Israeli defense exports rose by 10% last year to a record USD12.5bn, capping a rise of more than 70% since 2019. The country was the world’s tenth-largest arms exporter in 2018-22, with a 2.3% market share.
Key growth drivers have been:
• The Ukraine war, which has spurred European re-armament while depleting inventories due to aid-in-kind to Ukraine.
• The 2020 “Abraham Accords,” which opened new Gulf markets, notably for systems to counter drone attacks by Iranian proxies.
• China’s growing assertiveness over Taiwan and the South China Sea causing Asian neighbors to raise their defensive postures.
The Israeli government has prioritized defense exports, reducing red tape and helping companies develop new markets. Government-to-government deals grew nearly 16-fold to USD4bn over the five years to 2022.
Political Drivers
Israel spends heavily on arms, but much of its procurement budget is spent in the United States with U.S. aid money. Exports enable its arms makers to cover R&D costs and achieve economies of scale.
In addition, arms or cybersecurity exports often foster covert relations with hostile countries, especially in the Muslim world. They can pave the way for defense and intelligence cooperation and even full diplomatic relations, as with Sri Lanka in the 1980s, India in 1992 and, more recently, the Abraham Accords.
However, covert ties have led Israel to sell weapons to regimes with poor human rights records. Formal controls on arms exports, imposed only in 2007, are often overridden by geopolitical concerns, for instance, in the cases of Azerbaijan and Myanmar.
High-Tech Focus
Israeli arms-makers have an edge over rivals because all their systems have been recently battle-tested. The Ukraine war’s focus on drones, missiles and multi-layer air defense systems plays to Israeli strengths.
Last year, the defense industry’s biggest export categories were drone systems (about one-quarter of the total), followed by missiles and air defenses. Intelligence, information and cybersecurity tools are a growing segment.
New Gulf Markets
Following the 2020 Abraham Accords, Israeli arms exports to the United Arab Emirates (UAE), Bahrain and Morocco grew from nothing to about USD3bn last year—nearly one-quarter of total defense exports.
These deals are not public, but the UAE is believed to be the largest buyer, deploying Israel’s Barak and Spyder air defense systems. The former is a joint development between India and state-owned Israel Aerospace Industries (IAI), which was also involved in privately held Rafael Advanced Defense Systems’ (RADS) development of the latter.
Further sales are likely as Gulf countries seek to reduce their reliance on U.S. arms. A potential U.S.-backed Israeli-Saudi normalization deal could also open a huge new market.
Nonetheless, Israel may be warier in selling arms to Saudi Arabia. Unlike the UAE, it has large armed forces that could pose a threat in case of radical governmental change.
European Anxieties
European military spending rose after Russia’s 2014 occupation of Crimea and accelerated following the Ukraine invasion. Last year, Central and Western European governments spent USD345bn, more in real terms than in the final year of the Cold War.
The growth is set to continue, with Germany allocating an additional EUR100bn (USD105bn) to modernize its armed forces. On September 28, Berlin signed Israel’s largest-ever arms sale, a USD3.5bn deal to buy Israel’s Arrow-3 anti-missile system, jointly manufactured by IAI and Boeing.
A USD345mn sale to Finland of the David’s Sling defense system, jointly developed by RADS and Raytheon, was also approved in August.
In the past, Israel lost contracts in Europe due to hostile public opinion, but this pressure has faded. In March, Denmark awarded a contract to an Israeli firm that it had felt the need to shun in 2015.
Even so, Israel’s current far-right government has the potential to implement controversial policies—for instance, on gender or the Palestinian issue—that could refocus European activists.
In March, Israel approved the sale of a drone defense system to Ukraine, the first to the country since the war began. Israel has generally rebuffed Kyiv’s requests for arms to avoid friction with Moscow, which retains a military presence in neighboring Syria.
China Concerns
Asia was Israel’s largest regional market in 2022, at 30% of defense exports. That probably understates the region’s importance since India, a major market, buys most of its weapons through locally based joint ventures.
Exports to Asia are also poised to grow. Japan aims to double defense spending to 2% of GDP by 2027, India is increasing procurement, and ASEAN countries have slated significant rises as regional concerns over China increase.
Isreal will step into the gap left by Russia, long the leading arms supplier to India and the ASEAN countries, but now hobbled by sanctions and supply constraints.
Cyber Controversies
A handful of companies led by the NSO Group (known for its Pegasus spyware) offer sophisticated and often unique hacking technology.
However, the sector has been dogged by controversy, as Israel allowed sales to countries that use the technology to spy on government opponents. The United States has blacklisted NSO, and Israel tightened its controls on cyber exports.
That has caused NSO and others to downsize, close or move (for instance, to Cyprus). Some Israeli engineers have reportedly been hired by foreign companies, notably the UAE’s DarkMatter, which may cause Israel to lose its technological edge in the vibrant global surveillance market.
