The Phalcons Didn't Fly

Vagueness, uncertainty and even an attempt at deception were all part of Israel's doomed bid to sell a surveillance plane to China.

On Saturday, July 1, 2000, former prime minister Ehud Barak met with the director-general of the Ministry of Defense (MOD), reserve major general Amos Yaron, and with the director of the diplomatic-security coordination section in his own bureau, reserve major general Danny Yatom. The meeting was held at the home of Yatom, who lives near Barak in Kochav Yair, 10 days before the Camp David summit. The three men discussed ways to avoid friction with the United States over its demand that Israel cancel the sale of the Phalcon early-warning surveillance aircraft to the Chinese air force, even though a contract had already been signed with the Chinese government.

Barak had four memoranda written by deputy defense minister Ephraim Sneh, who described the affair as the most severe crisis in the history of Israel's relations with the United States. The Foreign Ministry and the National Security Council also rendered anxious prognoses of the transaction's impact on relations with the U.S. The recommendation was to cancel the sale without delay.

One of the more vociferous opponents of the transaction was Ora Namir, at the time Israel's ambassador to China. Last week, she accused Barak of canceling the deal in order to obtain president Bill Clinton's consent to hold the Camp David summit on July 11. In retrospect, however, the linkage is a bit problematic.

At Yatom's house, Amos Yaron appealed to Barak, saying, "In any event, you're going to Camp David. So before the summit begins, tell president Clinton that this is the decision. At the same time, I'll go to China and explain to them what happened here."

The three men agreed on two possible options, which would dictate the future of the advanced surveillance plane. One held that Israel Aircraft would complete the installation of radar systems on the Russian transport plane. The plane would remain in Israel and would be delivered at a later date to China, with U.S. agreement. The Americans rejected this. The second option, which the U.S. strongly insisted on, was outright cancellation of the sale. Yaron would leave for Beijing with a personal letter from Barak to President Jiang Zemin, in which the Israeli prime minister explained the reasons for the cancellation.

There was one subject that the three men preferred to disregard. At the July 1 meeting, they did not consider the question of how to ensure America's pledge to compensate Israel in the event that the Chinese government decided to sue Israel for breach of contract. And now, Israel indeed has to contend with a Chinese demand for $1.2 billion in compensation.

Crisis with China

Vagueness, uncertainty, and even an attempt at deception all played a role in the affair over the years, until the forced cancellation of the billion-dollar deal with China. The adventure is liable to cost Israel dearly; not only in the scope of the compensation but also in its future relationship with China. In one of his memos to Barak, Sneh cautioned: "The Chinese are slow to exact revenge, but when it comes, it is harsh."

Jerusalem is now weighing the appropriate timing for dispatching Foreign Minister Shimon Peres to Beijing in an attempt to settle the crisis with China. As prime minister in mid-1999, Peres signed the guarantee to the Chinese government, agreeing to compensate the buyer if Israel did not comply with the stipulations of the contract.

Israel found itself stuck between its standing as a protege and unofficial ally of the world's largest superpower and the opportunity to build a partnership - even if only on the basis of military interests - with the second largest superpower. At the Kochav Yair meeting, the three men concluded that there was no chance of persuading the U.S. Administration that the sale of the surveillance planes would not harm American interests - or of soothing American public opinion either. It was clear to those present that the defense relationship developing between Israel and China represented a strategic threat to the United States.

In the past, Israeli defense industries had always developed military systems for the IDF, for battling Soviet-made planes, warships and tanks. But when the countries considered threats to Israel (including Egypt) started to arm themselves with American airplanes, ships and tanks, Israeli defense industries began to develop sophisticated countermeasures that are effective against U.S. weapons. This was the case with the Phalcon. The Americans claimed that the surveillance aircraft, considered superior to Boeing's AWACS, would give China an advantage over the U.S. and its protege Taiwan in the South China Sea.

Discussions on the construction of surveillance aircraft for China began under a heavy shroud of secrecy in the late 1980s, but only picked up after the establishment of diplomatic relations between Israel and China on February 27, 1992. On a visit to Beijing in late 1993, Yitzhak Rabin discussed the matter with Chinese president Jiang Zemin. Israel was not the only country expressing interest in supplying this type of system to China. Russia and Britain submitted proposals to the Chinese, as well.

