REGIONAL FOCUS - Middle East and Africa [ES2016D1]
The Saudi-led intervention in Yemen and the rise of Iran in the wake of its nuclear deal appear to have set the stage for a further escalation in the region’s Shia- Sunni rivalry. Meanwhile, Russia has re-established itself as a major player in the Middle East with its military deployment to Syria.
Some of the key events in the Middle East have been predictable: the nuclear deal finalised with Iran in July 2015 had been expected since mid- 2014, while the modest gains made against the Islamic State were only too foreseeable. The US strategy of trying to create new groups to fight the Islamic State in Syria proved predictably flawed and was abandoned.
Others developments, however, have proved surprising.
A major military operation by an Arab coalition led by Saudi Arabia would have been difficult to imagine in 2014.
Russia’s initially unannounced deployment of a significant force to Syria also appeared to come from nowhere.
Wherever they operate in the Middle East, militaries struggle against agile and determined opponents increasingly armed with anti-tank missiles and high-definition video cameras.
Rebels have torn Syrian tanks apart with TOW missiles, while Yemeni fighters have knocked out numerous Saudi tanks and, on at least one occasion, hit the armoured recovery vehicle sent to rescue crippled vehicles. Several Egyptian M60 MBTs and even a patrol boat met a similar fate at the sharp end of Russia’s increasingly popular Kornet missile wielded by the Sinai branch of the Islamic State.
In defence, modern asymmetric operators sow fields of landmines and booby traps, making any advance painfully slow. They also appear adept at evading the sensors arrayed against them. Yemeni fighters can seemingly raid Saudi border positions without their approach being spotted, while the Islamic State launched a surprise attack in May 2015 using about 30 suicide vehicle bombs to break the will of Al-Ramadi’s defenders.
As a consequence, decisive battlefield victories are rare.
REGIONAL LAND VEHICLE FORECASTS (2016-2024)
End user countries Saudi Arabia’s negative –6% CAGR and USD31.7 billion market value leads the region with procurement of the Piranha LAV (USD20 billion). Procuring a new MBT for approximately USD3.4 billion potentially met with the Leopard 2A7 MBTs continues, along with Saudi Arabia’s plan to acquire 950 BMP-3s from Russia and 500 from Iraq. Saudi Arabia, like many users in the Middle East, is highly unpredictable in its spending and requirements.
The country does not follow a clear cycle of procurement-upgrade- replacement, instead being heavily led by the proactive efforts of defence suppliers and current trends within the market.
MAJOR DEFENCE MARKETS
With a defence budget estimated at USD46.3 billion in 2015, the Kingdom of Saudi Arabia continues to be the leading military power in the Gulf and one of the largest arms importers in the world.
Operating in a challenging security environment, Saudi Arabia is investing in capability modernisation to back an increasingly assertive foreign policy to meet regional security challenges. These range from the perceived Iranian threat; a fear of encirclement by a ‘Shia arc’ of pro-Iranian regimes stretching from Syria to Lebanon; and overspill from instability in neighbouring countries such as Iraq, Syria and Yemen. The Kingdom also faces internal security fears and the threat of domestic terrorism. As a result, the air force and national guard have seen significant investment.
Saudi Arabia’s ability to fund the modernisation and equipment of its armed forces is underpinned by the global demand for hydrocarbons. The slump in world oil prices in 2014 saw defence expenditure decline slightly in the short term, and undergo some delay in growth, but IHS forecasts a return to growth from 2017 onwards.
Defence and security investment has – in line with overall government spending – increased in all but two of the past 18 years, growing by an average of 19% a year between 2012 and 2014.
The Kingdom’s oil wealth enables substantial military spending. While this leaves it vulnerable to changes in global oil demand and prices, foreign reserves are substantial, standing at around USD700 billion as of 2015.
Saudi Arabia ranks as one of the world’s largest importers of defence materiel. Despite wider international interest in Saudi procurement aspirations, the dominant position held by the US has been reinforced with a series of major orders.
Although the position of the UK in the market is noteworthy and emerging participants – ranging from Russia, China and South Korea to the Czech Republic – will maintain an interest and no doubt win some business, the US is almost certain to remain Saudi Arabia’s key security partner.
Saudi Arabia’s huge investment in defence equipment is designed in part to boost its economic diversification away from hydrocarbons. Despite significant investment by foreign firms in Saudi Arabia’s defence industrial capability through the Kingdom’s offset programme, progress has not been as great as was once hoped.
