At Tab A is the State-Defense decision memorandum on longer-term military
assistance to Egypt, which you requested after the PRC met on this subject. I have held this
memorandum awaiting Jim
McIntyre’s comments,2 but
they are still not available, and I think that a decision is needed now.
(C)
The State-Defense memorandum provides the technical information you need
to make the crucial decisions required, so I would like to address
myself to the larger picture. With these decisions, we have the
opportunity, and in my view the obligation, to cement a relationship of
vital importance to the United States. President Sadat has nowhere else to turn for
military assistance. He is in this position by virtue of turning away
from the Soviets and moving closer to the United States and Israel—steps
of unprecedented benefit to our interests in the Middle East. Our
failure to support Sadat
militarily at this critical juncture could have disastrous effect on our
overall peace effort. (S)
It is important to stress that we have taken responsible steps to keep
the assistance package at a reasonable level. We received a larger and
more expensive list from Sadat,3 but we
pared that list by projecting smaller, yet more sophisticated, Egyptian
armed forces. Further, we are working with the Egyptians to build up
their indigenous arms production base, and, if the moderate Arabs move
closer to the peace process, we hope to encourage their resuming
contributions to Egypt’s defense. (S)
I strongly agree that we need to provide more assistance and preferred
financing terms in FY 81, and that this
funding should be in addition to the already strapped FY 81 security assistance budget. We do not
want an arms delivery gap to occur during the next two critical years,
nor do we want to affect adversely vital interests elsewhere as we move
to protect the interests at stake here. (S)
Finally, I think that sufficient facts are presented here for you to make
a decision at this time, rather than to wait until after the budget
cycle runs its course next month. Sadat is expecting a reply shortly, and delaying the
decision until December could affect the Strauss/Linowitz
visit on November 17.4 (S)
That you approve each of the five recommendations in the State-Defense
memorandum at Tab A.5 (U)
Tab A
Memorandum From Secretary of State Vance and Secretary of Defense
Brown to President
Carter6
SUBJECT
- Long-Term Military Relationship with Egypt
Issue for Decision
You asked7 for a decision paper examining
the implications of a long term military assistance program for
Egypt along the lines proposed by the PRC, and alternatives. In this paper, we have taken
into account the budget impacts of continuing security assistance
for Egypt, as you requested.
BACKGROUND
Following Vice President Mubarak’s visit last June,8 you wrote to President Sadat9 suggesting
that our two governments work closely to plan a longer-term military
supply relationship, in order that Egypt could satisfy a greater
proportion of its military equipment needs over the next several
years. You also indicated at that time the hope that Egypt would
assign highest priority to economic development rather than to
military programs. DOD began the
planning process with Egypt in August. Based on its report of the
results of this first exchange,10 the PRC met
on September 20 to consider the issues and make some
recommendations.11
The DOD report validated Egypt’s
priority military needs for the defense of its homeland. The
analysis showed that whatever assistance we could provide within
feasible financial assistance levels would not meet all their needs
and would not create a significant threat to Israel; Egyptian force
structure would in fact be less than that in the 1973–79 period. It
is also clear that, with the cessation of Soviet assistance earlier
and Arab assistance at the time of the Peace Treaty, the US is seen
by Egypt as not only chief supplier of military equipment but
practically
[Page 1000]
the only
source of substantial credit assistance. In view of present
political circumstances and Egypt’s economic situation, the US is
likely to remain in this position for a while to come.
Our decisions on the scope of a longer term arms supply relationship
thus have significant political content. This is true not only of
the size of the program, but also its pace. The deliveries in the
current “three-year” program are front-loaded. Therefore, if we
simply phase in a five-year program after “the three-year program,”
we will have a severe interim “delivery gap” of 2–3 years which will
put a serious strain on our overall relationship.
The PRC recommended a multi-year
security assistance program for Egypt, involving $350 million in
FMS credits in FY 1981 and $800 million annually for
the five years thereafter, FY
1982–86, borrowing from the unspent portion of the $1.5 billion
peace package12 to assist earlier starts of
selected new programs in order to minimize the gap in deliveries of
equipment, and relying on future appropriations to ensure full
funding of approved programs. The PRC also recommended that we agree to sell F–16
aircraft and M60A3 tanks to Egypt, as well as a few more F–4Es
(i.e., about 15) if necessary.
There are several issues that require your decision:
—The multi-year nature of the US commitment;
—Annual funding levels;
—Whether to begin additional funding in FY 1981;
—Use of “cash-flow” financing;
—Sale of F–16 aircraft and M60 tanks.
The Nature of the US Commitment
With the Peace Treaty, the $1.5 billion FMS program, and your decision to enter into joint
planning, we are already well on the road toward a long term
security assistance relationship with Egypt. To move the planning
process beyond this point, we need to indicate to Egypt what level
of credits we might provide in future years.
