Defence transformation

Despite oil prices plunging, GCC military spending continues.

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Militray expo

The Middle East has been a gold mine for military suppliers over the past several years. However, the recent oil prices downfall is expected to change some of the military shopping trends in the region.

In recent years we have witnessed a tremendous acceleration of defence expenditure in the Middle East, with four of the top fastest growing defence markets in 2013 being Middle Eastern countries, growing at an average annual rate of almost 9 percent in real terms, according to the IHS Jane’s Annual Defence Budgets Review from 2013.

For example, Oman and Saudi Arabia have seen a rapid growth of military spending of over 30 percent between 2011 and 2013. During this period, Saudi Arabia has become the fourth largest military spender globally, buying USD 80 billion worth of armaments last year alone, according to the International Institute for Strategic Studies.  Another three GCC member states – UAE, Oman and Qatar – are also significant weapon importers, and the four countries together spent USD 109 billion in 2014; up 44 percent from 2012, according to the same source.

The new IHS Jane’s Annual Report launched in December 2014, shows that plunging oil prices and declining oil revenues in the Middle East may change military expenditure this year, but only slightly. The report forecasts that while defence budgets will continue to shrink in the West, in the Middle East defence expenditure may contract only marginally in 2015.

Furthermore, it says that key defense spenders in the region – Saudi Arabia and UAE –  are unlikely to cut spending, especially after facing serious security threats on their borders, while spending in the rest of the region is expected to be flat in 2015 as fiscal consolidation becomes a consideration in many countries. Overall, the IHS Jane Institute expects military spending in the Middle East and North Africa this year to reach USD 150 bn, compared to USD 148 bn last year and USD 136 bn in 2013.

Military spending

Oil plunge not affecting military spending

Despite a temporary stall in global military expenditure, Middle Eastern countries will continue to spend heavily. The rise of the Islamic State, along with sectarian clashes in Iraq, Lebanon and Yemen significantly contributes to high spending trends as countries see the strengthening of the defence sector as one of the key pillars of their foreign policy.

However, overall MENA growth rate will eventually slow down a bit and previously higher forecasts have been corrected and now stand at 3.48 percent for the period between 2015 and 2020. Low oil prices have certainly hit some Middle East economies hard, notably Iran and Iraq, which don’t have sovereign wealth funds established to overcome the consequences of fluctuating prices of their main export resource.

The rich Gulf states have also felt the effects of the oil drop, but large surpluses accumulated over the years have secured the funds to keep up their military shopping habits. Moreover, GCC states are becoming increasingly active in the region, getting involved in military operations against Islamic State as in the case of UAE, which alongside Egypt has launched air strikes against militant groups in Libya.

Experts believe that Iran, on the other hand, will have to rely more on tax money in order to keep up with its ever more armed and prosperous neighbours from the southern side of the Gulf. Iraq also continues to allocate significant amounts to its defence budget (about USD 6 bn annually) in order to fight ISIS and restore peace in its territory.

Military equipment

IDEX – demonstration of force

It is not surprising then that the region hosts large military exhibitions, and Western arms suppliers, pressed by cutbacks at home, are flocking to one of the largest and most significant international arms fairs – International Defence Exhibition and Conference (IDEX) held in Abu Dhabi.

The exhibition space was sold out as early as November last year, and it is evident that arms suppliers have great expectations from Middle Eastern markets in the future. UAE Armed Forces alone have signed military deals worth USD 5 bn during this five-day event, according to exhibition spokesmen.

According to the analysts, the latest weapon purchase trends upgrade the ‘traditional’ assortment of military equipment – jets, tanks and guns – as Middle East governments show increased interest in acquiring equipment to counter Internet-savvy militants, cyber terrorism and sophisticated anti-missile systems.

Some of the huge investment is returned to the region through the so called “offset agreements,” whereas foreign companies use local producers and suppliers to build some of the equipment. It is estimated that around USD 27 bn will be created through such agreements with local governments. In this way, military budgets and the defence industry can significantly contribute to the diversification of the economy.

For Sabahat Khan, senior analyst at the Institute for Near East and Gulf Military Analysis, increased military spending is actually industrialisation, in the case of UAE, and the defence sector is becoming one of the cornerstones of UAE’s diversification efforts, boosting the country’s manufacturing and skills base according to Ali Majed Al Mansoori, the chairman of Abu Dhabi’s Department of Economic Development.

Two months ago, UAE lunched Emirates Defence Industries Company (EDIC), an integrated national defence services and manufacturing platform. Its main purpose is development of its own capabilities and partnership with other major producers, geared towards lesser dependency on foreign suppliers.

But there are downsides to increasing military spending in the region and some experts suggest that it may cause a regional arms race, making an already unstable region even more turbulent while causing rising distrust among states. Increased military capabilities may therefore lead to amplified tensions. The question remains whether more weapons really means more peace and more stability.

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