Saudi Arabia: Loss of Economic Confidence

by Charles Kestenbaum

Saudi Crown Prince Mohammed bin Salman (MbS) is leading a delegation to the US in coming weeks, seeking to attract massive US investment in the IT and high-tech sectors. The crown prince’s development plan for Saudi Arabia—called Vision 2030—is intended to transform the Saudi economy away from almost total dependence on hydrocarbon revenues to something more diverse.

The success of these efforts will be vital to the transformation of the Middle East into a stable, vital part of the global twenty-first century economy. In order to achieve these essential goals, the global finance community must feel that investment in the kingdom will face risk factors that are fully identified and deemed manageable.

Unfortunately, recent actions taken by MbS have, at least for the moment, undercut the very security global capital requires. The unannounced detention of hundreds of Saudi royal family members, senior government officials, and prominent business tycoons frayed Saudi Arabia’s ties to the global business community. The detentions came just a month after a major global investment seminar concluded at the same Ritz hotel the detained royals would be held. A host of global billionaire tycoons were excited by the prospects of an energized Saudi leadership dramatically expanding its engagement in world financial markets, such as the Public Investment Fund investing many billion dollars in several Silicon Valley enterprises.

In fact the timing of the detentions could not have been worse. What could these global tycoons think their risks might be valued if Prince Mit’eb, the son of the former king and himself a candidate for the crown, is summarily handcuffed at gunpoint and detained until he reportedly agreed to hand over a billion dollars allegedly embezzled from National Guard contracts. At the same time, newspapers were reporting that MbS purchased a private yacht valued at $400 million and paid $450 million for the Van Gogh sold recently at auction in London.

Saudi Arabia has undertaken the most dramatic series of social and financial reforms in modern history. The empowerment of women is well underway. The government is finally reining in and reducing the authority of the ultra-religious elements.

It is essential that rule of law be more transparent and enforced. In a royal kingdom, the royals makes the rules—and are exempt from these rules by virtue of being the rulers. But to transform from a kingdom with subjects to a new regime with citizens, the Saudi authorities must reestablish at the very least transparency and rule of law in the worlds of finance, business, and commerce.

Although reforming the system and reducing corruption is essential, how it is done is equally important. The recent detentions might have initially seemed a good way to recover many billions of dollars, but it also undercut the very rule of law on which global investors rely. And not just foreign investors were panicked by these shocking events. Many Saudis fled the country in anticipation that they might be next to be detained. The outward flow of Saudi wealth, especially in cash and other liquid asset forms, was reportedly significant. Meanwhile, the kingdom is suffering vast budget shortfalls and is drawing down currency reserves to cover the billions in subsidies to maintain low prices for electricity and gasoline. It’s no time to terrify the very entrepreneurs needed to expand the economy.

It will be difficult for MbS to reform royal corruption, make the markets more legally and commercially transparent, and employ the millions of under-30 Saudis he now represents. It will be almost impossible unless some sense of predictability is restored to the economy.

Imagine a major US defense contractor who has been working inside the Saudi National Guard (SANG) for the past 35 years suddenly discovering that the SANG commander is in detention. The relationship built up with the Saudi business partner, who is both a SANG commander and a member of the royal family, has been completely overturned. Now the US firm likely will lose the contract it had been developing for 35 years. Worse, the contractor is likely to be associated with the corruption that resulted in that official’s detention, which means that the contractor has fallen out of favor with the new SANG authorities.

Now repeat that dislocation thousands of times for the hundreds of Saudi sales representatives, partners, and in some cases investors/owners detained for allegedly extensive corruption. My job as a commercial counsellor at the US embassy in Riyadh was to advise US firms of exactly these kind of questions, such as who should I do business with and who has good relations with the Saudi government client I seek access to? It’s difficult to answer those essential questions now.

One does not simply overturn relationships between companies, executives, and employees built up over decades without some loss of confidence that the system is transparent and fair. It may be a long time before the Saudis and MbS can regain sufficient trust to assure investors, both Saudis and foreign, that their funds, assets, and rights are protected by rule of law.

Charles Kestenbaum served for 25 years as a senior diplomat in the US Foreign Commercial Service. In addition to service at embassies from Baghdad to Jakarta, he worked at the US Executive Director’s Office at the World Bank. Prior to joining the US government he worked for NBC News in Cairo and Beirut, covering the Lebanese civil war and the Camp David peace negotiations. For the past decade he has provided private-sector clients with competitive intelligence focused on risk management in the Middle East and North Africa. Photo: Mohammed bin Salman (Wikimedia Commons).

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  1. With all due respect to the author, in this case he’s either misunderstood or he’s pretending to understand the relationship and intentions of the Saudis with the US businesses! Simply put the author has gotten this case ass backward! Detention of the Saudi family members by MbS has been for eliminating all those who would have eventually asked for their cut in any business transaction with the US businesses! From their prior experiences the US businesses have revealed the names of those who were asking for their cuts to MbS because MbS requested of the names! At the end of day and from here on out the only person who will ask the US businesses for his cut would be MbS! So it is a win win situation for MbS and the US businesses!

  2. The article suffers from an immediate credibility deficit by citing “the Van Gogh” as being bought by MbS. It was actually a Da Vinci painting and was bought by an Emirati – not a Saudi – interest, to be placed in the Louvres Museum in Abu Dhabi. If you can’t get a simple fact right, don’t bother writing critical pieces analyzing other countries.

  3. I think the author has been a government employee for too long. Everyone in the world is happy about what MBS is doing – except the corrupt people who benefited from the “old system”. Perhaps the author was part of that cabal?

  4. I don’t find the corruption of the Saudi Princes much different from the skimming off of Americans by various US financial vultures and elites.
    Nothing about MbS ‘s high handed seizures gives me any faith that he is capable of bring off his economic promises to the street….they will lose patience with him.
    He will not last.

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