U.S. Foreign Military Sales Bounce Back.

• Author: Lee, Nooree

In January, the Defense Security Cooperation Agency announced the U.S. arms transfer figures for fiscal year 2022, showing that U.S. defense sales to foreign militaries bounced back after two years of decline. Arms transfers through the Foreign Military Sales program increased year-over-year by 49 percent up to $51.9 billion, and Direct Commercial Sales transactions increased by the same percentage up to $153.7 billion.

As experienced industry participants know, FMS and DCS are alternative legal frameworks for the sale of U.S. defense materiel or services to foreign governments. The core distinction between these frameworks is the role of the U.S. government. In FMS transactions, the U.S. government is a contractual party acting as an intermediary between the contractor and the foreign government. In contrast, DCS transactions are directly between the contractor and the foreign government.

These enormous single-year jumps in both FMS and DCS arms transfers reverse declining sales during the two preceding fiscal years, including a precipitous decline in 2021, and arms transfers have now returned to nearly match 2019 levels. Unsurprisingly, Russia's unprovoked invasion of Ukraine was a major driver, as Ukraine's FMS transactions increased more than fivefold, and several European countries near Russia significantly increased their FMS purchases, as seen in the table.

In total, these six countries accounted for $24.7 billion in 2022, after accounting for only $635 million in FMS transfers in 2021. Naturally, some of the arms transfers contributing to these totals were long planned and unrelated to recent geopolitical events, but these significant increases across several countries suggest that the invasion of Ukraine had a material impact on the FMS program, and this is a trend that looks likely to continue through 2023.

The increased demand from these six countries helped offset predictable declines elsewhere. At this time last year, we anticipated sales declines for certain countries in 2022. For example, the 2021 figures included approximately $1.26 billion in sales to Afghanistan, an amount that dropped to zero in 2022 given the regime change. We also anticipated regression in sales to France and Germany given high-value nonrecurring transactions in 2021 for France's naval carrier program and Germany's anti-submarine warfare program. Indeed, sales to France dropped from $1.5 billion to $665 million, and sales to Germany dropped from $1.1...