Since 1990, the U.S. government, through the Pentagon’s arms export program, has arranged for the delivery of more than $39.6 billion in  foreign military sales to Saudi Arabia, and an additional $394 million worth of arms were delivered to the Saudi regime through the State Department’s direct commercial sales program during that same period.  This has been part of the deal we’ve struck with Saudi Arabia to keep cheap sweet crude flowing to the US.  In return we’ve armed them to the teeth.

One can certainly debate the logic of such a move but for now let’s assume that this was at one time in our national security interest to do so.  Such interests are being threatened by the emergence of Russia as a serious economic player in the Middle East.  Russia has already be a strategic trading partner with Iran for years.  They have shared military and energy interests across the board, even going so as far as to make passenger jets together.  Up until this point, the dividing line as been that Saudi Arabia was (ostensibly) our ally and Iran was Russia’s.  The deck has been shuffled again, to the US’ strategic disadvantage.

Reuters UK is reporting that, “Saudi Arabia has offered to award major arms contracts to Russia in return for Moscow curtailing cooperation with Iran, Russia’s Kommersant newspaper reported on Tuesday, citing unidentified diplomatic sources.The Kremlin declined to comment immediately on the report, as did Saudi Arabia’s embassy in Moscow.Saudi Prince Bandar bin Sultan met Russian President Dmitry Medvedev and Prime Minister Vladimir Putin in Moscow for talks on Monday that focused on widening bilateral cooperation.

Kommersant said Saudi Foreign Minister Prince Saud al-Faisal suggested Russia curtail its cooperation with Iran at a meeting in Moscow this February. The proposal was made to the Kremlin in the name of King Abdullah.

“The Kingdom’s leadership advised Moscow to phase out cooperation with Tehran and in return promised attractive contracts with Saudi Arabia,” said the paper, one of Russia’s most respected dailies.

“In essence, Russia was offered to become a major partner in the Middle East.””

Saudi Arabia is interested in Russian tanks and helicopters, which would be a fairly significant loss to US manufacturers.  However, the US may still be in the game yet with“Overseas sales of the U.S. Army’s core missile defense system appear set to boom, spurred by tensions surrounding Iran, North Korea and other regional disputes.

Poland, Taiwan, Kuwait, Turkey, South Korea, Saudi Arabia and Qatar are among countries that could spin off billions of dollars in related revenue over the next five years, according to Raytheon Co (RTN.N: Quote, Profile, Research, Stock Buzz), the army’s primary contractor for the Patriot air and missile defence system.

Raytheon Chief Executive Bill Swanson said in April that sales could be in the “big billions” by 2013 or 2014 for what the company calls the world’s premier system of its kind.”

The lesson here is as more countries big and small enter the marketplace, no US industry is safe from competition.  The sooner CEO’s figure this out and adapt, the less likely we are to be completely surprised and thus suffer significant loss in our market share as we are currently are.

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