Riyadh draws line in the sand as MBS seeks to reinvigorate reform programme

7th February 2019, Issue 1,074.

Saudi officials are trying to put the Khashoggi murder, governance and human rights shortfalls behind them, but amid new efforts to kick-start inward investment, the kingdom may still struggle to address critics

Saudi officials are trying to put the murder of dissident journalist Jamal Khashoggi behind them, with a new initiative to kick-start inward investment and a range of soft power initiatives. But while the stellar turn-out of sporting stars, entertainers and business leaders arriving in the kingdom suggests that – rather predictably – many supports for Crown Prince Mohammed Bin Salman (MBS)’s Vision 2030 agenda see it is business as usual, Riyadh continues to struggle to address criticism of its record on human rights and financial abuses.

Saudi technocrats and business leaders are trying to consign the recent wave of negative publicity to the past and instead press on with the Vision 2030 economic and social reform programme instigated by MBS – even if changing the narrative on the international stage is proving more difficult than Saudi officials would like.

The kingdom’s insistance on drawing a line in the sand was underlined when the Royal Court on 30 January issued a statement announcing the controversial anti-corruption drive’s end. To some surprise, MBS said the crackdown had achieved its objectives – although it is clear that many billions of dollars have been pocketed in the ‘settlements’ agreed by the crown prince’s interrogators with most of those held in Riyadh’s Ritz-Carlton hotel in November 2017 (GSN 1,048/1).

However, GSN’s soundings suggest the public, and especially younger Saudis, are strongly supportive of anti-corruption efforts. The authorities say they will continue efforts to control graft, as underlined by the 4 February announcement of a new financial reporting office, to be integrated into the General Auditing Bureau. This was reflected in the Royal Court statement, which quoted King Salman Bin Abdelaziz saying: “The kingdom will continue its efforts to preserve integrity, combat corruption and empower law enforcement and other relevant state bodies so that they are able to effectively practice their role in preserving public funds”.

Officials in Riyadh have realised that, with or without an MBS who was wounded by the Khashoggi affair – it remains unclear how badly – there is no alternative to trying to reshape the economy. Recent developments highlight the attempt to inject fresh momentum into the reform programme and ensure there is sufficient investment to underpin Vision 2030. These include a plan to attract more investment into key industrial sectors, the unexpected early end to the anti-corruption purge and signs that the sale of shares in Saudi Aramco is still on the agenda.

At the same time, Riyadh faces continued opposition from politicians and institutions in countries that have historically been seen as reliable allies. On 25 January, it emerged that the European Commission had provisionally added Saudi Arabia to its list of countries which pose a risk because of deficiencies in their regime on anti-money laundering and countering terrorist financing. That followed similar criticism by the Paris-based Financial Action Task Force (FATF) in September (GSN 1,067/10). A report by a group of British MPs has sharply criticised Riyadh for its possible torture of women’s rights and other activists, with Conservative Party foreign affairs specialist Crispin Blunt, who is more usually seen as longstanding ally of the kingom, calling for a “re-evaluation” of the UK’s ties with Saudi Arabia.

Business returns to something like usual

Riyadh may turn to more reliable allies in the commercial sphere, with multinationals now returning to Saudi Arabia after initially shunning the kingdom in the wake of Khashoggi’s murder in October (GSN 1,068/9). MBS launched a National Industrial Development and Logistics Programme (NIDLP) on 28 January, at an event in Riyadh’s Ritz-Carlton hotel. This focused on attracting SR1.7bn ($450m) of investment over the next ten years to the industry, mining, energy and logistics sectors. Among those to attend were Dow Chemical chief executive Jim McIlveny and senior executives from companies including ArcelorMittal, Bechtel, Ford, General Electric, Lockheed Martin, Mitsubishi Corporation and Thales. The Ritz-Carlton has become the favoured spot for the government to host such conferences, despite its use as a temporary prison at the start of the anti-corruption drive.

The strong turn-out at the NIDLP will have pleased the government, as these companies are clearly considering making investments and not just bidding for state-funded contracts. But conference delegates told GSN that, while Saudi Arabia had a more attractive investment climate than many other destinations, the political risks of investing in the kingdom needed to be mitigated by co-investment with the likes of MBS’s favoured vehicle, the Public Investment Fund (PIF).

These sources observed that, unlike similar schemes in other Gulf countries, the Saudi programme is led by ministers with commercial backgrounds who “seems alive to the concerns of potential investors”. Company representatives were matched up with relevant ministries and potential local partners. Transport minister Nabil Al-Amoudi described how “financial enablement packages” would be on offer from the Saudi Industrial Development Fund.

The NIDLP is meant to create 1.6m new jobs, according to energy, industry and mineral resources minister Khalid Bin Abdelaziz Al-Falih. Addressing unemployment and under-employment is a vital element of reforms, but the initiatives to date have failed to make much difference. According to statistics released on 27 January, the overall unemployment rate stood at 12.8% in the third quarter of 2018, barely shifting from 12.9% in Q2 18; that encompasses an unemployment rate of 7.5% for Saudi men and 30.9% for Saudi women. Overall labour market participation stands at just 56.4% (19.7% for Saudi women).

MBS remains a toxic product in the West – which may explain why the crown prince opted not to go to the World Economic Forum in Davos, where in 2017 and 2018 he had been a star turn – but the Saudi establishment, from King Salman down, will seek to change this difficult situation. Thus just a couple of days after the industrial jamboree, the Anticorruption Committee unexpectedly announced that it had wound up its investigations. MBS had said, in October, the anti-graft drive had two years left to run.