Rabin asked the then director-general of the MOD, reserve major general David Ivry, to inform the Americans on the contacts with China. "Since 1987, we have had an agreement with the Americans that we will report to them on all of our arms deals with China," says Ivry, now Israel's ambassador to the U.S. "That is when we informed the Americans that there was competition over the sale of surveillance aircraft to the Chinese air force, and that we were going up against the English. Since it was an international competition, there was no reason for us not to join in."

Israel proposed that the radar system be installed on an American Boeing jet. The Chinese were enthusiastic about the Israeli Phalcon, but didn't want the American plane. They requested that the airborne Israeli radar system be installed on a Russian transport plane. And that is where negotiations stalled. Perhaps because of its own disappointment in losing the competition, Russia refused to sell the Ilyushin aircraft to Israel Aircraft Industries.

About a year and a half later, shortly before Rabin visited Russia, he was approached by the chairman of the board of Israel Aircraft Industries (IAI), reserve lieutenant general Zvi Zur, and company CEO Moshe Keret. They proposed that he bring the request to buy the Russian transport plane directly to Russian President Boris Yeltsin. In fact, during Rabin's September 1995 trip to Moscow, Yeltsin agreed in principle to the deal.

Yatom, then Rabin's military secretary, now says: "Rabin asked Ivry if the Americans were in the picture. Ivry reported to the Pentagon. Even Secretary of State Warren Christopher knew. If I'm not mistaken, President Clinton was also in on it. And even the chairman of the National Security Agency, Sandy Berger, knew. The only non-negotiable American stipulation: That the plane not contain any American item, and that the Phalcon would not be based on American technology." For the first time, the door opened to security cooperation between Israel, Russia and China.

In a trap

The next move to advancing the deal took place six months later. Shimon Peres, who was appointed as prime minister and defense minister after Rabin's assassination, signed a government guarantee to China in case of a breach of contract. But Russia still did not supply the plane.

In March 1997, prime minister Benjamin Netanyahu paid a first official visit to Russia. Accompanying him was the chairman of the IAI board of directors, reserve major general Avigdor Ben-Gal. This time, the fundamental consent that Yeltsin gave Rabin was translated into a presidential order. This was the go-ahead for the deal with China. Nevertheless, reporters accompanying the Netanyahu entourage were misled. They were told the two leaders had agreed to proceed with arms deals between Israel and Russia.

The Chinese government insisted on the secretiveness of the transaction. However, the secrecy became insignificant due to Israel's requirement to report to the American administration. The need to inform the Americans made Israel a pawn in their hands. Since 1994, there has been a steady sprinkling of tendentious leaks about the sale in the U.S. Meanwhile, Israel - due to its commitment to China - remained silent.

To extricate itself from the trap, Israel should have adopted a policy of transparency. This would have prevented Congress from claiming five years later that the sale was carried out behind America's back. The Israeli Foreign Ministry also suffered from poor foresight. Ministry policymakers did not weigh in with any criticism of the sale until 1999, after the storm erupted in Congress. They said nothing in 1994, when they were fully informed about the sale.

The project, code-named "Ring," picked up steam after Netanyahu's visit to Moscow. In the wake of the presidential order that Netanyahu had pried out of Yeltsin, director-general Keret negotiated the purchase of the Ilyushin for approximately $45 million. An IAI engineering team subsequently paid a visit to the Russian factory, to make the required changes in the technical specifications of the Ilyushin before its delivery to Israel, where the radar systems would be installed. Aside from purchase of the Russian jet, China would pay IAI $250 million for the surveillance plane, and had the option to purchase another three planes.

At this point, however, an argument broke out between Israel and the U.S., though it was still low-key. "We had a serious argument with the Americans about building the surveillance plane for China," says reserve major general Ilan Biran, who had replaced Ivry as MOD director-general, "But as long as I was director-general of the ministry, it was under control." The MOD deputy director general for foreign relations, reserve brigadier general Yekutiel Mor, stresses that the ministry also reported on the Chinese project at the semi-annual strategic meetings held by Israeli and American delegations.

