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The Saudi Shake-up

The Saudi Shake-up

No. 4, Mar.-Apr. 2017 » Bridging News

News of the ongoing purge of numerous high-level officials and Saudi Royal Family members by the Saudi government has rattled global markets and raised further doubts regarding the stability of the Kingdom. What some are calling a counter-coup is presented as an anti-corruption move that saw over 1,200 bank accounts frozen and numerous assets being seized. Two Saudi princes have also died, one in an as yet unexplained helicopter crash near the Yemeni border and the other, the youngest son of King Fahd who ruled Saudi Arabia until 2005, died in a shoot-out between his security detail and government forces.

One of the likelier motives of this destabilizing move is economic, related to the confiscation of assets to fund government projects, social spending and replenish its reserves in a time of fiscal contraction due to continuing low oil prices.

One of the likelier motives of this destabilizing move is economic, related to the confiscation of assets to fund government projects, social spending and replenish its reserves in a time of fiscal contraction due to continuing low oil prices. However, the purge may also fit into a wider scheme of “dynastic pruning”, as the current king will likely be the last of the sons of Ibn Saud, the founder of Saudi Arabia, to hold the throne and the next generations are both more numerous, as well as less cohesive than the prior ones. As the shift from the former Crown Prince, one of the last sons of Ibn Saud (Muqrin bin Abdulaziz Al Saud), to the current one (Mohammad bin Salman bin Abdulaziz Al Saud), who is the son of the current King, Salman, shows, games are afoot right now to determine which branch of the family will rule over the next generations and which branches will become ever more distant from power and the wealth and privileges that it brings. 

State confiscation 

According to Bloomberg, the four wealthiest businessmen ensnared in the trap together totaled 33 billion dollars in assets. Chief among them is Prince Alwaleed bin Talal, who is also notable for being a vocal critic of Donald Trump during the election and a major Clinton Foundation backer.

Bloomberg writes that:

“[…] the stunning series of arrests has implicated three of the country’s richest people, including Prince Alwaleed bin Talal, who’s No. 50 on the Bloomberg Billionaires Index ranking of the world’s 500 richest people, with $19 billion. Also being held are the kingdom’s second- and fifth-wealthiest people, as well as a travel-agency mogul and Bakr Binladin, a scion of a one of the country’s biggest construction empires”. 

The particular scion is also the brother of notable terrorist leader Osama bin Laden.

The Wall Street Journal asserted that:

“[…] the crackdown could also help replenish state coffers. The government has said that assets accumulated through corruption will become state property, and people familiar with the matter say the government estimates the value of assets it can reclaim at up to 3 trillion Saudi riyal, or $800 billion”. 

This is especially important since Saudi reserves have taken a significant beating because of the continuing low commodity prices, especially oil, as can be seen from the figure below. Reserves declines from a peak of 730 billion in 2015 to 485.6 billion in August 2017.

 

In addition to dipping into its reserves, Saudi Arabia has been borrowing on the international bond markets.

Of course, from a historical perspective, oil prices are not low except when compared to their spike during the conflicts in the Middle East which knocked out much of Iraq and Libya’s oil production capacity, as well as the sanctions regime that Tehran labored under. From a few dollars in the 1970s, prices reached around 20 dollars in the early 1990s until 9/11, then ballooned to over 100 dollars in 2008, after which the giddy OPEC countries magnanimously announced they will not let prices go over 120 dollars per barrel. Oil has since fallen to around 53 dollars per barrel, on the back of the ascent of non-conventional shale resources in non-OPEC countries (especially the US, which has since become the third largest oil producer, after Russia and Saudi Arabia), the effect on demand that the 2008 economic crisis continued to have, the structural slowdown of growth in China and, not least, the lack of discipline among the Member States of OPEC, who overproduced at every opportunity to shore up the mess created by their overspending.

In a vicious circle, the fall in prices exerted upward pressure on production in these countries which led to an even greater fall. Saudi Arabia tried to weather it and even take advantage of it to neutralize shale producers in the United States, Canada and elsewhere, with limited success. For instance, the 2008 Russian state budget was predicated on an expected 55 dollars per barrel of oil. Later budgets rested on the assumption of a 100-dollar barrel.

