By Joseph Sipalan

KUALA LUMPUR (Reuters) - Malaysia is in talks with at last six countries on the possibility of using palm oil to pay for arms, as Southeast Asia's third-biggest economy seeks to replace old equipment to boost its defence capabilities.

Malaysia has struggled to update its defence equipment over the years and a cut in its defence budget this year all but derailed efforts to replace navy ships, some of which have been in service for 35 years or more.

Costs have been a big hurdle but using palm oil to help pay for equipment could open new avenues to upgrade, Defence Minister Mohamad Sabu said on Monday.

Mohamad said discussions on paying with palm oil had started with China, Russia, India, Pakistan, Turkey and Iran.

"If they are prepared to accept a palm barter trade, we are very willing to go in that direction," Mohamad told Reuters in an interview.

"We have a lot of palm oil."

Malaysia and Indonesia, the world's two largest palm oil producers, are embroiled in a dispute with the European Union over a plan to phase out the commodity from renewable fuels used by the bloc by 2030 over deforestation concerns.

The two countries supply about 85% of global palm oil, much of which is used in food but also in items such as lipstick and soap.

Mohamad said he could not put a figure on how much palm oil Malaysia was looking to trade for defence equipment.

Besides new ships, Malaysia was also keen to acquire long-range surveillance aircraft, unmanned aerial vehicles and fast intercept boats, the minister said.





DEFENCE REVAMP

The planned barter is part of a 10-year defence policy to be tabled in parliament this year, which Mohamad said would focus on boosting naval capabilities, including in the disputed South China Sea.

China claims historic jurisdiction over the sea via a so-called nine-dash line on maps, but it overlaps with territory claimed by Malaysia, China, Vietnam, Brunei and the Philippines.

Taiwan also claims most of the sea.

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Recent Chinese naval deployments in the disputed sea, through which over $3.4 trillion in goods are transported annually, have reignited tension with Vietnam and the Philippines.

Malaysia had been critical of China's South China Sea position, but has not been excessively outspoken recently, especially after China pumped in billions of dollars into infrastructure projects under its Belt and Road Initiative.

Malaysia regularly tracked Chinese naval and coastguard vessels entering Malaysia's territorial waters, Mohamad said, but added that China respects Malaysia and had "not done anything that caused us trouble, so far".

However, Southeast Asian counties would need to work together to make sure their interests are not drowned out by big powers like the U.S. and China jostling for control, Mohamad said.

"We want this region to remain peaceful and neutral," Mohamad said.





(Reporting by Joseph Sipalan; Editing by Robert Birsel)