Given extensive and pressing Egyptian modernization needs, and the
high costs of the programs involved (e.g., 80 F–16s for $1.8 billion
or 900 M60s for $1.2 billion), we would not be able to fully fund
the most important programs with a single year’s credits, nor delay
the start of programs till the requisite credits had been
accumulated. This means we must start selected major programs with
available credits, e.g., drawing upon the unspent portion of the
$1.5 billion program, taking the risk that Congress will appropriate
in subsequent years the credits necessary to continue those programs
(this is called the “cash-flow” ap
[Page 1001]
proach). Nevertheless, we do not propose a
formal multi-year budget commitment. Rather we recommend that we
continue the planning process with Egypt, indicating the specific
level of FMS financing we intend to
seek from Congress in FY 1981 and
FY 1982. We would make clear
that financing is subject to annual Congressional authorization and
appropriation. We would point out that we do not have a formal
multi-year commitment with Israel. We would indicate that we intend
to request substantial levels for the out-years, suggesting we use
the FY 82 figure (and by implication
its extension in future years) for planning
purposes only. As programs are planned by the US and Egypt
together under these sums, the US would carefully control the flow
of letters of offer to them in order to avoid overcommitment.
FY 82 Funding
Levels
We have studied Egypt’s military needs and priority equipment
requests in great detail. We examined alternative annual funding
levels to see what militarily justified types and quantities of
equipment could be bought by Egypt with our credit assistance.
Illustrative alternatives are as follows:
—$500 million a year would permit purchase
over five years of some 50 F–16s, 300 M60s, 4 patrol gunboats, but a
severely cut-down list of vehicles and other equipment, and no
additional air defense. This is well under the quantities Egypt has
said have priority and which we believe are justified from a
military point of view.
—$650 million a year would allow us either to
add somewhat to the numbers of aircraft or
tanks Egypt could buy or to offer a more substantial amount of the
smaller equipment items the Egyptian services would like so much to
have and we believe they urgently need.
—$800 million a year would permit purchase of
the full quantity of priority F–16s (80), but still only 300 M60s,
plus other equipment, but no more aircraft and no more air defense
weapons. This amount would neatly replace Arab military aid, which
was $800 million a year.
—$1 billion a year—President Sadat’s request and the same as
Israel now receives—would permit the purchase by Egypt of 80 F–16s,
the full priority complement of 900 tanks, additional air defenses,
but no additional aircraft or frigate-type ships.
The PRC recommended $800 million a
year.
None of these alternatives meet all of Egypt’s needs or priority
requests. They would, however, provide some of Egypt’s requirements
for advanced weapons (which we support) over the next six years.
Nonetheless, the lower alternatives shown above would result in
considerable delays in the delivery of equipment, because of the
slow pace of programs required. While we are also embarking on a
program of
[Page 1002]
limited
production assistance to Egypt, it will have minimal impact in
satisfying Egyptian requirements for the foreseeable future.
The budgetary impact differential among these annual funding levels
is not great, assuming no “forgiveness” (grant aid) is involved. For
FMS credits extended by the
Federal Financing Bank, the annual appropriation must cover only the
guarantee fees, which equal 10% of the loans. Thus, the budget
appropriation would range from $50 million to $100 million a year.
OMB already assumes, in its
budget projections for FY 1982,
credit funding at the $500 million a year level. (The possibility of
FY 1981 funding is discussed
below).
We are sensitive to the “proportionality” of the annual funding level
to that of Israel. As it approaches Israel’s $1 billion, Israel will
undoubtedly feel the case for additional security assistance it has
submitted is even more justified. They have asked for an additional
$800 million a year, but we do not believe the accelerated pace of
military equipment deliveries which this would imply is necessary,
and we have not encouraged them to think they will get it or even a
portion of it. An increase for Israel, assuming that it contained
the usual 50% forgiveness, would add greatly to the budget impact;
e.g., an additional $800 million a year for Israel would require an
additional budget appropriation of $440 million. If this initiative
with Egypt did result in our also increasing assistance for Israel,
we would want to strongly resist extending any forgiveness in that
increase.
We do not recommend forgiveness for Egypt. Egypt’s external financing
deficit appears just about balanced by the external assistance they
receive. Egypt should be able to manage the interest and
subsequently the principal repayments if we offer the same terms
provided for under Peace Treaty package—10 year grace period and
20-year repayment of principal thereafter. By the same token,
however, we do not recommend that Egypt directly fund a major
portion of approved purchases from their own resources. It would
merely divert resources from priority economic development. In our
judgment, these recommendations would not lead to a requirement for
an increase in currently projected U.S. economic aid levels to Egypt.
FY 1981
Funding
The original $1.5 billion treaty package was supposed to cover a
three-year period, but it is already committed and it satisfied only
a small portion of Egypt’s priority needs. If we do not begin the
new assistance program until FY
1982, we would face a politically difficult two-year gap before we
can even announce a new sale to Egypt, and a three or four-year gap
between completion of major deliveries from the $1.5 billion program
and the start of new deliveries. In the meantime, Egypt’s Soviet
equipment will be seriously deteriorating, with attendant decline in
Egyptian military morale.
[Page 1003]
There will be unspent credits remaining from the $1.5 billion
package—either $520 million in FY
1980 or $320 million in FY 1981 and
we could draw upon those to start new programs for Egypt (“cash
flow”). However, we would have to pay them back out of subsequent
years’ appropriations.
