Egozi: Political Chaos Impeds Coping with US FMF Consequences for Israel

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By Arie Egozi

The Israeli defense industries will have to reorganize to be able to cope with the evolving situation caused by the current Foreign Military Funding (FMF) agreement with the US.

The political chaos left the companies alone against a very severe situation that may lead to huge problems in the industries’ capability to invest enough resources in new systems.

After a new government is hopefully formed following the March elections, the fourth in less than two years, an official request from the new U.S administration is expected, but according to senior sources here, the chances for meaningful concessions are slim. “The industries here are in a very bad situation that will get even more problematic as the percentage of U.S $ from the FMF will decrease until it completely vanishes,” a senior source said.

Some Israeli defense industries hoped that after the U.S canceled the sale of the F-35 to Turkey, subcontracting planned to be performed by Turkish companies will be transferred to Israeli companies. This has not happened.

Among the options preliminarily evaluated by the Israeli Ministry of Defense – more work from American companies, and easing the restrictions of exporting American-made platforms that have been phased out by Israel.

But the situation is not confronted full force, again due to the political chaos.

Currently, the Israeli defense industry is getting work as part of deals to purchase American-made platforms. Israel Aerospace Industries (IAI) is contracted to manufacture more than 800 pairs of F-35 wings, as part of the contract to buy 50 F-35 for the Israeli Air Force.

The U.S is blocking the sale of phased out US-made fighter aircraft to third countries.

Last year, the attempt to revive a plan to sell used Israeli Air Force F-16 to Croatia failed. 

During 2019, Israel offered, and began negotiations with, Croatia over a deal that included the sale of upgraded F-16Cs which were phased out of IAF service to replace the Croatian Air Force’s MIG 21s. However, at a very advanced stage of the negotiation, Washington vetoed the deal (estimated at US$ 500m for 12 aircraft), claiming that it has not been notified about the details of the contract and demanded all the Israeli systems installed in the aircraft be removed.

In September 2016, the Memorandum of Understanding (MOU) was signed between the governments of Israel and the United States for a $38 billion American defense aid package under the FMF Program for the period 2019-28.

The new aid agreement is the largest ever granted to Israel by the United States. Yet, compared with previous FMF agreements, it introduced a number of changes that are likely to have harsh consequences for the local defense industry, Israel’s preservation of armament knowhow, and for the Israeli economy as a whole. In particular, the new aid agreement substantially reduces the amount of aid money that Israel’s Ministry of Defense can convert into Israeli shekels (NIS) under the FMF and use for defense-related procurement from local defense companies.

The issue is being discussed in the Israeli government but the political chaos that will result in a fourth general election in less than two years has left the industries almost alone trying to solve the situation.

The Israeli defense industries are worried about the developing situation. While State-owned companies like IAI and Rafael are slowly trying to find solutions, Elbit Systems – a public company – makes big strides on the way to a solution.

In December, Elbit signed a definitive agreement with an affiliate of Cerberus Capital Management, L.P. for the acquisition of Sparton Corporation for a purchase price of $380 million.  

So sporadic efforts are being made to find ways to compensate for the impact of the current FMF agreement. An official request is expected only after a new government is formed.