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For Israel's defense industries, it's been a very bad year

SPECIAL TO WORLD TRIBUNE.COM
Thursday, August 31, 2000

TEL AVIV - U.S. pressure is only one reason Israel's defense industry is having a very bad year.

In the latest blow, an Israel Airfcraft Industries and Rafael consortium lost out on a $700 million contract to France's Matra Bae for the development and production of an advanced anti-ship missile for an unnamed Asian country.

The failure to win the Asian deal brings IAI's total losses over the past year to $4 billion, Middle East Newsline reports.

The cancelled or frozen international defense contracts include last month's cancellation of a $1 billion sale of four Phalcon spy planes to China after heavy pressure from the United States.

Meanwhile, the United States and Israel are close to an agreement on Israeli arms exports controls and technology transfers.

The agreement stipulates that Israel must consult with the U.S before concluding any defense deals with Russia, India, China and Pakistan.

The U.S. originally stipulated 25 countries that Israel would not be permitted to trade with without prior approval but Washington has modified its demands.

Defense Ministry officials said the failure to win the contract was more than just a monetary blow to state-owned IAI and Rafael. It was also a strategic blow to Israel as the Asian contractor had offered to finance the entire research and development of the system, Israel's daily Ha'aretz reported Wednesday. Moreover, the Israel Defense Forces had planned to procure the system and put it into service.

IAI and Rafael have previously cooperated to develop the Gabriel anti-ship missile. In the current deal, IAI was designated as the prime contractor with expected revenues of $450 million. Rafael was expected to net $250 million.

Other canceled or frozen deals include a $1.5 billion contract for Turkey's attack helicopters in conjunction with Russia's Kamov company, the Ofek spy satellite to Turkey and a $1 billion sale of the AWACS aircraft to Australia.

Deputy Defense Minister Ephraim Sneh told Ha'aretz that he attributed the loss of the deals to Russian President Vladimir Putin's efforts to revive the defense industry, especially upgrades of military equipment.

During the 1990s Israeli defense industries won upgrade contracts for Soviet made weapons platforms, including the M-21 and M-29 fighter aircraft. Russia is now winning these upgrade contracts. Sneh said that Russia has also warned countries wanting to upgrade MiGs that Russia will not authorize Israeli upgrade deals without prior permission.

Recent mergers of the European and U.S. defense companies have also captured some of Israel's former market.

By the end of the year, Israel's defense industrial exports will reach $2.15 billion, practically the same as last year.

Israel continues to raise concerns over U.S. arm sales to Arab countries, including the sale of 80 F-16 fighter jets to the United Arab Emirates. But an agreement on arms exports controls between Israel and the U.S. is unlikely to impose limitations on U.S. exports to countries that don't recognize the State of Israel, Israeli sources said.

Washington is also demanding that Israel participate in a joint technology committee with the U.S., intended to investigate complaints that Israel illegally transferred U.S.-manufactured components to third countries.

Israel recently bowed to U.S. pressure and cancelled a $250 million to sell the Phalcon airborne early warning system to China. China has since threatened to sue Israel for $500 million in damages and has forbidden Israel to sell the aircraft, demanding that it be delivered to Beijing.

Meanwhile India is also interested in purchasing the Phalcon but military officials in New Dehli have expressed concern over Israel's ability to deliver on the deal.

The United States and Israel have reportedly reached an agrement that the U.S. will compensate Israel Aircraft Industries for the cancellation of the Phalcon sale but no details were available as to the extent of the compensation. Senior defense ministry sources said that the compensation would be included in a special strategic aid package to Israel, Ha'aretz said Monday.

Defense Ministry Director-General Amos Yaron was scheduled to meet with U.S. officials Wednesday to discuss the arms exports control agreement and Israel's request for U.S. funding for a multi-million dollar project to develop drones capable of attacking missile launchers and ground-to-ground missiles.

On Monday, Israeli Prime Minister Ehud Barak made a one-day visit to Ankara to try and improve Israel's chances of winning several Turkish defense contracts.

Israel is currently bidding for contracts worth several hundred million dollars, including the upgrade of 180 U.S.-manufactured MIAI Abrams main battle tanks, unmanned aerial vehicles worth $300 million and anti-tank missiles.

Turkey also wants to acquire the Arrow anti-ballistic missile system which is a joint Israeli-U.S. project. Final approval for the transfer of technology depends on the U.S.

Thursday, August 31, 2000

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