Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

U.S. House to Israelis: No Spy Plane for China

LOD, Israel -- Behind a tarpaulin-covered fence at the far edge of the Israel Aircraft Industries complex at Ben-Gurion International Airport there sits a refurbished Russian transport plane, its saucer-like radar pod temporarily removed for fine-tuning.

Within weeks, company officials say, the pod will be back, the radar switched on, and the distinctive droop-winged jet ready for its final test-flights. The plane, a transformed Ilyushin-76, will be able to monitor air and telecommunications traffic more than 320 kilometers away. The specifications were ordered by the plane's owner, the People's Republic of China.

For Israel Aircraft Industries' president, Moshe Keret, who over the last 15 years has built a virtually bankrupt military contractor into Israel's biggest exporter, the sale was to have been one of his greatest achievements.

But if the Pentagon has its way - and the betting here is that it will - the converted Ilyushin will never reach China, which long ago gave Israel Aircraft the down payment on the $250 million spy plane.

On Thursday, U.S. President Bill Clinton reiterated Washington's concern that China could use the radar system against U.S. forces in the Taiwan Strait. Earlier in the week, the House Appropriations Committee called on Israel to terminate the deal, with many members pledging to cut Israel's aid if it does not.

"We signed a contract," a top official of Israel Aircraft said. "We have their money. Now we say, 'No, sorry?'"

To Keret, 65, the conflict is also a potential business catastrophe, one that he thinks threatens his company's survival.

A threat to Israel Aircraft's future is seen by many Israeli leaders as a threat to the nation, both militarily and economically. The company, founded in 1953, is the centerpiece of a domestic arms and aeronautics industry that Israel considers the key to its defense.

Israel Aircraft is no giant: Its $1 billion in foreign military sales puts it about 30th among major arms sellers abroad, according to independent assessments. Overall sales reached $2 billion last year, two-thirds from military contracts and the rest from commercial aircraft production and maintenance.

With 14,000 skilled workers, Israel Aircraft is by far the country's biggest industrial employer, comparable in U.S. terms to General Motors and General Electric combined. A further 15,000 Israeli jobs are indirectly dependent on the company. And its $1.6 billion in military and commercial sales abroad make it the biggest exporter.

A certain disaster for the company would be any significant erosion of U.S. aid. IAI has been the biggest beneficiary of U.S. rules permitting a quarter of military assistance to be spent in Israel - for purchases of arms produced in this country. Yet Moshe Arens, a three-time former defense minister, whose views are widely shared here, said this week that $2 billion in annual military aid is "not sufficient to make us start accepting U.S. control over defense industry exports."

U.S. officials seem mystified that Israel would jeopardize its critical international alliance by pursuing what appears to be a marginal weapons deal. Last fall, as the China controversy broke, the same Israeli officials who were defending the Phalcon sale were presenting Washington with a $17 billion list of arms they said the country needed to compensate for the then-expected turnover of the Golan Heights to Syria. Now the Israelis are discussing a similar military aid package to safeguard a peace pact with the Palestinians.

"I have tried to explain to Israelis that Americans cannot understand why Israel was refusing to give up $250 million when it was asking the United States for $17 billion," said David Makovsky, who has been an Israeli analyst at the Washington Institute for Near East Policy.

Even seen narrowly, the contract with China is potentially a $2 billion deal, huge by Israel Aircraft standards. Under terms negotiated three years ago, Beijing has options to buy seven more Phalcon-equipped Ilyushins.

Executives say, the cancellation of the contract would be a signal to potential customers that no deal with Israel Aircraft is final, as the United States could effectively veto a promised delivery.

"Better to buy from the Europeans," a gloomy executive said. Or perhaps from the Russians, who supplied destroyers, cruise missiles and other heavy weaponry to the Chinese over the last decade with few protests from Washington.

Or, as others here cynically suggest, from the Americans themselves.

Since the ban by Congress in 1989 on military sales to Beijing, after the crackdown on pro-democracy protests in Tiananmen Square, the White House has issued waivers for some $300 million in exports of satellite and encryption equipment to the country.

Moreover, the United States did not renege on its own deals, Israelis note, fulfilling $36 million in orders placed by China before the ban, including anti-artillery radar systems.

When the company bid for the contract in 1996, Israel officially notified the United States that the Phalcon system did not incorporate protected U.S. technology, a contention the Pentagon has never challenged.

Though U.S. companies were prohibited from selling radar planes to China after June 1989, Israel Aircraft considered this a commercial opportunity. In the first foreign sale of its airborne radar, it sent a Phalcon-equipped Boeing 767 to Chile, which was then prohibited by congressional structures from buying Boeing Awacs surveillance planes. Washington raised no objections, Keret said.

The last time Israel Aircraft tried to buck the Pentagon and its military contractors, Keret painfully recalls, it almost destroyed the company. The IAI's own jet fighter, the Lavi, was envisioned as a successor - and competitor - to the Air Force's F-16. The project was canceled under pressure from Washington in 1987. The move wiped out 5,000 jobs and nearly propelled Israel Aircraft into receivership.