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Saudi Arabia Wants to Make Half of Its Military Purchases Domestically

An F-15E Strike Eagle assigned to the 48th Fighter Wing flies over Royal Air Force Lakenheath, England, during a training sortie Aug. 17, 2015.An F-15E Strike Eagle assigned to the 48th Fighter Wing flies over Royal Air Force Lakenheath, England, during a training sortie Aug. 17, 2015.
An F-15E Strike Eagle assigned to the 48th Fighter Wing flies over Royal Air Force Lakenheath, England, during a training sortie Aug. 17, 2015.U.S. Air Force photo/Senior Airman Trevor T. McBride

As part of a larger shakeup designed to move Saudi Arabia’s economy beyond oil, Deputy Crown Prince and Minister of Defense Mohammed bin Salman Abdulaziz Al Saud said on Monday that the country—the world’s third-largest military spender—will direct half of its military expenditures toward domestic industry.

During a televised address on Al Arabiya television, Prince Mohammed—second in line to be king and widely considered the power behind the throne—laid out a range of economic reforms that would radically transform the Saudi economy. Among them: Placing the kingdom’s armaments industry into a government-owned holding company by the end of 2017 that will direct and oversee the development of a new, domestic defense sector that is now virtually non-existent.

Saudi Arabia overtook Russia in 2015 as the world’s third-largest defense spender, growing expenditures by 5.7% to $87.2 billion amid a concerted and costly aerial bombing campaign against Iran-backed Houthi rebels in Yemen. Yet the country only spends roughly 2% of that on military goods produced domestically, the prince noted.

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“Does it make sense that we are the world’s fourth-largest military spenders in 2014 and third in 2015 and we do not even have a local military industry?” he said during the Al Arabiya interview. “We spend more on military than the [British], more than France, and we do not even have a local military industry.”

By boosting the percentage of purchases from domestic industry to something between 30% and 50%, Saudi Arabia hopes to create thousands of new jobs while diversifying the kingdom’s energy-centric economy over the next 15 years. The move would also reduce Saudi Arabia’s dependence on U.S. military exports amid heightened tensions between the two nations.

That doesn’t bode well for U.S. defense contractors in the long term, which have long profited from what was once a dependable and regular free flow of cash and military equipment between Riyadh and Washington. Saudi Arabia owns the world’s third-largest fleet of Boeing (BA) F-15 fighter jets and purchases ground vehicles and other weapons and systems built in whole or in part by companies like Lockheed Martin (LMT), General Dynamics (GD), and Raytheon (RTN).

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But thawing relations between the U.S. and Iran—Saudi Arabia’s major rival in the region—and tensions over reports of indiscriminate bombing of civilian areas in Yemen by the Saudi Royal Air Force threaten that once-solid military relationship. Moreover, if Saudi Arabia can shift away from its dependence on American weapons and military systems, it could rob the U.S. of some of the leverage and influence it has traditionally had with the Saudi government.

Yet Prince Mohammed cited the U.S. as a model for how the kingdom would like to revamp its approach to defense spending in the future.

“When I enter a Saudi military base, the floor is tiled with marble, the walls are decorated, and the finishing is five stars. I enter a base in the U.S., you can see the pipes in the ceiling, the floor is bare, no marble and no carpets. It’s made of cement. Practical,” he said. “We cannot be the third largest military buyer in the world while our military is rated in the twenties when it comes to effectiveness; there is something wrong.”