The usual suspects

The government said it had questioned 381 individuals and reached settlements with 87 people who had confessed to the charges against them, resulting in SR400bn being seized in the form of real estate, cash, companies and other assets – among the last to be released was Saudi-Ethiopian business magnate Mohammed Al-Amoudi.

A further eight individuals refused to agree a settlement and have been referred to the Public Prosecutor. In addition, the Public Prosecutor refused to make a settlement with 56 others because of “already existing criminal charges against them”. The identities of those being prosecuted has not been revealed and it is not clear what charges they face. Among them is said to be Prince Khaled Bin Talal, who was briefly allowed out of custody to attend his father’s funeral in December (GSN 1,072/7).

The apparent end of the campaign is largely a symbolic gesture, because corruption remains prevalent. The authorities have set up a Financial Reports Office in the General Auditing Bureau to pursue future cases. However, by bringing the high-profile campaign to an early conclusion the government may be hoping that wealthy Saudis will stop trying to move their assets abroad and may instead start to invest in the local economy. It is likely to take some time for confidence to be restored, but if Vision 2030 is to have any chance of succeeding it is vital that local investors are on board because they are best equipped to deal with the domestic market.

Where are the assets going?

The assets seized during the anti-corruption campaign are meant to be channelled into investment to support Vision 2030, but it is not clear how this will be done. Many of the assets are likely to be illiquid and any attempt to rapidly sell large numbers of companies or properties could drive down their value.

There must also be some doubts about the scale of the seizure. In October, MBS told Bloomberg that “something above $35bn” had been captured. Independent calculations suggest it could be much more but the jump up to SR400bn/$107bn is still surprising. Whatever the numbers, the state (as represented by MBS) appears to have gained full control of some important assets. These include media companies Middle East Broadcasting Center (MBC Group), co-founded by the once dominant Waleed Al-Ibrahim, and the Rotana TV channels owned by the kingdom’s only entrepreneur with a global reputation, Prince Alwaleed Bin Talal Bin Abdelaziz.

Whither Aramco… and Neom

There has also been an attempt to reinvigorate the part-privatisation of Saudi Aramco – a critical step as it will provide the PIF with the money it needs to support the huge amounts of foreign direct investment Vision 2030 requires.

There is greater clarity around the value of the assets held by Aramco following the recent publication of Dallas-based petroleum consultancy DeGolyer & MacNaughton’s audit of Saudi oil reserves. International financial institutions, whose support for the initial public offering (IPO) is critical, now have a better idea of what they are being asked to underwrite. The audit indicated that, based on the December 2018 production rate of 10.6m b/d, Aramco’s crude reserves will last until 2088, excluding likely improvements in enhanced oil recovery techniques. Coupled with extremely low exploration and production costs, Riyadh is hoping the $2trn valuation MBS (and, presumably, his advisors) earmarked for Aramco is not as unrealistic as many analysts have claimed.

In a move to further de-risk the IPO, Aramco intends to issue up to $70bn worth of bonds in the coming weeks. The proceeds will go towards buying a 70% stake in Saudi Basic Industries Corporation (Sabic) from the PIF. This move will strengthen Aramco’s downstream capabilities and create a more balanced company with a broader range of assets. The bond sale, led by JP Morgan and Morgan Stanley, gives an opportunity to test the waters and build market confidence in Aramco – and Saudi Arabia’s status as an investment destination. The Sabic deal will provide PIF with funds needed to support inward investment.

The authorities are also trying to give a sense of progress on other aspects of the reform programme. On 29 January, approval was given to formally set up Neom as a company wholly-owned by the PIF to develop the grandiose Neom project in the north-west. Some development has already been carried out at the site, but there is plenty of scepticism about the viability of developing a new city in an area with no obvious natural resources, which is situated a great distance from any other city.

In the world of soft power

The authorities have also been pushing the entertainment angle, with the Supercoppa Italiana played between Juventus and AC Milan in Jeddah on 16 January, singer Maria Carey performing in Riyadh on 31 January, and the Saudi International golf tournament being played in King Abdullah Economic City on 31 January-3 February. A few golfers declined to participate – British Ryder Cup veteran Paul Casey explicity stating this was because of Khashoggi, while Tiger Woods refused a reported $9m fee and yacht for unspecificed reasons – but the event otherwise attracted the most storied field of the new golf season.

While such events help to put a modern gloss on the Saudi state and are seen as good PR by the authorities, other aspects of the regime continue to cause difficulties. A report by three British members of parliament on the jail conditions of activists arrested after campaigning for the right for women to drive concluded they were subjected to cruel and inhumane treatment which could amount to torture and that responsibility for their treatment lies with “Saudi authorities at the highest level”. What will have surprised (and concerned) the authorities was that one of the members of the group of MPs was Crispin Blunt who has long been seen as a strong supporter of Riyadh. Speaking at a debate about Saudi Arabia in London on 4 February, soon after the report was released, Blunt said “we must evaluate our ties with Saudi Arabia… The attitude and the actions of the kingdom cannot be tolerated and it has to be seen how our government will recast its relations with Saudi Arabia, not only in the light of the murder of Jamal Khashoggi, but with the active suppression of civil society.”

Although Blunt said he did not favour severing all military ties with Riyadh he did say “a re-evaluation of our defence relationship must be on the table” and added that “I think the best thing would be frankly if Saudi Arabia could find itself another ruler.”

 

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