Saudi Arabia had an estimated defence budget of USD46.28 billion in 2015, making it the biggest military spender in the Middle East by some margin.
Military investment is expected to retain its position in terms of GDP proportion at around 5-6%, but will experience a decline and stagnation in the years ahead as the country deals with reduced oil revenues.
Official defence-related expenditure is outlined (with very limited detail) in the Kingdom’s annual defence and security budget, details of which are released each year by the Saudi Arabian Monetary Agency.
The defence and security budget encompasses non-military state security organs including those under the authority of the Ministry of the Interior but excludes ad hoc discretionary spending, which can be substantial.
Defence and security spending was approved at USD81.9 billion for 2015. However, the budget is thought to have received an unquantified downward revision during the course of the financial year as a result of weak energy prices.
IHS Jane’s estimates that core military expenditure accounts for around 60% of the defence and security budget.
To achieve its ongoing force modernisation goals, IHS Jane’s forecasts that Saudi Arabia will spend a total of USD34 billion on procurement in the years from 2016 to 2020. This reflects the delivery of weapon systems – worth USD60 billion – under the 2010 framework agreement with the US and the Kingdom’s ongoing procurement links with other major powers in Europe and Asia.
Land sector indigenous industry
Most of the Kingdom’s capabilities in terms of both design/development work and assembly appear to centre on ground vehicles. Saudi Arabia has facilities for the overhaul and modernisation of the M113 series of armoured fighting vehicles (AFVs). Heavier AFVs, such as the M1A1 MBT, were to be upgraded to a common standard with much of this work to be carried out in the Kingdom.
IHS Jane’s reported in 2009 that Saudi Arabia had begun marketing two of its latest 4x4 light armoured vehicles, Al Shibl 1 and Al Shibl 2 (Lion Cub) to potential Middle Eastern customers (a transfer to Yemen was reported in 2010 but remains unconfirmed).
The vehicles are designed and built by the Armoured Vehicles & Heavy Equipment Factory (AVF) – one of the country’s Military Industries Corporation companies – and are already operational with the Saudi Ministry of Defence.
The company has also overhauled and upgraded a number of Saudi Arabia’s Panhard General Defense AML 60 (armed with a 60mm mortar) and AML 90 (armed with a 90mm gun) armoured cars as well as the M3 Armoured Personnel Carrier (APC) variant.
AVF has also developed an up-armouring package for the US-built AM General High- Mobility Multipurpose Wheeled Vehicle (HMMWV) and a number of specialised vehicles based on a Toyota Land Cruiser chassis.
In 2011, Saudi Groups unveiled an indigenous wheeled APC, the Masmak, which is also to be launched for export in Africa in co-operation with South Africa’s Industrial and Automotive Design (IAD). It was to be marketed in Africa as the Nyoka Mk 2. No known sales have taken place.
Saudi Arabia, in conjunction with FNSS Savunma Sistemleri (a joint venture between BAE Systems and Turkey’s Nurol) is undertaking the modernisation of Saudi M113 armoured personnel vehicles at the Saudi Arabian Ground Forces High Command’s Al-Kharj Maintenance and Modernization facilities in Al Kharj. The programme sees work undertaken in Saudi Arabia using kits from FNSS, with more than 1,000 vehicles returned to service since the programme began in 2004 out of a planned 2,000.
United Arab Emirates
The United Arab Emirates (UAE) has invested significant sums in defence modernisation in recent years in order to meet pressing social, economic and strategic challenges. Military procurement is facilitated by the federation’s petrochemical-derived wealth.
The national offset programme has been refined since 2010 with a view to maximising benefits for the UAE through defence purchases, with an emphasis on local employment and training, and the diversification of the economy away from hydrocarbons. To this end, the UAE has created a nascent defence industry, achieved some export success, and formed defence industrial and military trade ties with regional allies.
However, the UAE has historically been a challenging defence market. Those active in the region face issues ranging from a slow-moving bureaucracy to extensive procurement-related demands on contractors.
The country’s participation in military operations – notably expeditionary operations in Yemen – are likely to drive a re-examination of military capabilities and requirements, as well as increase operations and maintenance expenditure in the short term.
The UAE’s steadily deepening defence ties with its near neighbours are also worthy of note; co-operation between the Gulf Co-operation Council (GCC) states is broadening further in the defence realm.
There are reasons to expect the UAE to emerge as a major hub in a regional defence industrial complex, underlining its significance both as a market and springboard for wider regional sales. The UAE’s export profile has also grown, with an agreement to sell NIMR armoured vehicles to Algeria (2012) a notable example.
