(An earlier version of this story ran online.)
In the weeks since Egypt’s military deposed President Mohamed Mursi on July 3, the Obama administration has struggled to find the right response—and the right words. President Obama has been careful not to label what happened a coup, in part because doing so would put an end to the $1.3 billion in military aid the U.S. gives Egypt each year. (Washington cannot give aid to countries whose elected head of state is ousted by the military.) On July 25, the administration declared that the U.S. is not legally required to determine if Mursi’s ouster counts as a coup, which conveniently allows aid to keep flowing to one of the few allies in the region. But in a decision that acknowledges the chaos and violence in Egypt—Mursi remains in military custody and at least 72 protesters were reported killed during riots on July 27—the Pentagon is delaying the long-planned delivery of four F-16 fighter jets to the Egyptian military.
There’s growing pressure from some in Congress to reduce or eliminate the flow of military hardware from the U.S. to Egypt. That wouldn’t be easy, or cheap. The aid doesn’t go directly to Egypt. Instead, the Pentagon signs contracts with U.S. companies to deliver equipment the Egyptians request. As a result, the U.S., not Egypt, is liable for unpaid funds if a contract is broken. The four delayed F-16s are part of a $2.5 billion deal signed with Lockheed Martin (LMT) in 2010 to deliver a total of 20 planes by December 2014. Lockheed says that through June 30 it had delivered 14 of them. According to data compiled by Bloomberg, the U.S. has yet to pay $1.7 billion of the contract. Were the U.S. to cut aid to Egypt, it would have to negotiate a termination penalty with Lockheed, reimbursing the company for costs it incurred plus reasonable profit. The Pentagon won’t say how much that would come to.
The same terms would likely apply to a $395 million contract General Dynamics (GD) was awarded in 2011 to deliver 125 M1A1 Abrams tank kits to Egypt. The agreement runs through January 2016. As of April, General Dynamics had received only $176 million. The U.S. could potentially be on the hook for as much as $220 million if the contract has to be terminated. A further ripple effect: The hours of workers at General Dynamics’ plant in Lima, Ohio, where the tanks are built, might be cut, and some jobs could be lost.
The U.S. has provided military aid to Egypt since 1979 under the Foreign Military Financing program. This year a total of $5.4 billion will be dispersed to more than 70 countries including Israel, Pakistan, and Colombia. At the start of each fiscal year, Egypt’s FMF funds are deposited into an interest-bearing account at the Federal Reserve Bank of New York. Although the funds must be spent in full every year, Egypt’s military is allowed to negotiate major arms purchases spanning multiple years’ payments. Israel is the only other country given such flexibility.
There are ways the U.S. could avoid paying the termination fees. Gordon Adams, who oversaw all FMF programs as a White House Office of Management and Budget official in the Clinton administration, says the government could simply take delivery of the equipment instead of canceling the contracts. In the case of the F-16s, the U.S. Air Force could absorb them, or use them for parts. Another option would be to find another buyer, likely another FMF country such as Pakistan or Israel.
Even if the U.S. finds a way around the fees, canceling the contracts would further strain Washington’s tenuous bond with Cairo. “The last bit of leverage we have is through our relationship with the military,” says Dov Zakheim, who served as under secretary of Defense under President George W. Bush. “If we terminate those contracts, the resentment that would trigger in the military would be irreversible. They would never forgive us.” This, more than the money, may explain Obama’s circumlocutions about what was plainly a coup. “It’s obvious why the Obama administration is handling this so carefully,” says Adams. “When the only leverage you have left is hanging by a thread, you don’t reach for the scissors.”