The subject was also discussed in two other forums. One was at the level of the special relationship that had developed between defense minister Yitzhak Mordechai and U.S. Defense Secretary William Cohen. Mordechai, say persons close to him, insisted on complete transparency when it came to the Phalcon in his dealings with Cohen.

The second level was between Netanyahu and Clinton. Netanyahu's military secretary at the time, Major General Ze'ev Livne (who went on to become the IDF attache in the U.S.) says: "After the Moscow visit, Netanyahu informed Clinton that we were going ahead on the project with China. Nobody said: Don't do it. The Americans were not happy, but neither did they express any strong objections. To me, it seemed that the American side was sleeping on the job. It was a passiveness that I can't explain."

In May 1998, Netanyahu made a state visit to China. The Chinese were given information about the work in progress on the Ilyushin, which was still in Russia. It was believed that the plane would be arriving in Israel for further work in 1999. The next military secretary of the prime minister, reserve brigadier general Dr. Shimon Shapira, says that throughout this period, "The Phalcon issue proceeded smoothly and there was no American opposition. The MOD kept the subject very quiet, and did not present it as a problem that might require the involvement of the prime minister."

In January 1999, the Israeli defense establishment suffered a shock. Netanyahu fired Yitzhak Mordechai and appointed Moshe Arens as defense minister in his place. Simultaneously, Netanyahu set up the National Security Council and appointed Ivry as its chairman. Arens learned of the Chinese deal in the course of a visit to the Elta factory in Ashdod, but he was not asked to get involved. "As defense minister, I met secretary of defense William Cohen twice," says Arens. "He visited Israel in April and I later visited him in the U.S. Cohen did not even hint, not once, that we had any problem with them due to the deal with the Chinese."

Congressional criticism

In June 1999, Ehud Barak was elected prime minister, and he appointed himself as defense minister. Amos Yaron replaced Biran as director general of the MOD. The crisis with the U.S. over the Phalcon became public knowledge a few months later.

Sources in the MOD believe that the crisis was set off by a Ha'aretz report that the Ilyushin, with an antenna on its top, had arrived from Russia and landed at Ben-Gurion Airport in late October 1999, and that after additional work and installation of radar systems, it would be delivered to China. However, the Israeli Foreign Ministry refutes this version. As early as August 1999, Tova Herzl, then the delegate for congressional affairs at the Israeli embassy in Washington, reported that there was harsh criticism by members of the House of Representatives regarding the Phalcon sale.

On October 19, Chinese defense minister Chi Haotian arrived in Israel for a first visit. On October 24, The New York Times' influential columnist A. M. Rosenthal vocally condemned the visit to Israel of "one of the chief murderers in Tiananmen Square," as well as the Ilyushin planes that Israel would be outfitting as surveillance aircraft. They are clearly much more than light arms, Rosenthal wrote. Criticism in the U.S. media grew more extreme after the November 1999 visit to Israel of Li Peng, number two in the Chinese hierarchy, who also inspected the new surveillance plane being built for the Chinese air force.

Over the next 12 months, Barak was torn between the uncompromising American pressure exerted by the Pentagon and Congress, and his concerns about the long-term repercussions to Israel's image as a result of breaching the contract with China. And there were additional sub-plots, as well, including the unstated competition between the Israeli and U.S. defense industries, and the concern that Israel's warming relations with China would give its industries a big advantage in the arms markets of the Far East.

Relations between China and Israel peaked with the exceptional six-day visit to Israel by President Jiang Zemin in April 2000. This blossoming of China-Israel ties was occurring at the same time as relations between China and the U.S. were notably deteriorating, due to tension on the Taiwan issue and the strengthening of the Republicans at the expense of the Democrats. Against the background of China's identification as the next major enemy of the U.S. and the upcoming American elections, these irreconcilable trends generated - from mid-1999 - much suspicion of Israel's motives.

In the summer of that year, AIPAC, the powerful Jewish lobby, reported on opposition in Congress to the defense relationship between China and Israel. Ambassador Zalman Shoval informed the Foreign Ministry. Cabinet secretary Isaac Herzog also heard about it in meetings he held in Washington. In January 2000, Ivry replaced Shoval as ambassador in Washington. However, despite Ivry's close links with the administration, Barak preferred that Yaron be in charge of contacts with the Pentagon, with the aim of preventing cancellation of the Phalcon sale.