According to an older Deutsche Bank analysis, the price per barrel at which the petrostates could balance their budgets to avoid deficits was 184 dollars for Libya, 131 dollars for Iran and Algeria, 123 for Nigeria, 118 for Venezuela, 105 for Russia, 104 for Saudi Arabia, 101 for Iraq 81 for the United Arab Emirates, 78 for Kuwait and 77 for Qatar, the latter three having already diversified their economies as well and put a lid on social spending.

The states have had to adjust to lower incomes, but are still in the red financially. Saudi Arabia managed the largest adjustment, from 96 dollars per barrel required to balance the budget to 70 dollars, but it is still above current price and this has put pressure on social spending and other commitment, made up through borrowing and the current confiscatory measures.

 

 

The purge may also fit into a wider scheme of “dynastic pruning”, as the current king will likely be the last of the sons of Ibn Saud, the founder of Saudi Arabia, to hold the throne.

What happened was that, just like work expands to fill all available time, so too did the requirements of the petrostates expand to not only fit their generous new incomes, but also to exceed them. Saudi Arabia was less hit by the subsequent fall, because of its very low oil exploitation costs (estimated at 6 dollars per barrel). Still, it launched an arms spending spree which is one of its levers for continuing political support from the United States, it increased social spending for its burgeoning and increasingly restive population (50% under 25 years old, estimated to reach 40 million people in 2030) and it engaged in a so far fruitless military campaign in Yemen, where it committed every mistake the Americans had made in their misadventures.

In a vicious circle, the fall in prices exerted upward pressure on production in these countries which led to an even greater fall.

At the same time, Saudi Arabia has to bear the cost of significant investment into the future economic structure of the Kingdom to supplant its finite oil reserves and ensure employment for the population. Realistically or not, it is developing renewable energy sources and nuclear energy to lessen its costly dependence on oil, which must be consumed with extraordinarily heavy subsidies (like in most petrostates). It has endowed Universities to encourage innovation and it is planning the wholesale build-up of modern industrial and financial hubs (like the King Abdullah Economic City or the King Abdullah Financial District) such as the latest announcement for Neom, a city on the Red Sea, with ties to Jordan and Egypt, planned as a state of the art livable metropolis to attract significant foreign investment. This is all in line with the Crown Prince’s Vision 2030 document, launched in 2016.

However useful they may be to shore up state finances and the power of the ruling group, this has been a risky move, which invites not only frenzied counterplotting from individuals feeling themselves at risk, but also the uncertainty of international investors, who may decide to move operations and capital away from a country where property is not well protected and is disposed of at the whim of those in power. Given that Saudi Arabia is the closest example the world currently has for a patrimonial state, which is almost literally owned by its rulers, these possibilities should have been kept distinctly in mind. However, Middle Eastern monarchies and their innate conservatism and preference for stability have become a reassuring factor for skittish global investors, who contrast them with the cycle of anarchy present in other areas of the region, although the stability of one place and the anarchy of the other are closely intertwined in the dynamic system. 

Foreign interests 

Possibly relishing the downfall of his Twitter sparring partner, Prince Alwaleed, whose fate mirrors that of many Trump critics who once attacked him from positions of unimpeachable power, President Trump spoke out to defend the actions of ruling elites, personified by the Crown Prince, saying that “I have great confidence in King Salman and the Crown Prince of Saudi Arabia, they know exactly what they are doing. Some of those they are harshly treating have been ‘milking’ their country for years!”. Aside from his likely Schadenfreude, there are many reasons for Trump to score cheap points over a situation in which the US likely holds no levers, on account of the rapidity with which it is taking place.

Saudi Arabia managed the largest adjustment, from 96 dollars per barrel required to balance the budget to 70 dollars, but it is still above current price and this has put pressure on social spending and other commitment, made up through borrowing and the current confiscatory measures.

