By Stanly Johny
10 May 2016
There is no guarantee that Saudi Arabia’s new economic measures will succeed in a region grappling with regional setbacks, falling oil prices, and geopolitical conflicts
Saudi Arabia appears to be in a hurry to reshape its economy and reposition itself in West Asia. Deputy Crown Prince Mohammad bin Salman, who unveiled a plan late last month to diversify the country’s economy, says the kingdom will end dependence on oil in four years. Unlike the previous statements by the royal family on economic diversification, there’s at least a plan this time. Prince Mohammad, who has gained enormous influence over policy decisions since his father Salman bin Abdul-Aziz Al Saud ascended the throne early last year, has proposed to sell a stake in Saudi Aramco, the nation’s oil producer, and create the world’s largest sovereign wealth fund which will diversify into non-petroleum assets. The idea is to make investments, and not oil, the key source of Saudi Arabia’s government revenue.
The unprecedented urgency in Riyadh to shake up the economy speaks of the seriousness of the situation. For decades, the ruling Al Saud family used oil revenues to buy loyalty at home and influence abroad. It worked well when prices were high and the power dynamics in West Asia were largely in favour of the kingdom. But now prices remain persistently low, the kingdom is grappling with regional setbacks, and the oil-geopolitics industrial complex, which has been the bedrock of the Saudi-Wahhabi system, is in jeopardy.
The fall in oil prices (from around $110 a barrel in June 2014 to less than $50 now) has left a gaping hole in Saudi Arabia’s budget, which is predicted to be $100 billion this year. The government has taken several steps to deal with the crisis. It has cut spending, issued domestic bonds, and tapped its foreign exchange reserves which fell by around $116 billion, or 16 per cent, to $616.4 billion last year. In April, Saudi Arabia also turned to international banks for the first time in more than a decade for a $10 billion loan. The political implications of this crisis could be enormous. It was wealth from the oil that helped the kingdom weather the Arab Spring in 2011. When people elsewhere rose against dictatorships, the late King Abdullah announced a special economic package of $70 billion to quell discontent at home. There is doubt whether the present monarch has any such economic leeway left to cope with unwarranted situations.
But despite the oil shock, the Saudis are not ready to cut production to pump up prices. At a recent meeting of oil producers in Doha to strike a deal on production freeze to stabilise price, Prince Mohammad made a dramatic last-minute intervention, saying the Saudis would not agree to any such pact unless the Iranians freeze output. Iran, busy reintegrating itself into the global economy after international sanctions against it were lifted early this year, is unlikely to do so. But Mr. Mohammad’s intervention has revealed the thinking in Riyadh.
The Saudis are ready to live with lower prices for a longer time. The key reason is that Riyadh is afraid of losing market share to its rivals. Second, lower oil prices are hurting the shale oil producers in the U.S. worse than the Gulf countries. A vibrant shale oil industry is not in the long-term interests of the kingdom. Third, lower oil prices will hit Saudi Arabia’s geopolitical rivals, mainly Iran and Russia, as well. So the Saudis have turned to a road not taken earlier — they want to reduce the dependency on oil while letting their oil-dependent rivals struggle.
The Salman Doctrine
This is part of a long-term strategy. Ever since King Salman came to the throne, there has been a deliberate attempt to raise the kingdom’s regional profile through interventions and enhanced anti-Iranism. The Saudis have realised that the region is changing. Whether they like it or not, the nuclear deal is making Iran stronger in West Asia. Unless they change themselves, they will lose the so-called Cold War. So the Salman doctrine has two main components. The economic part is one, of course. An economy not vulnerable to oil fluctuations would put Saudi Arabia in an enviable position.
The second part is geopolitical. Today, Saudi Arabia and Iran are locked, though indirectly, in at least two conflicts — Syria and Yemen. Though it was the late King Abdullah who envisioned the Syrian strategy — help the rebels topple the rule of Bashar al-Assad — the Salman regime has relentlessly pursued the anti-Assad agenda. In Yemen, the Saudis want to defeat the Iran-backed Shia Houthi rebels and reinstate a Sunni regime. The flip side of this anti-Iranism is its sectarian overtone. The execution of Sheikh Nimr al-Nimr, a Shia cleric of Saudi Arabia, early this year despite strong protests from Tehran underscores the argument that Riyadh doesn’t mind playing the sectarian card in its rivalry with Iran.
But the problem is that none of the Saudi interventions is paying off, at least on the geopolitical front. For more than five years, the Saudis and their friends in the Gulf have invested in Syria to topple the Assad regime. They armed the rebels and succeeded in protracting the civil war. But they were never close to unseating President Assad. In Yemen, the ill-planned air strikes turned out to be disastrous both for the Saudis and the Yemenis. After a year-long campaign, the Houthis are still in Sana’a. At this point, the Saudis seem clueless about how to get out of the mess they have created in Yemen. Moreover, Saudi-U.S. relations are at the crossroads. U.S. President Barack Obama in a recent interview referred to the Saudis as “free riders”. The U.S. Congress is discussing a bill that, if passed, would let the families of the 9/11 victims sue Saudi Arabia for its alleged financial support to al-Qaeda. If the chill in U.S.-Saudi ties spills into the next U.S. presidency, it would pose an unprecedented regional challenge to Riyadh.
Even on the economic front, there’s no guarantee that the reform measures unveiled by Prince Mohammad will succeed. Last year, oil provided 73 per cent of state revenue. The promise to overcome this dependence in four years sounds unrealistic, given the practical and structural challenges. Ironically, an International Monetary Fund report last year had predicted that the kingdom could be bankrupt within the same time period, given the spending sprees and low oil prices.
Saudi Arabia has other challenges as well. The youth unemployment rate is 29.5 per cent, according to the World Bank. The embers of Arab Spring are yet to be put out. The kingdom also faces radicalisation of its youth; several of them have travelled to Syria to join the Islamic State. If the new economic reforms shake up the base of the reinter system, would the monarch succeed in keeping popular discontent within permissible limits? What appears now is that the royals are ready to prepare Saudi Arabia for a long game in West Asia. But the transition will be painful — it could weaken Riyadh’s regional influence further, at least in the short term, while throwing up more challenges for Al Saud at home. It’s a new reality for the king of Arabia.