There are reasons to approach defence trade with the UAE with a degree of caution. As a market it lacks transparency, and the offset and industrial participation reforms of 2010 provided – initially at least – reasons for disquiet.
The UAE’s defence industrial ambitions also suggest that partnerships and technology transfers aimed at achieving sales in the short term may carry the risk of creating a future industrial competitor in regional and global markets in the longer term.
IHS Jane’s forecasts that the UAE will increase (constant USD 2016) defence spending between 2016 and 2020 from USD19.1 billion to USD22.1 billion. This marks the reversal of a period of real decline, however, with military investment having dipped from USD16.2 billion in 2013.
The UAE, which is already considered to possess one of the best-equipped militaries within the region and the GCC, is expected to continue prioritising spending on procurement activities. Procurement accounts for around 20% of the overall defence budget.
Procurement spending in 2016 stood at an estimated USD3.1 billion – a steep decline on 2014’s USD4.4 billion.
However, IHS Jane’s forecasts procurement spending will steadily increase to USD3.8 billion by 2020.
Land sector indigenous industry
The UAE possesses a range of defence industrial capabilities in the land domain, although these are largely limited to tactical vehicles and small arms. NIMR Automotive, a joint venture of Tawazun and the Bin Jabr Group, is the principal land vehicle producer, building a range of wheeled 4x4 and 6x6 armoured and unarmoured utility and patrol vehicles. Al Taif and Vallo, meanwhile, provide maintenance, repair and overhaul (MRO) for the UAE’s heavy armour and land equipment.
The country is well supplied in small arms and munitions capabilities, with Caracal and Tawazun Advanced Defense Systems both producing a range of small arms (the companies were merged under the Caracal brand in 2013), while Caracal Light Ammunition and Burkan Munitions Systems manufacture a range of land, naval and air munitions. The establishment of joint ventures with Orbital ATK and other ammunition manufacturers in 2015 also holds promise for expanding the country’s ammunition manufacturing capabilities.
Foreign light armoured vehicle manufacturers such as Streit Group and IAG have also established manufacturing facilities in the country in order to place themselves closer to markets.
South Africa is the most developed country on the African continent and dominates the economic, diplomatic and strategic environment of southern Africa. The South African National Defence Force (SANDF) is the most capable ground force in sub-Saharan Africa. It had (and to an extent still has) a formidable base of operational experience, but major funding challenges mean the SANDF currently faces a crisis in equipment and capability.
Low spending notwithstanding, a degree of clarity came to the South African defence sector in March 2014 with the long-awaited cabinet approval of the Defence Review; the first such document for 16 years. The document – which began with the premise that the SANDF had been in decline – outlined broad goals for the recapitalisation and repurposing of the force; the security environment in which South Africa exists; and the objectives of the national defence industry. The review was a roadmap which outlined general strategy; progress will depend entirely on implementation. The review received official approval in mid-2015.
Poverty eradication and job creation remain key challenges for the government, although tackling these issues has been made more difficult by the global economic downturn.
Delivery of public services such as water, electricity and housing are other issues that have fuelled recurring, often violent, demonstrations against local government in recent years.
In an effort to reduce high unemployment and improve the capacity of domestic industry, South Africa operates a wide-ranging industrial participation policy applicable to all government procurements, including defence.
This policy is partly intended to stimulate South Africa’s defence industry and maintain self-sufficiency in some key technology areas, while also increasing defence exports overseas.
The defence budget for 2015‑16 increased by a nominal 4% to ZAR44.6 billion (USD3.19 billion) in an effort to address some of the major capability deficiencies that have emerged following two decades of chronic underfunding and operational overstretch.
This relatively minor increase was effectively cancelled out by inflation (at 5%), meaning that funding effectively dropped by 1% year on year. The Medium- Term Economic Framework (MTEF) gives some more positive spending projections, particularly covering air force procurement in 2017.
Land sector indigenous industry
South Africa has considerable experience and capability in land systems. Through companies such as Paramount, state-owned Denel, and OTT Technologies it is capable of producing protected vehicles, artillery and turrets for both domestic use and export customers. South Africa also produces its own ammunition and ordnance. Denel Integrated Systems Solutions (DISS) provides a system-integration capability for air defence.
Some consolidation of the country’s land vehicle industry took place in 2014 and 2015, with Paramount acquiring a former DCD Protected Mobility industrial facility, and BAE Systems selling its South African land systems division to Denel.
Information from IHS Jane’s Markets Forecast, Defence Budgets and Navigating the Emerging Markets