That unease was a deciding factor for an advisory board of retired American military officers to resign from the Saudi company, Scopa Defense, the people said. Scopa fired its American chief executive who had raised the sanctions concerns with his company’s owner and U.S. officials. And now other major Western defense companies are reconsidering early-stage agreements primarily because of the concerns around engagement with Russian and Chinese entities, the people said.

The failed talks with RTX, formerly known as Raytheon Technologies, demonstrate a challenge Saudi Arabia faces in pursuing diplomatic and business relationships with China and Russia that Washington says jeopardize U.S. national security. Doing business with sanctioned companies could undermine U.S. efforts to squeeze Russia and China financially and heighten the risks that Western companies would face sanctions themselves. It also raises the specter of Moscow and Beijing obtaining secret U.S. military technology.

The breakdown of RTX-Scopa talks also shows the challenges for countries that want to maintain relationships with both the U.S. and its top global rivals when Washington prefers its partners and allies to take sides.

Saudi Arabia was once firmly in the Western camp, but since Russia’s invasion of Ukraine, it has expanded ties with other powers, managing the oil market in alignment with Moscow and entering discussions with Chinese companies to help build its nascent nuclear program. The Biden administration has said it doesn’t want Saudi links with those countries to stray into military cooperation.

The oil-rich kingdom’s courtship of Russia and China also threatens ambitious plans to build its own military industry after decades as a top global-arms importer. Saudi Arabia’s strategy so far has been to join with defense firms from the U.S. and other North Atlantic Treaty Organization countries, which have sold the Saudis most of their current arsenal of defense systems.

Scopa’s owner, Mohamed Alajlan, chairs the Saudi-Chinese Business Council and is the scion of a prominent Saudi family that has imported Chinese textiles for decades and now operates in many sectors. Scopa, founded in 2021, is the highest-profile private Saudi company set up to support Crown Prince Mohammed bin Salman’s vision for a local arms sector, as the 38-year-old ruler tries to diversify the economy away from oil.

Alajlan denies dealing with Russian companies and says any transactions with Chinese firms are limited to securing raw materials such as copper or rubber for use in producing ammunition and armored vehicles.

“We don’t work with any companies that have international sanctions,” Alajlan said in an interview. Suggestions to the contrary “are all rumors, inaccurate and illogical and unrealistic,” he added. In a subsequent statement, he said none of his companies are involved in any negotiations or dealings with any sanctioned companies.

A State Department spokesperson declined to comment on any ongoing or potential investigations. “We expect all U.S. companies and individuals to do their necessary due diligence and operate in full compliance with all U.S. export control regulations and any applicable sanctions,” the person said.

A U.S. official said the Treasury Department is aware of concerns that Alajlan’s companies had dealings with sanctioned Russian and Chinese entities.

RTX and Scopa signed a memorandum of understanding in 2022 to set up a factory in Saudi Arabia for sophisticated air-defense systems to protect the country from drone and missile attacks.

The companies’ plan was to stitch together radars and multiple air-defense systems that could intercept drones and missiles of various sizes that fly at different speeds and altitudes, said Nasr Alghrairi, who was Scopa CEO until he was fired this year. Called a multi-mission battery, the system was supposed to be able to protect an eight-square-mile area, he said.

If information about current U.S. weapons systems that would be used in Scopa’s new weaponry were to fall into Russian or Chinese hands, it could risk being reverse engineered, undermining U.S. defenses.

The proposed joint venture between RTX and Scopa was expected to invest $25 billion in the kingdom and generate $17 billion of sales, said Alghrairi.

RTX’s decision to end talks with Scopa was “rushed, illogical and even irrational,” Alajlan said. He brought in a Saudi executive to succeed Alghrairi, whose contract wasn’t renewed after he failed to achieve performance targets, Alajlan said.

Alghrairi denied that and said he had expanded the business rapidly. He said he was fired for raising concerns about the Russia and China business.

RTX and the Saudi government didn’t respond to requests for comment.

Other Western companies, including Italy’s Beretta Defense Technologies and shipbuilder

Fincantieri

 SpA, have backed away from working with Scopa. Some of the people familiar with the matter said concerns about Russian and Chinese business were a factor.