Firstly, President Trump has pursued what seems, from the outside, to be a closer relationship with Saudi Arabia, on the back of his anti-Iran stance and Saudi willingness to support the American defense industry. Supposedly, Donald Trump had also extracted a promise that the Saudi rulers would crack down on the financing of Sunni extremism and terrorist activities. Secondly, the IPO of the century, that of Aramco, the national oil company of Saudi Arabia (nationalized from the Americans in an audacious Cold War move), is being courted by every major financial center in the world, and Trump wants it for the New York Stock Exchange, which would not only boost the paper boom registered under Trump, but would also provide significant earnings for the US financial industry.

However useful they may be to shore up state finances and the power of the ruling group, this has been a risky move, which invites not only frenzied counterplotting from individuals feeling themselves at risk, but also the uncertainty of international investors.

At the same time, the vultures are circling Saudi Arabia, something which has been on the mind of the leaders of this large and sparsely populated nation for decades. Its proxy conflict with Iran over regional hegemony spilled over into Yemen, agitating the oil-rich and Shiite-dominated Eastern region of Saudi Arabia as well. The row over Qatar not only damaged whatever political capital and trust the GCC had accumulated, but also provided a window for China to promote its “petro-yuan”, whereas Saudi Arabia was the original petrodollar nation, which was also its prime claim for American support and protection. Its heavy-handed policies in Africa and places like Bahrain have also won it few true regional friends, while its gambit in Syria has not only failed, but the arguable linchpin of the survival of the Assad regime, Russia, is now making overtures towards Saudi Arabia. While it is, as Machiavelli asserted, better to be feared than loved, the downside of the former is that one’s periods of weakness attract both one’s enemies and opportunistic former allies of convenience. Such periods can also overturn long-standing policies, such as the steady and uneasy rapprochement between Saudi Arabia and Israel. 

Internal difficulties 

President Trump has pursued what seems, from the outside, to be a closer relationship with Saudi Arabia, on the back of his anti-Iran stance and Saudi willingness to support the American defense industry.

The move attributed to the Crown Prince has, regardless of whether its motivations were mercantile, shaken up the fragile web of alliances, groups and blood ties that make up the politics of the populous Saudi Royal Family. It is a dispute which is not limited to Royals and assorted businessmen, but will inevitably involve structures of the state, such as the Army. The Asia Times quotes a Middle Eastern investor who has had significant dealings with the House of Saud and who says that:

“This is more serious than it appears. The arrest of the two sons of previous King Abdullah, Princes Miteb and Turki, was a fatal mistake. This now endangers the King himself. It was only the regard for the King that protected MBS. There are many left in the army against MBS and they are enraged at the arrest of their commanders” (ed. n.: MBS being the initials for the Crown Prince, whose self-aggrandizement is assumed to be the purpose of the move). 

The IPO of the century, that of Aramco, the national oil company of Saudi Arabia, is being courted by every major financial center in the world, and Trump wants it for the New York Stock Exchange, which would not only boost the paper boom registered under Trump, but would also provide significant earnings for the US financial industry.

At his death in 1953, Ibn Saud had over 50 sons and all of the kings of the country he created have been part of this group. The second-generation numbers over 800 men and the third generation several thousand, so the already thorny and murky political dealings of the House of Saud have become progressively worse as the number of first generation heirs dwindled. The former Crown Prince Mukrin, who had both experience and was born in 1945 (King Abdullah died at the age of 90), had been the initial Crown Prince, but he was replaced with the first of the second-generation aspirants for the top leadership role, Mohammed bin Nayef (former Minister of Interior), and then by King Salman’s son. Prince Mukrin had the disadvantage of being born outside of the complicated dynastic marriages of Ibn Saud, to a Yemeni concubine, while the current and the two prior kings (Salman, Abdullah and Fahd) were all sons of the Sudairi Seven and thus part of a naturally powerful group.

At his death in 1953, Ibn Saud had over 50 sons and all of the kings of the country he created have been part of this group. The second-generation numbers over 800 men and the third generation several thousand, so the already thorny and murky political dealings of the House of Saud have become progressively worse as the number of first generation heirs dwindled.

