mohammed bin salman’s saudi arabia: pitfalls in the road ahead · mohammed bin salman has...
TRANSCRIPT
12 30 January 2018
Mohammed bin Salman’s Saudi Arabia: Pitfalls in the Road Ahead
Lindsay Hughes Research Analyst Indian Ocean Research Programme
Summary
The December 2017 FDI paper that analysed some of the changes being unleashed in Saudi
Arabia by Crown Prince Mohammed bin Salman (MBS) examined some of the royal family’s
antecedents and the social changes that could eventuate as a consequence of those. This
paper will examine the economic and foreign policy factors that could have an impact on the
future of Saudi Arabia. As with the previous paper, this one will also identify some of the
preceding factors that have triggered the need for change, as MBS apparently sees it, and
some of the risks that go hand-in-hand with attempting to make those changes.
Key Points
Mohammed bin Salman has embarked on a series of economic changes to
wean Saudi Arabia off its dependence on oil.
He has also taken steps to enhance his country’s regional standing and
influence.
If he succeeds in his goals, he will have truly transformed Saudi Arabia and
brought it fully into the twenty-first century.
If he fails, however, the results could potentially be catastrophic for the
kingdom and for himself.
Page 2 of 7
Analysis
The Economic Imperative for Change
The Saudi economy is predominantly based on oil production and export. The kingdom has
an estimated twenty per cent of the world’s proven oil reserves and is the largest exporter
of petroleum. The petroleum sector accounts for around eighty per cent of its budget
revenues, 45 per cent of total GDP and a full ninety per cent of its export earnings. Given
that degree of dependence on its oil, it is hardly surprising that the country’s leaders wish to
protect all aspects of oil production and their international markets. They are also protective
of the power and influence that they wield in organisations such as the Organisation of
Petroleum Exporting Countries and, as a consequence of their oil-derived wealth, in the
region.
One way of retaining that influence is by managing the price of oil in international markets.
The Saudis want to maximise oil prices but not keep prices so high that it curbs demand, that
other non-OPEC sources become viable for consumers or that different forms of energy
become economically feasible. Consequently, Saudi Arabia tries to ensure that oil prices are,
simultaneously, not so low that its revenues are affected. Its weapon in ensuring optimal oil
prices (as it sees them) is its spare capacity, i.e. its ability to ramp up production when
required and to maintain that elevated production for extended periods of time. Riyadh has
exhibited no qualms on several previous occasions in using that spare capacity to destroy oil
exports from countries that threaten its market share.
In 1997, for instance, Venezuela increased its oil production by a large margin in order to
push Saudi Arabia aside and corner the US market. Riyadh took the diplomatic route in an
attempt to persuade Caracas not to disrupt its established market. When that approach
failed, Saudi Arabia boosted its production by one million barrels of oil per day, creating a
glut and forcing prices down to a level at which Venezuela could not feasibly maintain its
production. Venezuela was forced to withdraw its challenge. In 1985, again, Riyadh forced
other, mainly non-OPEC, producers to curb production in order to enable Saudi Arabia to
reduce its own production and force prices back up.
This experience did not help Riyadh in 2016, however, when oil prices fell to below US$27
per barrel in the US, arguably the world’s largest market for oil. That was due to
developments in technology that enabled US oil producers to access deposits in their
country previously thought to be inaccessible. It was a development that the Saudis had not
foreseen and for which they were grossly unprepared. Further developments, such as the
move towards automobiles powered by electricity and hydrogen, the move towards better
utilisation of renewable sources of energy such as solar, wind, geothermal and tidal power,
and the increasing use of nuclear-fuelled power plants in developing countries such as India,
demonstrated to the Saudi leaders that they needed to wean the economy off its
dependence on oil. It was that reasoning that formed the basis of MBS’s plans to consolidate
power in order to remake Saudi Arabia.
Page 3 of 7
The Planned Changes
MBS called his grand vision for a post-petroleum future Vision 2030, its overarching goal
being to turn the kingdom into ‘an exemplary and leading nation’. Vision 2030 ‘revolves
around three pillars: a vibrant society, a thriving economy and an ambitious nation’. It
comprises three main programmes: a public investment fund programme, a fiscal balance
programme and the national transformation programme that was examined in the previous
FDI paper.
The Public Investment Fund (PIF) Programme (2018-2020):
… outlines our objectives in local and international investments that enable
the diversification of the Kingdom’s sources of development and growth. The
Programme crystalises PIF’s role as the engine behind economic diversity in
the Kingdom by developing strategic sectors. It also seeks to grow PIF into one
of the largest sovereign wealth funds in the world, as well as to build strong
economic partnerships to deepen and strengthen the impact and role of Saudi
Arabia on the regional and global stages.
The Fiscal Balance Programme is a:
… key component in developing a more effective government, by providing
intense scrutiny of government finances and acting as a spur to increased
efficiency. … Beyond fiscal balance and government performance, this
programme contributes to key socioeconomic impacts sought by Vision 2030.