In his drive to create a local arms-manufacturing industry, the Saudi crown prince set up a defense company under the Saudi sovereign-wealth fund to do weapons and aerospace deals with Western manufacturers and encouraged the private sector to get involved. Scopa and Alajlan’s other companies aren’t state-owned but are generally expected to fall in line with the kingdom’s foreign policy. Alajlan said the government is their only customer.

To run Scopa, Alajlan hired Alghrairi, a U.S. Navy veteran who set up a small government-service contractor in Florida with his wife but had never worked for a major defense manufacturer.

The company splashed onto the scene in March 2022 at an arms expo in the Saudi desert. American executives in attendance grumbled privately about Scopa erecting billboards featuring NATO weapons systems and the company logo before it had even begun negotiations with their manufacturers.

Alghrairi used his military connections to establish an advisory board for Scopa led by retired Army Lt. Gen. Michael Barbero and other U.S. military veterans. They began lining up partnerships with RTX and dozens of other arms manufacturers in the U.S. and Europe.

Scopa envisioned manufacturing significant portions of NATO weaponry inside Saudi Arabia, which meant gaining access to technology that is tightly guarded by the International Traffic in Arms Regulations, a set of Cold War-era American rules that control the export of U.S. defense equipment.

Interviews with people familiar with the matter and documents reviewed by The Wall Street Journal indicate that two of his other companies made efforts to engage with sanctioned Chinese, Russian and Belarusian entities. It was those contacts that spooked Scopa’s board and potential Western partners such as RTX, some of the people said.

Barbero said Scopa’s U.S. advisers had worked in good faith and delivered potential partnerships with Western defense firms. “However, the situation on the ground made it untenable for us to continue to work with Scopa and left us with no choice other than to resign,” he said.

Alongside Scopa, Alajlan said, he set up Tal Military Industries and Sepha Military Industries. To run Sepha, he hired an executive from Concern Granit-Electron, a Russian company that supplies the Moscow government with communications technology and was sanctioned by the U.S. for supporting Russia’s military-industrial base.

He hired a Chinese national to run Tal, which he said does deals in Asia.

For months, Tal engaged in discussions about deals with Chinese companies sanctioned by the U.S., the U.K. and the European Union, while Sepha held deal talks with Russian and Belarusian companies that also face Western sanctions, according to company records reviewed by the Journal and the people familiar with the matter.

Tal and Sepha also shared corporate functions, including computer servers, with Scopa employees, according to one of the people familiar with the matter, even as Scopa was moving toward getting access to sensitive data from companies including RTX.

One document dated September 2022 indicates that Sepha had a preliminary agreement with Belarusian state arms exporter BelTechExport to acquire mobile air defense and counterdrone systems it proposed to sell to the Saudi Defense Ministry. The U.S. Treasury sanctioned BelTechExport as part of restrictions put on the Belarusian defense industry in 2021.

Another preliminary agreement with Granit and Russian state-arms exporter Rosoboronexport aimed to acquire communications interception technology that Sepha proposed to sell to the Saudi intelligence services. The document also shows that Sepha looked at marketing Russian ammunition, body armor and surveillance equipment in Saudi Arabia, assembling Russian attack helicopters there, and manufacturing armored vehicles with Russia’s Military Industrial Co.

A complaint lodged with the U.S. Treasury and reviewed by the Journal alleges Tal was in touch with at least half a dozen sanctioned Chinese companies. For example, it sought to produce land systems with Norinco Group, which has faced U.S. sanctions for years for links to the Chinese military and allegedly supplying missile technology to Iran, according to a Tal company record from January 2023.

The Russian, Belarusian and Chinese companies didn’t respond to requests for comment or couldn’t be reached.

Scopa, Tal and Sepha were planning to display Chinese drones and radars from BelTechExport alongside RTX air-defense systems and Beretta firearms at the next Riyadh defense show, scheduled for February 2024, according to another document and the people familiar with the matter.

The U.S. Embassy in Riyadh knew about the talks that Tal and Sepha were having with Chinese and Russian companies as early as August 2022, when it told Scopa in an email reviewed by the Journal that those activities “could seriously hinder the ability of Scopa to enter into contractual agreements with U.S. defense firms.”

Alajlan said that Sepha works with Eastern European companies and that Tal’s engagement with China is limited to securing supply chains for manufacturing military and civilian equipment in Saudi Arabia.

He continues inviting U.S. companies to work with Scopa and said some still talk to him. “There is a huge opportunity to cooperate together,” he said.