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(S/NF) SUMMARY. The Government of Iraq (GOI) and the
Government of Ukraine (GOU) announced an arms deal for
armored personnel carriers, light transport aircraft, and
helicopter repair. The deal is valued at $560.1 million, but
was announced as a $2.5 billion commitment, with the
additional money based on potential future deals.

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S E C R E T SECTION 01 OF 02 BAGHDAD 003294

NOFORN
SIPDIS

PASS TO PM AND NEA/I/PM

E.O. 12958: DECL: 12/12/2019
TAGS: PARM, PREL, MARR, EFIN, IZ, UP
SUBJECT: IRAQI DEFENSE MINISTRY DEAL WITH UKRAINE RAISES
EYEBROWS, QUESTIONS ABOUT BUDGET REALITIES

Classified By: Acting Political-Military Counselor Walter S. Reid for r
easons 1.4. (b, d)

1. (S/NF) SUMMARY. The Government of Iraq (GOI) and the
Government of Ukraine (GOU) announced an arms deal for
armored personnel carriers, light transport aircraft, and
helicopter repair. The deal is valued at $560.1 million, but
was announced as a $2.5 billion commitment, with the
additional money based on potential future deals. The
Ministry of Defense (MOD) has recently signed agreements and
Letters of Credit with multiple non-US military suppliers,
and there are concerns over both the budgetary effects and
military inter-operability effects these deals will have on
readiness capabilities. Though the GOI has paid a fair share
(in excess of $5.1 billion since 2005) of existing USG
Foreign Military Sales (FMS) cases, there is concern over
their ability to continue to do so in light of both falling
budgets and allocation of resources elsewhere. Multi-National
Security Transition Command - Iraq (MNSTC-I), which tracks
existing FMS cases and advises both the MOD and MOI on the
FMS process and budget, also has concerns about the GOI's
ability to pay for existing cases in light of recently issued
Letters of Credit. END SUMMARY.

2. (S/NF) The GOI and the GOU signed the reported arms deal
on October 22. The deal is for 420 BTR Armored Personnel
Carriers (APCs), six AN-32b light transport planes, and a
small Mi-8T repair package. According to MNSTC-I MOD budget
advisors, the Iraqi Ministry of Defense has already
transferred $99 million for the six AN-32bs and the $3.6
million for the repairs package. The Associated Press has
reported that the deal is worth $2.5 billion, to be carried
out in stages according to Ukrainian Defense officials. The
MOD signed a letter of agreement to purchase 420 BTR APCs for
a total cost of $457.5 million payable over three years ($91
million in 2009, $183 million in 2010, $183 million in 2011).
The Government of Ukraine is hoping that these purchases
will lead to further buys that will account for the remaining
$1.94 billion announced in the deal, but there are no further
commitments at this time from the GOI. No information on
delivery timetables has been announced.

3. (S/NF) According to LTG Barbero, MNSTC-I CG, the MOD has
400 million left in its budget to commit this fiscal year. Of
this amount, at least 100 million is tied up in existing
negotiations. The MOD currently needs to fund the FMS
sub-account of the Development Fund for Iraq (DFI) account at
the Federal Reserve Bank of New York with a minimum of $285
million to implement five FMS cases required to support
future sustainment of already acquired U.S.-manufactured M1
tanks, and an additional $186 million case for sustainment of
a future delivery of six U.S.-manufactured C-130J transport
aircraft. MNSTC-I is currently pressing the GOI to deposit
any end of year unexecuted funds into the DFI account. The
MOD recently signed four lesser rotary and fixed-wing
aircraft sustainment cases in early November with the USG.
Three of these cases were implemented with the amount
remaining in the DFI account, but the fourth (for pilot
training - $30 million) could not be implemented with the
remaining and current balance of $6.8 Million. MOD agreed to
add $25 million by November 15 to implement this case, but as
Qadd $25 million by November 15 to implement this case, but as
yet the funds have not reached the DFI account. (NOTE: The
FMS sub-account of the DFI account also has MOI funds in it.
That balance is $473.6 million but cannot be used to fund MOD
requested cases.) Additionally, there is concern that if the
deal is accurate and the GOI truly intends to spend $2.5
billion, the size of the commitment could endanger the IMF
Stand-By Arrangement with Iraq, since the size of the GOI's
budget will be a pivotal concern to the IMF Executive Board.

4. (S/NF) COMMENT - MOD officials have gone on numerous trips
for potential acquisition of non-U.S. military hardware and
ammunition in recent months. According to MNSTC-I, several
Letters of Credit have been offered from MOD officials but
their current payout status and quantity is unknown.
Including the October 22 Ukrainian deal, the MOD now has
deals with French, Ukrainian, Polish, Serbian and South
Korean government and private manufacturers for equipment to
include training planes, transport aircraft, helicopters and
light vehicles, in addition to ammunition and basic equipment
such as uniforms and supplies. This has raised concerns by
some over the inter-operability of these systems with
existing purchases from the USG. If the Ukrainian deal does
in fact proceed as is, it meets a number of Iraqi needs for
minimum capabilities, but should have been more transparent,

BAGHDAD 00003294 002 OF 002

and there are still concerns over corruption in general with
regards to international military deals for non-U.S. military
hardware outside of FMS. Despite the delays and concerns
above, the GOI has contributed a fair share (in excess of
$5.1 billion since 2005) to existing FMS cases. According to
MNSTC-I numbers, in 2008, the GOI spent $1.62 billion
compared to U.S. Iraq Security Force Funding (ISFF) $125
million toward FMS cases, whereas in 2009, the GOI spent
$437.2 million to U.S. ISFF $400 million due in part to
falling oil prices. END COMMENT.
FORD