While the opacity of the politics of the House of Saud is a given, a few elements stand out. For one, we have the growing impatience of the “young wolves” as the end of the first-generation leadership is in sight and the likely competition and even conflict that may stir up amongst them in the fight not just for temporary power, but power that can project across generations, marginalizing other branches of the family. King Salman himself can staff an entire government of worthies, being the father of: the first Arab and Muslim astronaut, Sultan bin Salman, who is a high-level official credited with the development of the Saudi tourism sector, which includes the all-important Hajj that legitimizes the rule of the House of Saud by facilitating the access to the two Holy Sites; the governor of Medina Province, Prince Faisal; one of the airmen fighting alongside the Americans in anti-Daesh operations, Prince Khaled etc. In practice, not many of the top roles in government are occupied by royals, but by technocrats, and even the royal positions tend to be awarded and held on merit (King Salman, for instance, had been the governor of Riyadh through its explosive growth, as well as the “sheriff” of the Royal Family, policing the younger generations).

The main constituency of the Saudi leadership are the Royal Family, who expect stipends from the national wealth, which have become increasingly onerous as the group has ballooned in size and so have their demands in order to live up to the stereotypical lavish lifestyle.

Secondly, we have the balancing act that the Saudi leadership must perform between the demands of society coupled with the current global trends and the wishes of the influential clergy and its particular religious vision. While they are not liberal by any Western standards, King Abdullah had broken with tradition by allowing women in the Shura proto-parliament, in municipal elections and by appointing one as Minister for women issues. Educational initiatives sent both men and women abroad, and now the current leadership is easing its policy on a symbolic issue, that of women driving. Not only that, but the words “moderate Islam” are being bandied about, which surely amount to a significant departure from the usual rhetoric. It is likely that this reflects not only the need to rely more on an indigenous work force that must be both educated and must possess some level of mobility, but also that these moves are a tactical courting of Western public opinion, whose liberal interest groups are notoriously easy to persuade through limited concessions and are more focused on internal pursuits of their agenda than external ones.

Thirdly, the main constituency of the Saudi leadership are the Royal Family, who expect stipends from the national wealth, which have become increasingly onerous as the group has ballooned in size and so have their demands in order to live up to the stereotypical lavish lifestyle. Cutting those stipends is an unpopular move, though it will eventually be necessary, and the leadership in the transition phase between generations had best be wary of challengers. 

Conclusion 

The tumultuous phase of the Saudi transition from the first to the second generation of descendants from the founder of the state has begun early, with a move that reflects both the ambition of the current Crown Prince, and his likely vulnerability, as well as the economic difficulties of the Saudi state in the current commodity market.

The tumultuous phase of the Saudi transition from the first to the second generation of descendants from the founder of the state has begun early, with a move that reflects both the ambition of the current Crown Prince, and his likely vulnerability, as well as the economic difficulties of the Saudi state in the current commodity market. Whether or not such a “coup” can be pulled off without galvanizing ambitious and frightened potential rivals has yet to be ascertained, and neither can we be sure of how the rest of the world, in the aggregate, will regard such a move that ultimately may threaten its own economic interests as well as the perception of the stability of Saudi Arabia. Many things can happen, from an expansion of the low-level insurgency in the Saudi Eastern regions to a breakdown of its projects abroad spilling over into the Kingdom’s delicate internal politics. Another scenario, which is very speculative, is that purported challenger not just for the current leadership, but the entire House of Saud and the existence of Saudi Arabia, may try to discredit it in the role of protector of the Holy Sites and of the pilgrims making their way there by staging an attack there similar to the one in 1979 when followers of a new “Mahdi”, Mohammed Abdullah al-Qahtani, seized the Grand Mosque in Mecca and held it for two weeks with the help of friendly elements within the Saudi National Guard, necessitating even the presence of French commandos in a city normally off limits to Muslims. At the same time, the Shiite Qatif uprising took place opportunistically in the Al-Ahsa Province. This threat to the prime source of legitimacy for the House of Saud precipitated a turn to more conservative policies, to undermine the forces that led to such a challenge. It is not unthinkable that such an obvious weak spot would be again a prime target for asymmetrical warfare.

 
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OEconomica No. 1, 2016