This includes targeting the social welfare system on the neediest and
supporting them effectively, and also making our economy more competitive.
These programmes seek to create a smaller but more efficient public sector, a vibrant
private sector and to reduce the influence of the religious establishment in Saudi Arabia.
MBS stated in unequivocal terms that he wished to return the kingdom to a more ‘moderate
Islam’, saying:
We are a G20 country. One of the biggest world economies. We’re in the
middle of three continents. Changing Saudi Arabia for the better means
helping the region and changing the world. So this is what we are trying to do
here. And we hope we get support from everyone. What happened in the last
30 years is not Saudi Arabia. What happened in the region in the last 30 years
is not the Middle East. After the Iranian revolution in 1979, people wanted to
copy this model in different countries; one of them is Saudi Arabia. We didn’t
know how to deal with it. And the problem spread all over the world. Now is
the time to get rid of it.
The above is an expansion of his previous statement that, ‘We are simply reverting to what
we followed: a moderate Islam open to the world and all religions’, which was made during
his announcement that he would launch a US$500 billion independent economic zone on
the Red Sea – based around the to-be-constructed city of Neom – that straddled Saudi
Arabia, Jordan and Egypt.
Page 4 of 7
MBS’s Vision would appear to be a direct emulation of the Vision 2021 concept from the
United Arab Emirates. Despite the differences in the physical sizes of the two states and
their varying degrees of ideological conservatism, they share many similarities. Both are
monarchies that depend on energy exports to sustain themselves, are socially conservative,
have growing youth populations that increasingly demand not just employment, but
relatively relaxed government positions that provide a greater chance of a comfortable
career, and citizens who demand the cradle-to-grave welfare systems to which they have
become accustomed. The tacit understanding in both states is that the ruling class is
permitted to retain the status quo if those conditions are met.
As a consequence, where the UAE constructed Masdar City, which was touted as the world’s
first carbon-neutral city, MBS announced the construction of the city of Neom on the Red
Sea to concentrate on robotics and other cutting-edge technologies; where the UAE created
the position of Minister of State for (religious) Tolerance, MBS created a Centre for
Moderation. The difficulty for MBS, however, lies in the degree to which Wahhabi
conservatism has been allowed to control ideological thinking in the kingdom; it is difficult to
see how he could enact legislation that would allow Saudi women to work alongside men in
a laboratory, office or on a factory floor without changing social attitudes first. Enacting
legislation is relatively easy in an authoritarian state, changing societal thinking, less so. That
requires a different way of thinking to be inculcated in the educational system from a very
early stage, if not from the very start of the educational system. It needs to be done,
however, if the skills of the fifty per cent of the population who are women are to be fully
utilised.
Page 5 of 7
There are several bumps on the road to achieving those goals, however. The entire Vision
2030 concept is predicated upon the ability of MBS to raise the estimated US$300 billion
required to put the various elements of the plan into action and diversify the Saudi
economy. He planned to raise that amount by privatising parts of the Saudi infrastructure,
including housing, water, telecommunications, religious tourism services, the health sector,
grain mills and, the cornerstone of the privatisation effort, five per cent of the Saudi-owned
oil and gas enterprise, Aramco. The difficulty lies in the perceived value of those enterprises.
As one source puts it:
Since the so-called Future Investment Initiative came together a few months
ago under the auspices of Saudi’s massive Public Investment Fund, questions
about the viability of a planned $100 billion initial public offering of stock in
Saudi Aramco, the national oil company, have intensified. Chief among them is
the difficulty of reaching the $2 trillion valuation for the group that the ruling
family wants, according to news stories.
Other sectors that were earmarked for sale have also encountered delays. The Deputy
Minister for Electricity remarked in October that he would enable the sale of the country’s
electricity sector after ‘some developments required us to wait’. Bidders for the grain sector
have complained of restrictive ownership rules. The Ministry of Health has put its tender
seeking financial advisers for the privatisation of fifty-five primary healthcare units in Riyadh
on hold after receiving bids in April. It issued a new tender to identify a technical adviser on
the costs and demand linked to the privatisation. Saudi Post Corp’s privatisation effort has
been no more successful than its health counterpart. After being scheduled to be sold this
year, its management has now decided to turn the organisation into a state-run organisation
with a profit-and-loss accountability before being sold in about five years. Similar hesitancy
surrounds the sale of five soccer clubs and twenty-seven airports.
The danger in all of this to MBS is that of perception. He is perceived as having accumulated
power in order to be able to make decisive changes more easily. If the changes he promised
in his Vision 2030 plan are subject to the dithering and uncertainty that appears to surround
the sale of the above assets, he will almost certainly be held equally accountable for the
plan’s failure.
