced capabilities would dilute American military superiority in the Pacific theater.
As a result, Israel was forced to pay termination liability fees and added compensation, and is still working — in consultation with Washington — to repair frayed ties with Beijing.
The Way Forward
As for expanded ties with Russia, beyond the initial two UAVs, IAI hopes to interest Moscow in high-technology fields unlikely to arouse suspicion in Washington.
In an October 13 news release, Nissan noted, “We hope to expand our joint relationship to include additional areas such as the commercial market and the green energy sector.” But a Russian diplomat said Moscow would eventually like to be able to design as well as produce frontline unmanned systems; a capability, he said, that was found lacking during the 2006 war with Georgia. The diplomat noted that as a condition for final government authorization, Moscow expects Israel to maintain its freeze on export licenses to Georgia, and to continue to consult with Moscow on arms sales to former satellite states such as Kazakhstan.
As for Israel’s geopolitical interests, a defense official here said that if properly executed, this deal and future cooperation in the high tech and military sphere are expected to slow and perhaps even halt controversial frontline Russian-made weaponry to Syria, Iran and other aggressor states.
But Amir Oren, veteran defense analyst at Israel’s daily Ha’aretz newspaper, said this thinking is delusional.
“It’s obvious that the Russians, just like the Soviets before them, will operate out of cold, calculated interests,” Oren said. “If they want to sell missiles to Iran, Syria or whomever, they will do so. Israeli consideration will always be secondary to their overall calculus.”
Posted by Michele Kearney at 6:47 PM