Investment Alert: Arms Sales Bonanza

War, instability, and high oil prices have created a perfect storm of profit for the world's weapons manufacturers. This year, military analysts predict the biggest arms bonanza since 1993 … which is saying something because in the aftermath of the first Gulf War the global industry reaped the benefits of a $42 billion arms race.

As the world's largest producer and exporter, the United States is riding the wave. For fiscal year 2006, which ended on September 31, the U.S. Defense Security Cooperation Agency churned out notices for $21 billion in arms sales offers . In most cases, that agency is required to notify Congress of all potential major arms deals worth more than $14 million. In one typical day—September 28—the DSCA issued notification on $5.5 billion in agreements. South Korea would get $1.5 billion in Patriot missile equipment and other hardware, Turkey was offered a $2.9 billion package including 30 F-16 fighter planes, while Jordan and Chile were also offered weapons packages.

While not all deals are finalized with arms deliveries, these notifications are a way of taking the pulse of the weapons market … and it is racing. U.S. a rms sales offers for 2006 appear to be roughly twice the levels of any other year during the Bush administration. Noteworthy among these are the $5 billion deal for F-16s to Pakistan and a $5.8 billion agreement to completely re-equip Saudi Arabia's internal security force.

The Perfect Storm
In the case of Pakistan and other allies in the war on terrorism, sales are booming as sanctions and embargoes imposed because of human rights concerns or nuclear proliferation are being lifted. For Saudi Arabia and other oil-rich nations, the price at the pump (which topped $3 a gallon this summer) freed up cash for weapons. Finally, war in Iraq, Afghanistan, and in corners of the globe where the war on terrorism is being waged more quietly, allows foreign militaries to see some of the most advanced weapons systems in action. As one U.S. government source told The Times of London in August: “Conflicts act like a customer demonstration show and we tend to see an upsurge in sales because other countries [are] … impressed by what is available.”

This storm equals rainbows and pots of gold for the defense industry. For example, Lockheed Martin, the world's largest weapons manufacturer, stands to reap more than $11 billion in possible new offers. U.S. weapons companies may have patriotic slogans (Lockheed Martin's is “We Never Forget Who We're Working For”), but foreign sales mean the biggest bucks because they involve systems where research and development costs were covered by the Pentagon. Also, they are often accompanied by lucrative deals for accessories, spare parts, and eventual upgrades.

But, what means money in the bank for Lockheed Martin, Raytheon, and other defense corporations, often means misery where the weapons are shipped. Despite having some of the world's strongest laws regulating the arms trade, almost half of U.S. weapons end up in countries plagued with ongoing conflict and governed by undemocratic regimes with poor human rights records. According to the annual Conventional Arms Sales to the Developing World released by the Congressional Research Service in November, the United States provided countries in the developing world with more than $11 billion in U.S. arms last year. Of these 25 countries, all had human rights problems according to the State Department's Human Rights Report, and 10 (including three of the top five) were “undemocratic” in the sense that citizens of those nations “did not have a meaningful right to change their government” in a peaceful manner.

This is the eighth year in a row that the United States has led in global arms deliveries. The United Kingdom trailed in second with $3.1 billion and Russia was a close third, at $2.8 billion in arms deliveries. Together, these three weapons exporters where responsible for almost 70% all arms delivered worldwide last year.

In late October, the United Nations began work on the Arms Trade Treaty, which is aimed at curbing arms transfers to major human rights abusers and areas of conflict. The treaty would also urge weapons suppliers to limit weapons sales likely to undermine development in poor nations. The United States was the only country to vote against the resolution, while 24 (including many other major weapons suppliers) abstained.

The General Assembly will take the next step, but without the active participation of the world's largest weapons producer and exporter, this important mandate will not be strong enough to counter the perfect storm of profiting from war.