The State of Saudi Arabia

The recent trip of U.S. President Donald Trump to Saudi Arabia undoubtedly attracted a lot of media attention: Trump dancing with the Saudi royals at the all-male party; his face projected onto a glorious hotel; or billboards chanting ‘together we prevail’ next to the images of King Salman and Trump. All this in a country with historically high anti-US sentiments. The House of Saud’s overwhelmingly warm welcome of the U.S. President is no coincidence: economic challenges the Gulf state is facing at the moment pose a risk to stability, which means the regime is ready to go to great lengths to ensure the survival of the petro-state.

Every now and then, analyses preoccupied with the question of Saudi stability emerge, doubting the Kingdom’s survival. The focus of attention in such overly-dramatic reports is usually the Saudi royal family, known as the House of Saud. An exemplary period causing an overflow of speculation was January 2015, when the death of the previous king, Abdullah bin Abdalaziz brought the Kingdom’s succession issue into focus. House of Saud succession has always been obscure to non-royal observers (and perhaps even to most of Saudi's state-salaried 5,000 princes as well).

However, such speculation omits that whilst being an ever-present issue, succession has never caused serious instability in Saudi Arabia. In 1964, King Saud bin Abdalaziz Al Saud was forced from the throne by his own brother, Prince Faisal. Though intially tense, the power struggle preceding the King’s abdication was ultimately resolved through mediation, resulting in Faisal's eventual coronation.

To avoid potential turbulences upon his inauguration in 2015, King Salman bin Abdalaziz chose an approach at odds with the Kingdom’s economic difficulties yet was unsurprising by historical standards: two-month bonuses to all public sector employees (about two-thirds of working Saudis) ordered by the King. This suggests that financial incentives for the population are an effective prevention against turbulence of transition periods and in times of potential instability.

Therefore, there is good reason to believe the Kingdom is well aware of its weakness regarding succession and in-house power struggles. However, the fact remains that interests of the Saudi royals in maintaining stability overshadow the costs. In other words, the transfer of power is not the primary threat to domestic stability. Instead, it can be rather described as a double-edged sword with royal succession on one side, and the Kingdom’s oil wealth on the other.

Saudi’s current King, Salman bin Abdalaziz is 81 years old, and recent media reports of his declining health lead to speculation on the competition between two potential heirs to the throne. The Crown Prince, Muhammad bin Nayef (MBN - 57), who also holds the post of Minister of Interior, is Salman’s nephew and officially the next in line. MBN’s rival is a young, assertive and ambitious son of Salman, Muhammad bin Salman (MBS - 31), who also happens to be the youngest Minister of Defense in the world.

The rivalry between the two is believed by media sources to be strong. MBS’s appointment as Deputy Crown Prince by his father in 2015 was significant: it included his launch of Operation Decisive Storm in Yemen, as well as chairing the Council of Economic and Development Affairs that is in charge of current economic reform programme Vision 2030. Since then, MBS’s influence on Saudi politics has grown, and is believed to have caused friction with MBN’s ambitions.

This is one reason why the decisive element in future political developments in the Kingdom is the state of its economy, which may influence the choice of a successor to King Salman. MBS has made gains in establishing himself as a driving power behind Saudi’s budgetary ambitions and the saving of the governmental revenues as part of the Vision 2030 economic reforms. The National Transformation Plan which aims to secure institutional capacities for achieving the 2030 Vision, is run by MBS. This ambitious project aims to move Saudi Arabia away from oil dependency, and transform the domestic economy by boosting the Kingdom’s manufacturing capabilities and expanding the private sector. As Vision 2030 currently constitutes the key vector of Saudi economy, it sheds light on MBS’s significant role in Saudi policy and his ascendance in the Kingdom’s politics. But the performance of those reforms has yet to be seen.

Looking at the current state of the Saudi economy: national debt reached heights over the past few years, amounting up to 316.5 billion SAR (approximately 84.4 billion USD) in 2016 according to the 2017 Governmental report. Despite the drop in oil prices since 2014, the King’s decision to keep pumping Saudi oil, in order to maintain the Kingdom’s income and tackle foreign competitors, resulted in a harsh financial hit to the Kingdom and pointed to an acute need to diversify the economy in order to decrease its oil dependency. The Saudi tradition of patronage networks and a population reliant on governmental subsidies as a part of a functioning rentier system (which was also one of the key reasons why Saudi Arabia avoided domestic protests during the Arab Spring) was bound to come under threat. Employment in the public sector increasingly burdens the Kingdom, and the demand for such jobs - with high rates of youth unemployment (as high as 30%) and the rapidly growing population
- exceeds the supply, which does not bode well for the economy.

