Arms Megadeal Collapsed When China, Russia Links Emerged

Failed talks between RTX and a Saudi defense firm show the kingdom’s difficulties in establishing its own military industry

by Stephen Kalin, wsj.com

That unease was a deciding factor for an advisory board of retired U.S. military officers to resign from the Saudi company, Scopa Défense, the people said. Scopa fired its U.S. chief executive who had raised the sanctions concerns with his company's owner and U.S. officials. Now, other major Western defense companies are reconsidering early stage deals primarily because of the concerns around engagement with Russian and Chinese entities, the people said.

The failed talks with RTX, formerly known as Raytheon Technologies,demonstrate a challenge Saudi Arabia faces in pursuing diplomatic and business relationships with China and Russia that Washington says jeopardize U.S. national security. Doing business with companies under sanctions could undermine U.S. efforts to squeeze Russia and China financially and heighten the risks that Western companies would face sanctions themselves. It also raises the specter of Moscow and Beijing obtaining secret U.S. military technology.

The breakdown of RTX-Scopa talks also shows the challenges for countries that want to maintain relationships with the U.S. and it stop global rivals when Washington prefers its partners and allies take sides.

Saudi Arabia was once firmly in the Western camp, but since Russia’s invasion of Ukraine, it has expanded ties withotherpowers,managing theoilmarketinalignment with Moscow and entering discussions with Chinese companies to help build its nascent nuclear program. The Biden administration has said it doesn’t want Saudi links with those countries to stray into military cooperation.

The oil-rich kingdom’s courtship of Russia and China also threatens ambitious plans to build its own military industry after decades as a top global-arms importer. Saudi Arabia’s strategy has been to join with défense firms from the U.S. and other North Atlantic Treaty Organization countries, which have sold the Saudis most of their current arsenal of defense systems.

Scopa’s owner, Mohamed Alajlan, chairs the Saudi-Chinese Business Council and is the scion of a prominent Saudi family that has imported Chinese textiles for decades and now operates in many sectors. Scopa, founded in 2021, is the highest-profile private Saudi company set up to support Crown Prince Mohammed bin Salman’s vision for a local arms sector, as the 38-year old ruler tries to diversify the economy away from oil.

Alajlan denies dealing with Russian companies and said any transactions with Chinese firms are limited to securing raw materials like copper or rubber for use in producing ammunition and armored vehicles.

“We don't work with any companies that have international sanctions,” Alajlan said in an interview. Suggestions to the contrary “are all rumors, inaccurate and illogicaland unrealistic,” he said. He later said none of his companies are involved in any negotiations or dealings with any companies under sanction.

The State Department declined to comment on investigations. A U.S. official said the Treasury Department is aware of concerns that Alajlan’s companies had dealings with entities under sanctions.

RTX and Scopa signed a memorandum of understanding in 2022 to set up a factory in Saudi Arabia for sophisticated air-defense systems to protect thecountry from drone and missile attacks.

The companies’ plan was to stitch together radars and multiple air-defense systems that could intercept drones and missiles of various sizes that fly at different speeds and altitudes, said Nasr Alghrairi, who was Scopa CEO until he was fired this year.

If information about current U.S. weapons systems that would be used in Scopa’s new weaponry were to fall into Russian or Chinese hands, it could risk being reverse engineered, undermining U.S. defenses.

The proposed joint venture was expected to invest $25 billion in the kingdom and generate $17 billion of sales, Alghrairi said.

RTX’s decision to end talks with Scopa was “rushed, illogical and even irrational, ”Alajlan said. He brought in a Saudi executive to succeed Alghrairi, whose contract wasn't renewed after he failed to achieve performance targets, Alajlan said.

Alghrairi denied that and said he had expanded the business rapidly. He said he was fired for raising concerns about the Russia and China business.

RTX and the Saudi government didn't respond to requests for comment.

In his drive to create a local arms-manufacturing industry, the Saudi crown prince set up a defense company under the Saudi sovereign-wealth fund to do weapons and aerospace deals with Western manufacturers and encouraged theprivatesector to get involved. Scopa and Alajlan’s other companies aren't state-owned but are generally expected to fall in line with the kingdom’s foreign policy. Alajlan said the government is their only customer.

To run Scopa, Alajlan hired Alghrairi, a U.S. Navy veteran who set up a small government service contractor in Florida with his wife but had never worked for a major defense manufacturer.

Alghrairi used his military connections to establish an advisory board for Scopa led by retired Army Lt. Gen. Michael Barbero and other U.S. military veterans. They began lining up partnerships with RTX and dozens of other arms manufacturers in the U.S. and Europe.

Scopa envisioned manufacturing significant portions of NATO weaponry inside Saudi Arabia, which meant gaining access to technology that is tightly guarded by the International Traffic in Arms Regulations, a set of Cold War-era American rules that control U.S. défense-equipment exports.

Interviews with people familiar with the matter and documents reviewed byThe WallStreet Journal indicate that two of his other companies made efforts to engage with Chinese, Russian and Belarusian entities under sanctions. It was those contacts that spooked Scopa’s board and potential Western partners like RTX, some of the people said.

Barbero said Scopa’s U.S. advisershad worked in good-faith and delivered potential partnerships with Western defense firms. “However, the situation on the ground made it untenable for us to continue to work with Scopa and left us with no choice other than to resign.”