Therefore, the PRC has recommended
some new funds be made available in FY 1981 to permit a transition to be made to the new
longer-term program. The PRC
specifically suggested $350 million for this purpose.
Additional credits for Egypt in FY
1981 could have serious implications for the overall FMS credit program. State and Defense
have requested a global level of $2.304 billion for FY 1981 (the present OMB mark is $1.98 billion). $1 billion
of this is for Israel, $175 million is for treaty commitments to
Spain, Philippines, and Panama; $250 million is for Turkey, leaving
only $879 million for Greece, Jordan, Thailand, and numerous smaller
but crucial programs around the world. A program for Egypt cannot be
undertaken with the security assistance financing levels cited
above. A decision to begin a regular program of FMS financing for Egypt means the
level will have to be raised by the amount earmarked for Egypt, for
FY 1981 and beyond.
Alternatives for FY 1981 funding are
as follows:
—No new credits in FY 1981. We could make some minor new program
starts by borrowing from the unspent portion of the $1.5 billion,
but this alternative would probably be insufficient to start any
major program, like F–16. Egypt would see cash flow financing alone
as simply an accounting sleight of hand. Some new U.S. resources need to be committed to
meet our foreign policy objectives.
—$225 million in new credits in FY 1981. This would make
available a total of $545 million in credits in FY 1981, permitting some new program
starts. However, at the pace these amounts would permit, the
delivery gap could be reduced in perhaps only one major program. The
budget impact would be only $22.5 million (10%) additional.
—$350 million in new credits in FY 1981. This would make
available up to $670 million, and would allow substantial new starts
and acceleration of deliveries to close the delivery gap. It would
impose less of a “cash flow” payback burden in FY 1982 and thereafter. The budget
impact would be only $35 million (10%) additional. The PRC recommended this alternative.
Use of Cash Flow Financing
The foregoing alternatives for FY
1981 funding have assumed the use of cash flow financing to minimize
the deliveries gap. Objections to cash flow financing, which we
utilize in the Israeli program, have been raised because of the
financial risk to the US involved unless a long-
[Page 1004]
term FMS financing program at substantial levels were
established. Because of this risk we do not recommend cash flow
financing across the board; rather we propose this method of
financial implementation only on a selected basis to begin important
programs in FY 80 and 81 and only
drawing on committed but not yet spent funds from the original $1.5
billion program. We believe that limiting the use of cash flow
financing in this manner meets previous objections and limits our
financial exposure to an acceptable level. Cash flow financing (up
to $320 million available) in combination with new FY 81 funds (e.g. $225–350 million)
would make available up to $545–670 million to begin new programs in
FY 1981. This will help bridge
the gap until a more substantial program can begin in FY 82.
Equipment
Only F–16 aircraft and M60 tanks pose policy issues. Their release
poses no serious arms control or arms transfer issues given the
quantities under consideration and the quality of equipment in
neighboring countries. We have sold identical or superior equipment
to other friendly nations in the area. Tactically, Israel could
object in hopes we will provide it more equipment and we will need
to conduct extensive consultations with Congress before any formal
proposal is made. Because of production line problems the tank sale
may have to be notified to Congress relatively soon. F–16s might
wait, although we need a decision in principle to permit us to
continue our discussions with the Egyptians.
We have looked at less capable equipment such as F–4s and M48A5s from
the U.S. inventory, but have
concluded we cannot strip U.S.
forces without adversely affecting U.S. combat capability. We might be able to provide up
to 15 F–4s and some M48A5s if we can buy back M48s from Jordan. This
may change over time and we will keep the situation under
review.
Congressional and Israeli Implications
A substantial continuing FMS program
for Egypt will come as no surprise to either Israel or to the
Congress. Israel will probably not object as long as the program
does not threaten its security—which any feasible programs do
not—but it will certainly bring pressure to increase its own
security assistance level. Congress has been supportive of our
security assistance to Egypt. We will have to guard against
Congressional attempts to wedge the Egyptian program in under the
overall level or to cut crucial programs in other countries. Once we
have your decisions, we plan to consult closely with key members and
committees about the emerging program.
[Page 1005]
Recommendations:13
1. That we continue our five-year planning discussions with Egypt,
without seeking a multi-year appropriation from Congress, on the
basis of anticipated annual FMS
credit amounts of up to:
—$1 billion (equal to Israel)
—$800 million (recommended by PRC)
—$650 million
—$500 million
2. That we begin new FMS financing
in FY 1981 at:
—$350 million (budget impact $35 million)(PRC recommendation)
—$225 million (budget impact $22.5 million)
—Other
3. That the amount of financing for Egypt in FY 1981 and in subsequent years be added to the
projected FMS financing level.
4. That the “cash flow” approach be used in FY 1980 and FY 1981 to
facilitate selected new program starts and sustain the momentum of
programs.
5. That you approve in principle the sale of F–16 aircraft and M60
tanks.
- Cyrus
Vance14
Secretary of State
- W.
Graham Claytor15
Secretary of Defense
