By Trevor Hunnicutt and Nandita Bose
WASHINGTON (Reuters) - The Biden administration is in talks with Vietnam over an agreement for the largest arms transfer in history between the ex-Cold War adversaries, according to two people familiar with a deal that could irk China and sideline Russia.
A package, which could come together within the next year, could consummate the newly upgraded partnership between Washington and Hanoi with the sale of a fleet of American F-16 fighter jets as the Southeast Asian nation faces tensions with Beijing in the disputed South China Sea (NYSE:SE), one of the people said.
The deal is still in its early stages, with exact terms yet to be worked out, and may not come together. But it was a key topic of Vietnamese-U.S. official talks in Hanoi, New York and Washington over the past month.
Washington is considering structuring special financing terms for the pricey equipment that could help cash-strapped Hanoi steer away from its traditional reliance on lower-cost, Russian-made arms, according to the other source, who declined to be named.
Spokespersons for the White House and Vietnamese foreign ministry did not respond to requests for comment.
"We have a very productive and promising security relationship with the Vietnamese and we do see interesting movement from them in some U.S. systems, in particular anything that can help them better monitor their maritime domain, perhaps transport aircraft and some other platforms," said a U.S. official.
"Part of what we're working on internally as the U.S. government is being creative about how we could try to provide better financing options to Vietnam to get them things that might be really useful to them."
A major U.S.-Vietnam arms deal could aggravate China, Vietnam's larger neighbor, which is wary of Western efforts to box in Beijing. A long-simmering territorial dispute between Vietnam and China is heating up in the South China Sea and explains why Vietnam is looking to build up maritime defenses.
"They are developing asymmetric defensive capabilities, but (want) to do so without triggering a response from China," said Jeffrey Ordaniel, associate professor of international security studies at Tokyo International University and director for maritime security at Pacific Forum International, a think tank. "It is a delicate balancing act."
Ordaniel said Washington should shift funds set aside for financing militaries in the Middle East to the Indo-Pacific region "so partners like Vietnam, the Philippines and Taiwan can afford the weapons they need to resist Beijing."
The Biden administration has said it is trying to balance geopolitical competition with China, including in the Pacific, and responsibly managing the two superpowers' relationship.
Earlier this month, Vietnam upgraded Washington to Hanoi's highest diplomatic status, alongside China and Russia, when U.S. President Joe Biden visited the country.
The diplomatic turnaround marks a sharp pivot nearly a half-century after the end of the Vietnam War.
Since an arms embargo was lifted in 2016, U.S. defense exports to Vietnam have been limited to coast guard ships and trainer aircraft, while Russia has supplied about 80% of the country's arsenal.
Vietnam spends an estimated $2 billion annually in arms imports, and Washington is optimistic that they can shift a share of that budget over the long term to weapons from the United States or its allies and partners, especially South Korea and India.
The cost of U.S. weaponry is a major obstacle, as is training on the equipment, and is among the reasons the country has taken in less than $400 million of American arms over the past decade.
"Vietnamese officials are well aware that they need to spread the wealth," the U.S. official said. "We need to lead the charge in helping Vietnam get what it needs."
Meanwhile, the war in Ukraine has complicated Hanoi's longstanding relationship with Moscow, making supplies and spare parts for Russian-made arms harder to acquire. Nonetheless, Vietnam is also actively in talks with Moscow over a new arms supply deal that could trigger U.S. sanctions, Reuters has reported.