The Saudi Arabian defense minister, Prince Sultan, announced today that the Cairo-based Arab arms industry is to be shut down and liquidated because of Egypt's peace treaty with Israel.
This is the heaviest blow struck at Egypt so far by the Arabs, who are imposing an economic and political boycott on Egypt because of President Anwar Sadat's acceptance of the treaty. Egypt stands to lose up to 15,000 jobs, a major source of imported technology and a source of weapons Sadat had been counting on to supply vitally needed equipment to his armed forces.
The shutdown of the arms industry might also be an economic blow to Britain and France, which have signed or are negotiating multimillion-dollar contracts for coproduction of military equipment.
The dissolution of the arms industry proves, if further proof were needed, that the Arabs were serious when they agreed at a meeting last March in Baghdad to punish Sadat economically and politically.
Egypt has been expelled or suspended from the Arab League and its subsidiary organization, the Islamic Conference and its regional affiliates and several Arab financial organizations and regional banks. Arab investment capital and loan money are drying up and even the Arab tourists who flock to Egypt every summer to escape the heat of the Gulf apparently are staying away this year.
Sadat said over the weekend that he no longer expects Saudi Arabia to come forward with the $525 million it had pledged to finance Egypt's purchase of 50 F5E jet fighters from the United States.
Reports published last week, still unconfirmed but believed by diplomats here to be true, said Kuwait is planning to pull a billion dollars out of Egyptian banks, although the Egyptians are expected to freeze the accounts if the Kuwaitis try. In addition, the Arab Civil Aviation Organization has called on its members to close their airspace to Egyptian planes and pull their national airlines out of Cairo.
While it is still too soon to calculate the overall impact of this on the Egyptian economy, it clearly goes beyond anything Sadat expected when he signed the treaty. He has been saying that it will all blow over by the end of the year, but the evidence so far is that the Arab squeeze on Egypt is only beginning.
In an official announcement carried by the Saudi News Agency, Sultan said the Arab Industrialization Organization would go out of existence "because the signing of a peace treaty between Egypt and Israel clashes with the purpose of establishing the company," according to reports from Riyadh. He said the organization's executives had been instructed to cease operations immediately and arrange to liquidate the $1.4 billion corporation by July 1.
The organization was set up in 1975 by Saudi Arabia, Qatar, the United Arab Emirates and Egypt to end Arab dependence on imported weapons, acquire Western military technology and aid the Egyptian economy. The theory was that the cash-rich, manpower-short oil states would provide money and Egyptians would provide labor and factories.
Much of the money was used to refurbish and reequip existing arms factories in the Cairo area and to build a new plant on the edge of the city to assemble jeeps.
While the factories were being readied, the organization negotiated with American, British and French suppliers to coproduce equipment, with the contracts generally providing that Arab technicians would be trained by their Western counterparts. The main customer was to be the Egyptian armed forces, but executives anticipated sales to other countries as well.
In January, the organization and American Motors Co. opened the jeep plant. Their jointly owned operation was to produce about 10,000 jeeps a year, all of which could be fitted with the British Swingfire antitank missile, which the Arab arms factories had been scheduled to start producing later this year under another contract.
With agreements also in hand to assemble Lynx helicopters in partnership with Westland and Rolls-Royce of Britain and for establishment in Saudi Arabia of factories to produce radar and electronic equipment in association with Thomson-CSF of France, the organization seemed ready to become an important factor in Arab industry. But the seeds of trouble had already been planted before the first jeep rolled off the line.
Egypt's Gulf partners were troubled by the Camp David agreements last September, which presaged the peace treaty. Then Sadat, without explanation, recalled the organization's Egyptian chairman, Ashraf Marwan, who had become its driving force.
Marwan's ouster, without notice to the Saudis, undermined their confidence. Military sources here say that once Marwan left, the organization began to drift.Obstacles to further contracts were raised and the future looked uncertain.
Today's announcement left unclear whether the British firms, reportedly protected by penalty clauses in their contacts, will be paid, and by whom. It left unsettled the proposed electronic weapon factories to be built in Saudi Arabia by the French, who were reportedly accusing the United States of undercutting them in an effort to corner the Arab arms market. And it did not make clear what would happen if the Egyptians tried to keep the jeep plant running without further input of capital, or whether there is enough cash in Egyptian banks so that the Cairo government could seize it to protect its new industries.
It seemed unlikely that the three Gulf states would want to renegotiate the contracts on their own, because they lack manpower to run the factories they would need. In any case, unlike Egypt, they have the money to buy whatever arms they need on the world market.
Officials at the organization's modern, lavishly equipped headquarters here said they knew no more of what was happening than was in the news reports from Riyadh and therefore could not comment. There was no official reaction from the Egyptian government, which had feared such a development but continued to hope that such a definitive step would not be taken.