Kingdom of Saudi Arabia standing at complex crossroads

Saudi Arabia’s decisions will certainly have strong domestic, regional and global implications for years to come

By Al Emid

The Kingdom of Saudi Arabia currently stands at so many crossroads — and rather complex ones, it may be added — that a short magazine article cannot do more than just consider some of the more striking examples. The paths that KSA chooses at these crossroads will affect its relationships with its own population, its neighbors in the Gulf Cooperation Council, as well as with Russia and with the West. Politically, the full fallout continues from the arrests last November of more than 200 prominent Saudi princes and businessmen on corruption charges.

The sweep also netted billions in assets and negotiated fines. The ultimate decision maker for the sweep was Crown Prince and Minister of Defense Mohammed bin Salman Al Saud, who had earlier consolidated his power.

The sweep recalibrated the nexus between business and politics in the country and reflected the Crown Prince’s power, explains Graham Griffiths, Senior Analyst at the Dubai office of Control Risks, a global risk and strategic consulting firm specializing in political, security and integrity risk. “This was the result of the political emergence and consolation of power of [the Crown] Prince,” he says during an interview in his Dubai office. Bin Salman’s targets included powerful princes who controlled large ministries.

“They also controlled significant economic resources of those ministries that they could use to distribute money to their clients and also feed it back to themselves in some cases,” Griffiths says. The sweep allowed the Crown Prince to strike a blow at those networks and continue centralizing economic power in government hands.

Joining hands

The sweep appealed to the Saudi public, many of whom were discontented and disgruntled at the long history of government funds being appropriated by members of the political and economic elite. “This was tailored to be a kind of popular and populist move and, on that score, the reaction to it amongst the general public seemed to have been, in many cases, quite positive,” Griffiths says.

The prominent profile of the princes and businessmen in last November’s wave of arrests suggests that the government will not undertake any future actions on the same scale, although less senior government officials could still be charged with corruption or abuse of office.

While this episode has no direct-line impact outside of the country to date, it could still reduce multinational companies’ interest in dealing with the Saudi Arabia. That would slow the inward
flow of foreign direct investment (FDI) by multinational corporations whose executives may be understandably nervous until the proverbial dust has settled. There are reports that some of them have been told by their business partners not to invest in the kingdom until the situation becomes clearer. “They’re going to want to be able to demonstrate credibly to everyone that ‘We’ve done this — we’ve punished the wrongdoers and we’ve reclaimed some of the assets’,” Griffiths says, paraphrasing the apparent government attitude.

Meanwhile, FDI net inflows into Saudi Arabia have been dropping steadily since 2008, when FDI hit $39,455,863,929. By 2016, it had dropped to $7,452,533,333. (Figures for 2017 will become available in approximately six months.)

Expanding beyond four walls

Socially, most recent developments in Saudi Arabia can be generally considered ‘startling’, but some of the most surprising include the expansion of the rights of women, who are now allowed to drive, attend public events and carry out other commonplace activities long considered their right in other cultures. These changes appear aimed at several priorities within the country.

Relaxing the ban on women driving will complement the government’s aim of shoring up its populist appeal — which could erode with the introduction of new taxes — and as part of its hopes for its Vision 2030 plan, which aims for an increase in female employment.

However, it is much anticipated that women’s admission to public events will bring in added revenues for high-cost facilities built during the days of higher oil prices. Moreover, it will also enhance the Saudi’s image on the global podium and help to attract more investments from the international corridors.

Geopolitically, tensions between Saudi Arabia and Iran appear likely to continue rising as both countries have waged wars of words and proxies over Yemen, Lebanon and Syria. The KSA, a staunchly Sunni nation, and Iran, a predominantly Shiite country, have a long-standing and biter enmity based on regional geopolitical, ambitious and religious animosities. The nuclear deal of 2015 between Iran, the United States and its allies, and the storming of the KSA embassy in January 2016 added more fuel to the proverbial fire.

While a full-scale shooting war between the two superpowers appears unlikely at the time of writing, the possibility cannot be dismissed entirely. The tensions between them and the fighting by their proxies will most likely continue and, given the other priorities discussed here, the proverbial last thing KSA needs is instability in its geopolitical relationships.

“Instability is not in the best interests of Saudi Arabia,” says Lebanon-born Atif Kubursi, economics professor emeritus at McMaster University and former acting executive secretary of the United Nations Economic and Social Commission.

Winds of change

The geopolitical category includes a surprise that would have been unthinkable a decade ago. For an unknown period of time, KSA and Israel have been cooperating behind the scenes and, in late 2017, reports of their rapprochement become more open in the international arena. Faced with declining American involvement in the Middle East and rising aggressiveness of Iran, Saudi Arabia needs friends, explains Kubursi. “They are turning [to Israel] because of the commonality of their interest in standing up to Iran,” he says.

