CLOSING OUT THE ICELAND AIR DEFENSE SYSTEM TRANSFER

C O N F I D E N T I A L REYKJAVIK 000127

SIPDIS

DEPT FOR EUR A/S FRIED, A/PDAS GARBER, EUR/NB, EUR/RPM, PM/RSAT
OSD-P FOR DASD FATA, T. HARVEY, A. WINTERNITZ
HQ USAF FOR SAF/IA
USEUCOM FOR J-5
OSLO FOR ODC, DATT

FROM AMBASSADOR VAN VOORST

E.O. 12958: DECL: 06/30/2018
TAGS: MASS PREL MARR NATO PGOV IC
SUBJECT: CLOSING OUT THE ICELAND AIR DEFENSE SYSTEM TRANSFER

Refs: A) 07 Reykjavik 99
B) Memorandum from USD Edelman to Secretary of the Air Force, 08
May 2007
C) 07 Reykjavik 192
D) 07 Reykjavik 322
E) State 63686

Classified By: Amb. Carol van Voorst for reasons 1.4 (b) and (d).


1. (C) Summary: Twenty-one months after the closure of U.S. Naval
Air Station Keflavik, one major issue remains unresolved: the
ultimate disposition of the residual parts and equipment associated
with the Iceland Air Defense System (IADS). The Government of
Iceland has made the IADS radar system its key contribution to the
defense of their country and NATO, and desperately wants to complete
this transfer as soon as possible. Although the U.S. Air Force has
put together a significant effort to develop a Foreign Military Sales
(FMS) case to allow the transfer, Iceland is still waiting to receive
an authoritative Letter of Offer and Acceptance (LOA). Post greatly
appreciates all efforts but is concerned that any further delay in
providing an LOA will materially undermine our bilateral defense
relationship. We look forward to the promulgation of a final LOA no
later than July 31. End Summary.

Background
--------------


2. (SBU) The NATO-owned Iceland Air Defense System (IADS) is
composed of four radar sites at Iceland's geographic "corners" linked
to a control and reporting center and integrated software support
facility at the former U.S. Naval Air Station Keflavik (NASKEF) site.
The final disposition of U.S.-owned IADS equipment (primarily
"supply point items" or spare parts) was left unresolved during the
2006 NASKEF closure negotiations, though a date of August 16, 2007
was set for the handover of the system to the Government of Iceland.
These items, a large number of which are unique to the IADS system
and cannot be used elsewhere, are essential to the continued
operation of the radars.


3. (C) Discussions regarding the sale or lease of this equipment
through a Foreign Military Sales (FMS) case took place throughout
2007 (Refs A and C). At both working levels and at the Under
Secretary level, the Government of Iceland made it clear that IADS
transfer is of key importance and that an operational and reliable
system is Iceland's single largest contribution to its own defense
and its biggest contribution to NATO.


4. (SBU) In an 8 May 2007 memorandum, Under Secretary of Defense for
Policy Edelman requested that USAF inventory U.S.-owned equipment
vital to continued IADS operation, and develop options for its
transfer to Iceland "minimiz[ing] the cost of such transfers to both
Iceland and the Air Force" (Ref B). Despite serious efforts by OSD,
USAF International Affairs, USAF Europe, EUCOM, and others, USAF was
not able to present an FMS case to Iceland for consideration until
October 2007. The price requested was approximately $5.8 million.
Meanwhile, a contractual arrangement has allowed Iceland necessary
access to these items despite the fact that the August 2007 IADS
transfer date has passed.

Repricing
--------------


5. (SBU) Iceland's Ministry for Foreign Affairs (MFA) raised
concerns in November 2007 that not all items in the case were
actually U.S.-owned and that the price for some items appeared to be
excessive given their age and condition. These concerns generated a
reevaluation of the ownership of all the items as well as a review of
whether the price for this materiel was statutorily allowable.
Initial indications to the Government of Iceland were that some items
were in fact NATO-owned and that the price of the FMS case would most
likely decrease as a result. Nevertheless, upon completion of the
review, DOD informed the Icelandic Embassy in Washington in February
2008 that the price of the FMS case had increased by approximately $2
million to $7.9 million, pending final preparation of a new LOA.
(Note: The entire 2008 defense budget for Iceland is approximately
$20 million. End note.)


6. (SBU) Though our Icelandic counterparts have been gravely
disappointed at the lack of progress in this matter, they have been
patient, noting that they would likely agree to purchase at least
some portion of the items in the FMS case. However, through the
spring and summer, the Icelandic Government has become increasingly
anxious, and representatives have raised the issue at almost every
opportunity (ref E).


7. (C) On 9 June, the Icelandic Embassy in Washington was informed
that the revised LOA would be delayed again due to concerns over
proper pricing. Post understands there is some possibility that this
new review may actually result in a price reduction. MFA reps have
informed us that an LOA, whatever the terms, is long overdue. The
lack of a formal offer undermines their ability to appraise the offer
and make necessary decisions. Additionally, the MFA has asked
whether they should regard the delays and revisions as a
demonstration of the level of the USG's commitment to the broader
defense relationship.

Comment: The Need for Conclusion
--------------


8. (SBU) From the Prime Minister and Foreign Minister down, every
level of the Icelandic Government has made it clear that IADS is the
linchpin of Iceland's security policy. Iceland sees IADS as its
major contribution to facilitate the security operations of greatest
visible importance; i.e., NATO air policing. Although positive about
the U.S.-Iceland defense and security relationship overall, the MFA
and new Iceland Defense Agency nonetheless are frustrated with the
dragged-out IADS FMS process.


9. (C) The longer this process takes, the more we add credence to
the perception that we do not take this NATO Ally's concerns
seriously. The considerable efforts of all of us at EUCOM, OSD,
USAF, State, here in Reykjavik, and elsewhere to build a new defense
relationship after the closure of NASKEF are at risk. An impression
of shabby treatment is taking hold -- an impression that we cannot
allow to remain if we wish Iceland to contribute to NATO in the North
Atlantic neighborhood, Afghanistan, and elsewhere.


10. (SBU) I look forward to the promulgation of the revised LOA and
am hopeful that this matter can be wrapped up by no later than 31
July 2008. Embassy Reykjavik stands ready to assist in any way
possible.


VAN VOORST