Saudi Arabia presents itself to the world as a booming economy and a major player on the geopolitical stage. Its regional influence in the Middle East, be it cultural, military, or economic, is undeniable. Yet the draconian reforms of the controversial Crown Prince Mohammed bin Salman (MbS) may be having a negative impact on investment in the kingdom.
MbS is officially Saudi Arabia’s Deputy Prime Minister, the position of Prime Minister, being held by his father King Salman. Still only 34 years of age, MbS has been steadily gaining more power in the country over recent years and, in 2017, announced his “Vision 2030,” a program of wide-reaching reforms. Vision-2030 consists largely of a blueprint for diversifying the Saudi economy and reducing its dependence on oil, but also contains plans for developing many aspects of the public sector, from education to tourism. Since that time, foreign investment has dropped, house prices have increased, and many overseas workers have left the country.
It is perhaps inevitable that any country would experience a short-term reduction in investment after announcing that it would be reducing its dependence on a commodity upon which it had previously relied so heavily. This especially applies in the case of a resource as lucrative as oil. Yet many observers have suggested that the Prince’s strongman political tactics are at least in part to blame for the downturn.
On November 4, 2017, MbS was behind a brutal crackdown against many of his political rivals. Members of the Saudi royal family and other powerful figures were rounded up at an event at the Ritz-Carlton Hotel in the Saudi capital of Riyadh. Those held were allegedly subjected to psychological abuse, extortion, and torture. Hundreds of royals, politicians, and billionaire investors were detained on that extraordinary evening, a night that saw the glitzy marble halls of the Ritz-Carlton transformed into a common prison. The detainees were told they had to sign away large swathes of their fortunes in order to be released.
MbS described the violent crackdown on his opponents as a patriotic act, designed to weed out corruption in the country, but it is now clear that the move was nothing more than an attempt to consolidate his own power and send a message to his domestic competitors. The detentions were designed “to remind people going forward that their wealth and their well-being would depend on the crown prince and not anything else, which is why it was so upsetting for many in the royal family,” an anonymous former US official told NBC News. Many of those targeted had been close to the inner circle of the now deceased King Abdullah, who preceded King Salman on the throne, and two of his sons.
MbS has ruled Saudi Arabia with an iron fist. The most infamous moment came on October 2, 2018, when Washington Post journalist Jamal Khashoggi was murdered in the Saudi consulate in Istanbul.
Since that time, MbS has ruled Saudi Arabia with an iron fist. The most infamous moment came on October 2, 2018, when Washington Post journalist Jamal Khashoggi was murdered in the Saudi consulate in Istanbul. According to the CIA, MbS personally ordered the assassination. Less well publicized are the myriad other abuses that have taken place under MbS, such as the detention of large numbers of women’s rights activists in 2018, many of whom have allegedly been subjected to torture and sexual abuse in prison. Add that to the escalation of the brutal war in Yemen, and it is no mystery that the reputation of Saudi Arabia has plummeted under MbS (and may be damaged beyond repair). It is against this background that investment in the country is faltering.
The roundup at the Ritz had an immediate impact on the Saudi economy. All in all, 201 people were charged in the supposed corruption inquiry that followed, including 11 of MbS’s fellow princes. Over 1,700 bank accounts were frozen, with over $100 billion investigated for financial crimes. For many in the country, there is a real worry that these kinds of actions make the leadership in the country look unstable, putting off foreign, private investors. (MbS’s targets under Vision 2030 massively emphasize the role of the private sector—included is a plan to raise the private sector’s GDP contribution from around 40% to 60%. Vision 2030 also set the goal of creating 450,000 non-government jobs by 2020). Following the events at the Ritz, many foreign investors either decided to sit on their cash until the situation had stabilized, or else simply looked elsewhere.
As foreign investment stagnated, MbS turned his attention towards Saudi firms. However, thus far it is Saudi companies that have borne the brunt of MbS’s policies.
As foreign investment stagnated further after the Khashoggi killing, MbS turned his attention towards Saudi firms. “They are respected now; before they were spat on,” an anonymous foreign executive told the Financial Times. The royal court even went as far as setting up a WhatsApp group on which industrial leaders can talk to MbS and his senior officials.
However, thus far it is Saudi companies that have borne the brunt of MbS’s policies. “There are about 7,000 industrial firms in Saudi Arabia and many of them are losing money or barely making money,” said another anonymous foreign executive. Analysts have attributed this to factors such as the massive cuts in energy subsidies and the introduction of a Value-Added Tax (VAT) in Vision 2030, which are having a negative impact on household spending, although such developments may correct themselves in the long term.
More alarming is the fact that, after the slump in oil prices in 2014, tens of billions of dollars of government contracts went unpaid. There has also been a significant exodus of expats, who filled around 90% of all private sector jobs prior to MbS’s ascendency. This is largely down to significant increases in tariffs on foreign workers and has led to both rising costs and plunging profits.
Despite all that has happened in Saudi Arabia over the past five years, one fact remains unchanged: money talks. It is conceivable therefore that the status quo may hold for the time being. To give one example, after the Khashoggi killing, several important financial institutions and figures boycotted Saudi Arabia. These included John Flint, chief executive of HSBC and Larry Fink, head of BlackRock.
Yet Flint and Fink were among those who joined Saudi ministers for a financial conference in Riyadh in April 2019. While MbS’s thuggish tactics make political change more likely, investors will always go where the money is.