Obama Denouncing Egypt Unrest Has Reasons to Maintain Aid

Aug. 16 (Bloomberg) -- Thomas Byrne, senior vice-president for sovereign risk at Moody's Investors Service, talks about the credit ratings outlook for Egypt, the Philippines and Japan. Egypt’s army-backed government declared a state of emergency following police clashes with Islamist protesters, as deaths from the crackdown passed 500. Byrne speaks with Rishaad Salamat and Susan Li on Bloomberg Television's "Asia Edge." (Source: Bloomberg)

While thousands of American soldiers won’t go to Egypt next month for military exercises, President Barack Obama left intact the centerpiece of U.S.-Egypt military cooperation -- $1.3 billion a year in military aid.

Obama didn’t mention U.S. aid yesterday when he condemned the violent crackdown by Egypt’s interim government and announced the cancellation of the “Bright Star” joint military exercise. He alluded to it when he said his national security team will assess “further steps that we may take as necessary.”

Obama may find it politically difficult to sustain the funding if the military-controlled government continues its crackdown. Yet there are incentives to keep it flowing: it provides some leverage over Egypt’s military leaders, it cements Egypt’s peace accord with Israel and it would be costly to cancel contracts with U.S. defense companies.

Republican Senators John McCain of Arizona and Lindsey Graham of South Carolina, critics of Obama’s Mideast policies, today called for suspending U.S. aid to Egypt and making it “clear to the current leadership of the country what steps we believe are necessary to halt Egypt’s descent into civil conflict and ultimately to restore our assistance relationship, which has historically served U.S. national security interests.”

Photographer: Ed Giles/Getty Images

Egyptian military police officers walk into the burnt-out Rabaa al-Adaweya Mosque in Nasr City in Cairo on Aug. 15, 2013. Close

Egyptian military police officers walk into the burnt-out Rabaa al-Adaweya Mosque in... Read More

Close
Open
Photographer: Ed Giles/Getty Images

Egyptian military police officers walk into the burnt-out Rabaa al-Adaweya Mosque in Nasr City in Cairo on Aug. 15, 2013.

‘Dark Path’

“The interim civilian government and security forces -- backed up, unfortunately, by the military -- are taking Egypt down a dark path, one that the United States cannot and should not travel with them,” they said in a statement.

Previously, the administration, citing national security interests, shielded Egypt from a law mandating an aid cutoff by declining to say that the military’s July ouster of elected Islamist President Mohamed Mursi was a coup d’etat.

“While suspending joint military exercises as the president has done is an important step, our law is clear: aid to the Egyptian military should cease unless they restore democracy,” Democratic Senator Patrick Leahy of Vermont, who is chairman of the appropriations subcommittee responsible for foreign aid, said in a statement yesterday.

National Security

Republican Representative Howard P. “Buck” McKeon of California, chairman of the House Armed Services Committee, said in an e-mailed statement yesterday that “our strong and supportive relationship with Egypt continues to be in America’s national security interest, but only so long as the Egyptian military respects civilian rule and continues the transition.”

Egyptian security forces this week charged into pro-Mursi protest camps, and the government imposed a monthlong state of emergency curtailing rights. The death toll in the crackdown is about 600, with more than 4,000 hurt, according to the state-run Middle East News Agency. The Muslim Brotherhood that supports Mursi says the figure is much higher.

The actions put a spotlight on the Egyptian military’s ties to the U.S. through aid that provides battle tanks made by General Dynamics Corp. (GD), F-16 fighter jets from Lockheed Martin Corp. (LMT) and other equipment. Many senior Egyptian military officers have received U.S. training over the years.

Egypt received a total of $1.56 billion in military and economic aid in fiscal 2012, ranking fifth behind Israel, Afghanistan, Pakistan, and Iraq, according to the Congressional Research Service.

’On Notice’

“I can’t see how we continue aid as usual now,” Michael O’Hanlon, director of foreign policy research at the Brookings Institution in Washington, said in an e-mail. “At a minimum, it needs to be suspended or temporarily reduced, or held in escrow.”

Richard Haass, president of the Council on Foreign Relations in New York, supported the president on maintaining aid for the time being. His action “puts generals on notice” that time is running out absent restraint and reform, Haass said in a posting on Twitter Inc.’s website yesterday.