It is not only in the economic sector that his plans to remake Saudi Arabia appear to have
stalled, moreover. It was he who deliberately inserted the country into the war in Yemen. It
is true that he would have found it difficult to countenance an Iran-influenced Iraq, Syria and
Yemen. His overt aggressiveness towards Iran, however, and his decision to fight that
country by proxy in Syria and Yemen have only caused his judgement to be questioned. In
Yemen, he backed President Abdrabbuh Mansour Hadi and former President Ali Abdullah
Saleh against the Iranian-backed Shia Houthi. He was almost immediately drawn further into
the conflict, turning a poor situation into a foreign policy disaster. Saudi fighter aircraft have
caused many Yemeni civilian casualties (see here and here, for instance), causing an
international backlash. He has also ordered a blockade of Yemen, leading the UN to call it
the ‘worst humanitarian crisis in the world’, causing further civilian suffering in Yemen and
Page 6 of 7
further damaging his country’s international reputation. Saudi Arabia can ill-afford to be
perceived as the regional bully.
MBS has also initiated a feud with Qatar, a fellow member of the Gulf Co-operation Council.
Saudi Arabia accused Qatar of providing safe haven and political backing to the Muslim
Brotherhood, Hamas and various militant groups opposed by the UAE or Saudi Arabia in
Libya and Syria. Qatar claimed that the only way to bring about a settled and lasting peace
would be through discussion and negotiation; Doha, the Qatari leaders claimed, provided
the ideal venue for that approach. Riyadh, however, claimed that the Qatari television
network Al Jazeera disseminated decidedly anti-Saudi propaganda and demanded it be shut
down. The Saudis also demanded that Qatar break off its relationship with Iran. When Qatar
refused to acquiesce to those demands, the bulk of the GCC member states withdrew their
ambassadors from Doha and imposed a land, maritime and air blockade on Qatar. Whether
MBS was right or not in carrying out these actions and persuading the other GCC members
to do so alongside Saudi Arabia has become a secondary issue; the image of Saudi Arabia as
a bully has only grown in the region. Iran, moreover, has used the opportunity to strengthen
its relationship with Qatar, which has served to further incense Saudi Arabia.
MBS is also seen to have been behind the temporary resignation of Sa’ad Hariri. The fact
that the Lebanese Prime Minister announced his resignation from Riyadh soon led to
suspicions that he had been coerced to do so by MBS and that he was being held against his
will in Riyadh. Hariri, it was believed, was forced to read a statement prepared by the Saudis
denouncing the activities in Lebanon of Iran and its proxy, Hezbollah. It was rumoured that it
was only because the entire affair garnered so much negative attention for Saudi Arabia that
Hariri was finally released.
There have also been murmurs of anger and dissatisfaction domestically. MBS’s arrests of
potential challengers and those he deemed not sufficiently loyal to him – princes, ministers,
military officers, civilian officials, major businessmen and political dissidents – on charges of
corruption has caused a strong degree of unrest among many of the country’s older citizens
and even some of its younger ones. His treatment of those arrested has only furthered their
anxiety. His replacement of Prince Mutaib bin Abdullah as the head of the Royal Guard with
another prince who showed a personal loyalty to him was not well received and again led to
the perception of a coup being staged.
On the personal front, it is remarkable that even as he talks of fiscal prudence and cracking
down on ill-gotten gains, MBS has himself been less than prudent with his purchases. These
include a chateau in France that he allegedly purchased for around US$300 million, a
painting by Leonardo da Vinci for US$450 million and a yacht for US$500 million. Although it
is claimed that the painting was purchased by the Ministry of Culture in Abu Dhabi, a report
stated that Reuters has seen a document that showed that a Saudi prince, Badr bin Abdullah
al Saud, was authorised to purchase the painting on behalf of the Abu Dhabi culture
ministry. The final owner allegedly was Mohammed bin Salman. MBS was not alone in such
spending, however. Even as the government cancelled US$250 billion worth of projects to
rein in deficits in 2016, King Salman was building a luxurious new vacation palace on
Morocco’s Atlantic coast.
Page 7 of 7
It is more than likely that MBS carried out the arrests and foreign policy actions to
strengthen his hand domestically and to enhance Saudi Arabia’s regional influence. While he
has succeeded in achieving some of his goals – the perception among the majority of
younger Saudi citizens of a strong ruler taking charge of the country being one of those – his
handling of other issues is fraught with risk. It is that risk that could see those plans halted
and even reversed, the country lose its current standing and he be held responsible and
personally accountable. This is, indeed, a time of great change and, equally, a time of great
risk for MBS and his future kingdom.
*****
Any opinions or views expressed in this paper are those of the individual author, unless stated to be those of Future
Directions International.
Published by Future Directions International Pty Ltd.
80 Birdwood Parade, Dalkeith WA 6009, Australia.
Tel: +61 8 9389 9831 Fax: +61 8 9389 8803
Web: www.futuredirections.org.au