However, the cost could become enormous over time and could be exacted in two parts. “There is going to be a cost,” Kubursi says. It may include an erosion of Saudi Arabia’s role as leader in the region as other nations may become uncomfortable with the new relationship because they resent the shift.

Also in the geopolitical category, the KSA stands at another crossroads in its relationship with Russia, as President Vladimir Putin labors to restore Russia’s strong place on the world stage. Putin continues to pursue his own claim to global leadership, implicitly rivaling US President Donald Trump and China’s President and General Secretary of the Communist Party of China, Xi Jinping. Saudi Arabia seems to accept that Moscow has achieved influence in the region, explains Anna Borshchevskaya, Ira Weiner Fellow at the Washington Institute with a focus on Russia’s policy toward the Middle East.

In her analysis prepared for TRENDS, Borshchevskaya points out that Saudi Arabia appears to be coming around to Moscow’s view on Syria — including Syrian President Bashar al Assad’s continuing occupancy of the President’s office — and has decided that, from a pragmatic point of view, it has to deal with Moscow.

Boosting investment

The recent visit to Moscow by Saudi King Salman bin Abdulaziz Al Saud points to this, along with massive plans for Saudi investment in Russia. The Kingdom may also hope that, by moving closer to Russia, it can limit Moscow’s partnership with Iran, Borshchevskaya says, while noting that that outcome appears a little doubtful.

“The Kremlin will welcome the investments, of course, but that is not going to change its political orientation,” she says in her analysis.

Russian President Vladimir Putin’s priority has always been the survival of his own regime and he believes that, to survive, he has to undermine the United States’ supremacy specifically and the West more broadly.

Limiting Western influence in the region — and thereby increasing his own influence — appears to be Putin’s goal. For him, it’s zero-sum — for Putin to win, the West has to lose and, to the extent that he moves closer to Saudi Arabia, he moves closer to that goal.

Militarily, Saudi Arabia’s challenges will continue to include Yemen and Syria with little change in sight, according to Kubursi. “Saudi Arabia has failed in its war in Yemen,” he says, in spite of overwhelming military superiority and countless airstrikes by the Saudi-led coalition.

“You have the richest Arab country attacking the poorest and that alone will create the seeds for problems,” he notes, adding that Saudi Arabia had consistently blocked Yemen’s attempts to join the GCC. The bombings and civilian casualties will mean damage and civilian deaths will mean continuing enmity, he explains. The conflict in Yemen shows no signs of resolution in the short-term, meaning Saudi Arabia faces continuing expense and enmity. And it is high time to reach on an amiable solution ending Yemen’s crisis.

The Kingdom has also taken losses in Syria. “They invested very heavily and transferred weapons and paid insurgents and got basically nothing,” Kubursi says, pointing out that the Syrian army is increasing its control and encroaching on rebel-held areas. At this particular juncture, the country has two choices, neither of them very appetizing, according to Kubursi.

“They can pull get out and cut their losses, or remain embroiled and lose more,” he explains.

Finding the answers

Economically, the Kingdom needs to find more solutions to falling oil prices and more strategies for economic diversification than at present.

It does have its long-term strategic plan, the Saudi Vision 2030. However not enough time has elapsed to grasp whether it will eventually become successful, says Griffiths.

The new taxes will boost non-oil revenues but, at the same time, the government plans to boost expenditures while achieving a balanced budget by 2023. Within the present outlook, the combination may not work.

“If you look at their plans to achieve a balanced budget by 2023, they plan to increase expenditure every year until 2023,” Griffiths says. “Their plan to balance the budget depends on rising oil prices and oil will continue to be a very large part of government revenue for the foreseeable future.”

The new revenues will help but, at this time, the target of a balanced budget still depends on rising oil prices. Meanwhile, approximately 45 percent of expenditures go to government salaries.

Notwithstanding the eventual resolution of these difficult decisions, the country faces several uncertainties, including its business relationships with outside companies.

“The biggest uncertainty to me is whether they can continue to invest in the kind of ecosystem [necessary] for doing business in the kingdom,” Griffiths suggests. This means making areas such as regulations and legal infrastructure more responsive and transparent as the state continues to evolve.

“I haven’t seen the kind of local … driving economic growth and employment.” Also unclear is the length of time necessary for Crown Prince Mohammed bin Salman to complete his corruption crackdown sufficiently to increase the comfort level of foreign multinationals a major key to the KSA’s ability to diversify the economy.

No less important is the fact that these uncertainties include to what extent the population will accept the new taxes and how well the government’s stimulus package will work. Its the perfect wait and watch situation.