MBS, as the figurehead of Vision 2030’s ambitious transformation plan, introduced austerity measures last year and into 2017, which included public sector salary cuts. Initially, these were seen as a push Saudi Arabia urgently needed to diversify its economy and address its fiscal crisis. The problem has been that the Saudi population, nurtured with governmental benefits, continues to resist such changes. It is thus not surprising that some of MBS’s budget cuts were quickly reversed by the government earlier this year.

Despite that, Saudi Minister of Finance, Mohammed al-Jadaan, expressed commitment to the changes, stating that future reforms would be eased with the private sector package for housing, as well as low-interest loans aiding businesses and the growth of SMEs.

Another crucial element of the 2030 Vision is the creation of a sovereign fund, which would be the largest in the world. Having in mind recent deals between Saudi Arabia and the U.S. upon Trump’s visit, the Kingdom seeks to increase its foreign investments and strengthen its role in the global economy beyond oil. This plan not only aims for financial strengthening of the Kingdom, but it also secures its economy and ability to deal with the decline of oil prices by increasing foreign interests in Saudi stability.

Furthermore, the boost for the sovereign fund is to come from what is predicted to become the largest public offering in history: up to 5% of Saudi Aramco, the Kingdom’s oil giant, will be put on international sale which is a unique move that would not be conceived without the Kingdom’s serious commitment to its financial stability. Saudi government estimates put the value of the sale at US$ 100 billion. However, the public offering will also require more financial transparency to sway investors, and Saudi Arabia will have to prepare for scrutiny of its assets if it wants to convince the world of its reliability.

At the same time, it is important to note that the 2030 Vision and diversification plans do not clash with Saudi desire to maintain its leading position in the global oil market. As petroleum will most likely remain the key source of income in the foreseeable future, the Vision 2030 is designed to keep the oil sector income flowing while restructuring the economy to facilitate the growth of non-oil sector.

In fact, despite the rivalry between U.S. and Saudi Arabian oil producers, the Kingdom is investing into its ties with American energy firms, most recently seen in the agreements amounting up to 50 billion USD with companies such as General Electrics, Schlumberg and Halliburton. Modernization of Saudi oil industry through American technology is an illustration of pragmatism in the Saudi-American relations, and shows that the ends are far more valuable than the means - for both the U.S. and Saudi Arabia.

Furthermore, the Kingdom recently became the owner of the largest oil refinery in the U.S. In fact, expansion in Aramco’s refining is a part of MBS’s initiative to push Aramco towards industrial capacities, which includes expansion into Asia. By investing in new refineries in India, China, South Africa and Indonesia, Saudi Arabia aims to secure demand for its crude oil.

However, to protect itself from American competitors and to secure its petroleum revenues, the Saudis also look to Russia to pursue its interests in OPEC and agree on cutting production. The two significantly differ on their foreign policy ambitions in the Middle East, such as the Syrian conflict and their respective stances towards Iran.

Russia’s reassertion of power in the region does not seem to have hampered Saudi-Russian economic cooperation, however. Both have a mutual interest in preventing U.S. shale oil from threatening their oil market share, which was also a factor that facilitated the renewal of Saudi and Russia’s subtle alliance since its breakdown in 2004.

While chances of a lasting agreement to coordinate their interests may be slim, based on historic evidence of Saudi-Russian relations, both countries currently benefit from intense cooperation on stabilizing oil prices. After all, Russia’s own financial difficulties need addressing before President Putin’s re-election campaign in 2018.

In Saudi Arabia, the success of MBS’s reforms will continue to encounter friction caused by the Kingdom’s internal policy-making rigidity, and MBS will welcome any opportunity to boost his position within the Saudi government.

In sum, the Kingdom finds itself in a tricky position. The government needs to enforce reforms that include salary cuts and decreasing subsidies to address the budgetary deficit. However, such changes are constrained by the tradition of a patronage system, and its disruption causes a dissatisfied population and potential instability. Moreover, the Kingdom needs to gather resources for the diversification of the Saudi economy, which will be a huge challenge both technically and politically. Since diversification is long overdue in Saudi Arabia, the support MBS can receive amongst the House of Saud for his reforms will reveal the flexibility of the Kingdom in terms of its capability for reform, which is in effect decisive not only for his future, but also for the Kingdom itself. In the meantime, oil will remain the key source of income, providing for the society and serving as a glue of Saudi Arabia.

Alexandra Gerasimcikova
OAG Analysis

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