Lacking diplomatic experience and having failed to foster relationships in Congress, Barak was hard pressed to find allies in the ensuing struggle. It wasn't long before voices in Congress were calling for cutbacks in U.S. defense aid to Israel to be commensurate with the amount that Israel would receive from China if the sale went through. The campaign against the Phalcon transaction was spearheaded by the Republican secretary of defense, Cohen.

"Barak's mistake was that he tried to explain to Cohen why, from the Israeli perspective, we had concluded that the Phalcon did not constitute such a substantial threat that the U.S. wouldn't be able to overcome it," says a source close to Barak. "Cohen was obstinate, at which point Ehud said to him, `Then I'll talk about it with Clinton.'" In fact, when Barak talked it over with the president, he got the impression that Clinton would find a solution. Clinton told Barak something along these lines: "Let me take care of it. I'll talk with Cohen and with the defense establishment."

Recalls Danny Yatom: "We genuinely left the conversations with Clinton with the sense that he was going to find a solution to the Phalcon problem, but Clinton wasn't capable of standing up to Congress, and Cohen, according to one of the Defense Ministry versions, was hurt by Barak's attempt to bypass him, and hardened his stance."

Some people close to Barak and in the Foreign Ministry interpreted the ensuing situation as an indication of weakness and indecisiveness. Unlike the Foreign Ministry, which called for an immediate cancellation the deal so as to avoid a crisis in relations with the U.S., Yaron took the position that it should be pushed to the limit. A former IDF attache in Washington, Yaron argued that Israel needn't panic from the Pentagon's position. "The Americans have known for five years. True, they didn't say `it's authorized,' but neither did they say no. So there are two options. Immediate capitulation or waging a war and winning it."

As an example, Yaron told the story of the sale of the Green Pine radar system to India. "William Cohen was stubborn about not approving its sale. Then we tried to explain one more time, and succeeded. You can always raise your hands and surrender." Sneh and Yatom implored Barak to inform the Americans that Israel had decided to suspend the sale. But Barak believed in Yaron.

At the time of the visit to Israel by the Chinese president, the question arose as to how to describe the conflict with U.S. Ambassador Namir, who had woven a special relationship of trust with the Chinese leadership and was the only one in favor of a direct, no-nonsense approach. She told Barak and Jiang Zemin that Israel could not afford a conflict with the U.S. There were two aspects to Israel's opposition to selling the surveillance planes to China. One, Israel is an ally of the U.S. Two, Israel cannot be certain that the technology it would sell to China would not be leaked to hostile countries. Barak used a different approach with the Chinese president. "Jiang Zemin was told by Ehud that there were problems with the Americans, but he was given to understand that Ehud would resolve them," says a Barak aide.

All or nothing

By the middle of 2000, the Phalcon transaction was dead in the water. The unilateral withdrawal from South Lebanon, which provided the go-ahead for an accelerated diplomatic process and which led to a slimmer government coalition, left Barak with almost no breathing room. In preparing for the Camp David summit and the expected signing of an agreement, both Clinton and Barak analyzed their political standing. Both suffered from a similar problem. They had lost their parliamentary majority. Barak had another problem. The U.S. Congress did not support him, either.

When they discussed the anticipated expenses in the event of a diplomatic settlement, Clinton told Barak: "If there is going to be a settlement with the Palestinians, it will cost a lot of money. Compensation to settlers who will have to leave their homes. Money to deal with the refugee problem. I will need Congress, but in the atmosphere that has developed because of the Phalcon, I will have a hard time gaining the support of Congress." The conversation led to the meeting held in Yatom's home on July 1.

In the diplomatic process, Barak had adopted an all-or-nothing approach. It was going to be a fight to the finish in Congress against cancellation of the Phalcon sale. Barak had hoped it would be a win-win situation for him: if there was a settlement with the Palestinians, there would also be money to compensate the Chinese. The hope proved vain. Israel was forced to cancel the sale without the U.S. feeling any guilt or obligation to take part in expenses. In the end, Israel will have to pay out the compensation to China from its own depleted coffers.