Cutting off military aid carries its own set of issues, both geopolitically and financially, for the U.S. government, which plays the role of intermediary in Egypt’s defense purchases.

Egypt’s ties to the Pentagon have grown since that nation and Israel signed the U.S.-brokered peace agreement of 1979. For years, U.S. aid was linked by a formula to the amount of assistance given to Israel.

Gaza, Sinai

The U.S. and Israel look for Egyptian military help on security issues such as restricting smuggling tunnels into the Gaza Strip and, most recently, against terrorists seeking to operate in the Sinai Peninsula. The U.S. Navy receives preferred transit through the Suez Canal.

“One should remember that in large part the funding of the Egyptian military has always been a bribe following the Camp David accords to maintain peace with Israel and keep smuggling into Gaza under some control,” said Joel Johnson, an international trade analyst for the Teal Group Corp., a defense and aerospace consulting company based in Fairfax, Virginia.

“I suspect Israel will not be eager to see the U.S. cut off the Egyptian military at this juncture, when the military is feeling besieged and might believe an ‘incident’ with Israel might provide it a means to generate public support,” Johnson said in an e-mailed statement.

Phone Calls

The U.S.-Egyptian military channel has been tested during this crisis by frequent phone contacts between Defense Secretary Chuck Hagel and Egyptian Defense Minister Abdelfatah al-Seesi, the general who commands Egypt’s military and is effectively leading the government.

In a call yesterday, Hagel said in a statement, he told al-Seesi that “the Department of Defense will continue to maintain a military relationship with Egypt, but I made it clear that the violence and inadequate steps towards reconciliation are putting important elements of our longstanding defense cooperation at risk.”

After Mursi’s ouster, the Obama administration decided to delay the delivery of four F-16s to Egypt, citing the “fluid situation.” Eight more are planned for delivery by January, if the schedule isn’t altered.

U.S. military aid may cover as much as 80 percent of the Egyptian Defense Ministry’s weapons procurement costs, Congressional Research Service analyst Jeremy Sharp wrote in a June report, although he said there are no verifiable figures on total Egyptian military spending.

Cutting off aid would be complicated because Egypt is allowed to negotiate the purchase of major defense equipment under contracts that last for a number of years, while counting on annual aid appropriations to make future payments. The U.S. government signs the contracts with American companies on Egypt’s behalf.

U.S. Liable

That means the U.S. would be liable for unpaid funds if a contract is broken, unless the Pentagon negotiates a termination penalty, buys the weapons for its own use or sells them to another country, according to Kevin Brancato, an analyst with Bloomberg Government.

U.S.-Egyptian coproduction of the M1A1 Abrams Battle tank, which began in 1988, is financed by the U.S. Egypt plans to acquire a total of 1,200 tanks, according to Sharp.

Some of the tank’s components are manufactured at a facility near Cairo, and the rest are produced in Lima, Ohio, and shipped to Egypt for final assembly. Falls Church, Virginia-based General Dynamics is the prime contractor.

General Dynamics is providing kits to produce the tanks to Egypt under a 2011 contract valued at $395 million, which calls for delivery of 125 through January 2016. As of April, General Dynamics had received $176 million under that contract, according to Brancato.

Fighter Jets

The four delayed F-16s were to be supplied as part of a $2.5 billion deal with Bethesda, Maryland-based Lockheed to supply 20 jets. According to data compiled by Bloomberg, the U.S. has yet to pay $1.7 billion of the contract.

Lockheed spokesman Mark Johnson declined to comment on the F-16 sales to Egypt, saying they fall under a program between the U.S. and Egyptian governments. Pete Keating, a spokesman for the General Dynamics tank program, didn’t immediately return an e-mail and phone call seeking a comment.

The canceled Bright Star exercises, scheduled in Egypt every two years, are an outgrowth of the Camp David accords. Last held in 2009, the exercises were called off in 2011 due to political turmoil following the revolution that toppled former President Hosni Mubarak.

Since then, the Egyptian military “has lost a lot of its international support,” Ian Bremmer, the New York-based president of the Eurasia Group, said in an interview yesterday on “Bloomberg Surveillance.” Denmark has halted its development aid for Egypt and “many Europeans are already calling for suspension of aid,” he said.

To contact the reporter on this story: Terry Atlas in Washington at tatlas@bloomberg.net

To contact the editor responsible for this story: John Walcott at jwalcott9@bloomberg.net

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.