Chinese Demand $2 Billion From Israel For Spy Plane Deal

By Julie Stahl | July 7, 2008 | 8:10 PM EDT

Jerusalem ( - China is demanding that Israel pay as much as $2 billion in compensation for breaking a deal to sell Beijing an advanced airborne radar system, after intense pressure from the United States, according to reports on Monday.

Israel cancelled the quarter of a billion dollar deal 17 months ago because Washington feared the sale of the PHALCON surveillance system to China could potentially pose a strategic threat to U.S. forces in the Straights of Taiwan.

Press reports on Monday suggested that China was demanding $2 billion in compensation, although there was no official confirmation of the amount.

The Prime Minister's office and Foreign Ministry both declined to comment on the reports but the Defense Ministry issued a brief statement.

"Israel has recently begun deliberations with the Government of China in order to 'clear up any misunderstandings,' and remove the PHALCON issue from the bilateral agenda through mutual understanding and agreement between the two countries," a Defense Ministry spokeswoman said in a statement.

"China, for its part, has indeed claimed monetary compensation, the range and amount of which have yet to be finalized," she said.

"Israel, for its part, attributes great importance to its relations with China, and will do all it can to maintain, and expand, them," she added.

Chinese Embassy spokesman in Tel Aviv Qianjin Qi confirmed by telephone on Monday that the cancellation of the PHALCON deal had indeed disrupted Israeli-Chinese relations.

"The PHALCON deal has become a problem and an obstacle in bilateral relations between Israel and China," Qi said. "The Chinese think that the Israeli government should take responsibility since it blocked the deal," he added.

Both sides are carrying on negotiations but until now they have not produced any results, he said. "We hope to resolve the problem as soon as possible."

Recently, Defense Ministry Director General Amos Yaron and Yitzhak Ben Yisrael, head of development department at RAPHAEL, Israel's Authority for the Development of Weapons, represented Israel in the first round of discussions with the Chinese in Beijing.

Ben Yisrael was quoted in an interview in the Hebrew daily Ha'aretz on Monday as saying he believed Israel would be forced to pay the compensation and that the United States would not help.

"The Chinese are demanding compensation of more than a billion dollars. But when we spoke with the Americans about [helping us] pay the compensation, they didn't even want to hear [about it]," Ben Yisrael said.

"There is apparently no choice," he added. "The Israeli taxpayer will be the one who will need to pay more than four billion shekels."

Zev Sufott, who was Israel's first ambassador to China, said that the Chinese were obviously "deeply hurt" by the fact that they had made an international commercial deal with Israel and it was cancelled.

Beijing had already made a down payment of between $70-250 million and was to have had an option to purchase several more of the systems later. They will likely want all of that payment returned plus compensation for what they will consider to be "material damage to their military planning," Suffot said.

"It is certainly going to leave its mark on Israeli-Chinese relations," he said.
Nevertheless, he said, "the reality is that the U.S. is much more important to Israel."

Israel and China struck a deal for the advanced surveillance system, to be fitted on a Russian-made plane, in 1996, apparently with Washington's approval. It provided for the option of a possible sale of an additional four planes, which could have netted Israel's defense industry some $1 billion.

However, as the time drew closer for Israel to deliver the plane, Washington sounded the alarm.

The Israeli-Chinese deal created an unprecedented rift between Israel and the U.S. Congress, which feared that the system could eventually be used to track U.S. planes in the Far East if a conflict erupted between Beijing and Washington's ally Taiwan.

Former Israeli Prime Minister Ehud Barak cancelled the deal with China under pressure from former President Bill Clinton at the start of the U.S.-brokered Israeli-Palestinian Authority summit at Camp David in July 2000.

The move angered the Chinese, who politely told the U.S. it should mind its own business.

See earlier story: Barak Pursues Mid-East Peace, Cancels Advanced Radar Deal With China, July 12, 2000.