Bush, Saudis discuss arms, economy

Saudi King Abdullah bin Abdul Aziz al-Saud, right, embraces President Bush after presenting him with the King Abdul Aziz Order of Merit on Jan. 14, 2008, at the Riyadh Palace in Saudi Arabia.

TEXT OF INTERVIEW

TESS VIGELAND: President Bush flew to Saudi Arabia today on the latest leg of his Middle East tour. He arrived in the Saudi capital bearing gifts, including a multibillion-dollar arms deal intended to counter Iran's military clout. The administration announced plans last year to sell $20 billion worth of U.S. arms to the Saudis and other allies in the Gulf. Saudi Arabia's portion of that includes sophisticated bomb-delivery technology known as JDAMs -- Joint Direct Attack Munitions. Joining us with more on this is our correspondent in London, Stephen Beard. He recently returned from a reporting trip to the region. Hello, Stephen.

STEPHEN BEARD: Hello, Tess.

VIGELAND: So tell us about this deal. We've heard some of the basics. What lies behind it?

BEARD: Well this deal stems from a military assistance agreement that the U.S. signed last year with Saudi Arabia and other Gulf states. It needs Congressional approval and there's been some disquiet in Congress that in this deal there are some high-tech weapons which could be used to target Israel. The White House, however, says this deal is a very important way for the U.S. to beef up the defenses of American allies in the Gulf against the enemy on the opposite side of the Gulf, the ever-resurgent Iran.

VIGELAND: How has the President's anti-Iran message been going down throughout the Gulf? Because, you know Gulf states like Saudi Arabia and the United Arab Emirates have been getting closer actually, politically and economically, to Iran.

BEARD: That's right, and this must indeed irritate the White House, no end. Relations between Iran and its Gulf neighbors have definitely been improving. Last month the Iranians were, for the first time ever, invited to a meeting of the Gulf Cooperation Council. This is the group of six Gulf states, including Saudi Arabia, Kuwait, Untied Arab Emirates, and so on, and they were invited into this closed-door meeting to discuss Iran's suggestion for a free-trade agreement between the Gulf Arab countries and Iran as a way of undermining American influence. Now no decisions have been made on that. The Gulf states certainly don't want to upset the U.S., which is by far their most important ally, but they want to keep Iran sweet too, as it is a major economic and political force in the region, with influence extending well beyond its borders. So these Gulf Arab states are walking a tightrope between the two sides.

VIGELAND: Yeah, really looking to play both sides of that coin, huh?

BEARD: Yeah.

VIGELAND: There is, however, some economic friction between these Gulf states and the U.S. isn't there? I mean we've all been looking and watching the decline of the dollar, and that's been causing some problems.

BEARD: It certainly has, because many of these states, I mean Saudi Arabia, UAE, Amman, Qatar, Bahrain they have pegged their currencies to the dollar. In good times this was a source of stability for them, but as the dollar has declined this has dragged down the value of their currencies. It's made it more expensive for them to import goods, and they really do import big time. They don't make many things in this region so they're very big importers. This has fueled a great deal of inflation in this region, causing a lot of problems. I mean UAE for example, it's got near 10 percent inflation at the moment, so pressure is building to sever that link between these currencies and the dollar, but the fear is that if you get major oil-producing countries like Saudi Arabia severing the link with the U.S. dollar, that could really knock international confidence in the greenback. There could be a dollar route, a huge plunge, possibly tipping the U.S. economy into a pretty steep recession. That really would upset the Americans, so the Saudis are saying no, the dollar link remains for the time being, but it is causing problems.

VIGELAND: Yeah, on top of all the other factors that could be contributing to a possible recession in this country.

BEARD: Indeed.

VIGELAND: Alright, Marketplace's Stephen Beard joining us from London. Thanks so much.

BEARD: Ok, Tess.

About the author

Stephen Beard is the European bureau chief and provides daily coverage of Europe’s business and economic developments for the entire Marketplace portfolio.

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