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Saudi and French defence deal

February 19, 2019 | Expert Insights

As a part of the effort to diversify away from the oil-based economy, Saudi Arabia has signed an agreement with the France’s Naval group to build warships and frigates in the kingdom.

Background

Saudi Arabia aims to build a defence industry at breakneck speed to align with the Vision 2030. The country is ready to look beyond its traditional Western ally for help, under a deal that would let them manufacture related products at home. 

France and Saudi have a strong history of bilateral trade relations within the defence, infrastructure and aerospace sectors. Saudi Arabia was the second biggest purchaser of French arms, with deals totalling more than 11 billion euros ($12.67 billion). France has sold equipment to Riyadh and fellow coalition member, the UAE - notably Caesar artillery guns and ammunition, sniper rifles and armoured vehicles. Saudi Arabia is also a major economic and commercial partner for France in the Gulf region and in the Middle East. 

Analysis

A joint venture aimed at strengthening the Royal Saudi Naval Forces is being set up between a state-owned defence firm, SAMI and a French company specializing in naval defence. The Saudi Arabian Military Industries Company (SAMI) signed a preliminary agreement with France’s Naval Group, as part of its efforts to develop domestic manufacturing capabilities. The French state holds 62.49% stake in the Naval Group and aims to provide the Gulf state's navy with "state-of-the-art systems". 

SAMI aims to be one of the world’s top 25 military industry companies by 2030, and Crown Prince Mohammed bin Salman wants to localize 50 per cent of Saudi military spending by 2030 also. The latest agreement includes building warships, frigates, Corvettes and related items in Saudi Arabia through a majority SAMI-owned joint venture with the French firm, SAMI Chief Executive Andreas Schwer said. “Through design, construction, and maintenance activities the joint venture will contribute significantly to further enhance the capabilities and readiness of the Royal Saudi Naval Forces,” he said.  Saudi Arabia set up SAMI in 2017.

SAMI made the announcement at the IDEX military exhibition in Abu Dhabi, a showpiece event for Saudi Arabia’s close ally the United Arab Emirates.  UAE has heavily invested in developing its own manufacturing capabilities and has military and civilian contracts with several foreign companies.  SAMI has also signed an agreement with Abu Dhabi state-fund Mubadala to co-invest in manufacturing, maintenance, and engineering. 

Vision 2030 is highly reliant on the contribution of SAMI to the gross domestic product (GDP). According to the vision, the plan is to nationalize 50 per cent of the military spending and increase the contribution of the private sector to the GDP by 40-65 per cent. The Public Investment Fund of Saudi Arabia expects SAMI to contribute almost $240 million to the national GDP by 2020, and to create 5,000 new jobs.

Saudi Arabia, among the top five defence spenders in the world, has been fighting a costly war in Yemen since 2015 in support of the internationally recognized government against the armed Houthi movement. Military deals with Saudi Arabia have come under renewed scrutiny since the October killing of Washington Post columnist Jamal Khashoggi in the Saudi consulate in Istanbul. Germany halted arms exports to Saudi Arabia over what it said was the uncertainty surrounding the murder. 

Paramount Group Chairman Ivor Ichikowitz said that this has created a “huge opportunity” for those outside of Europe such as his South African defence firm. “I think some of them may be quite short-sighted but quite honestly that is their problem and we are quite happy to be continuing,” he said. Paramount has held talks with the Saudi Arabian government to establish production facilities in the kingdom. 

The U.S. Senate, in a largely symbolic gesture, voted in December to end U.S. military support for the war in Yemen and blame the Saudi crown prince for the murder of Khashoggi. Saudi Arabia denies that its crown prince was involved.

Assessment

Our assessment is that SAMI is set to become one of the top manufacturers globally, combining the latest technologies and expertise to produce equipment according to international standards. We feel that despite the sanctions on Saudi officials and the withdrawal of investments over Khashoggi’s death, Riyadh is important for France as one of its largest customers.