Image by Alshareefsn

A new country is gradually emerging from the desert terrain of Saudi Arabia. Mohammed bin Salman, or MBS as the Crown Prince is commonly known, is at the helm. At 32 years of age, Mohammed bin Salman is the youngest minister of defence in the world, and is offering an ambitious programme of economic, religious, and social reforms for the people of Saudi Arabia. The heir to the throne has promised sweeping changes across all sectors of society, except for in the political sphere, which is likely to remain autocratic to preserve the supremacy of the House of Saud.

Vision 2030, Saudi Arabia’s national transformation strategy, was announced by the Crown Prince in April 2016. The modernisation seeks to reduce the Kingdom’s dependence on oil by diversifying the economy and developing its public service sectors. Without significant oil revenues to fund public expenditure, Saudi Arabia will find it difficult to implement its bold reforms. However, the global slump in oil prices during recent years has severely strained the country’s national budget. Paradoxically, Saudi Arabia will need to continue pumping oil in order to to sever its addiction.

To help fund Vision 2030, Mohammed bin Salman announced that 5% of the national oil company, Saudi Aramco, would be sold through an Initial Public Offer (IPO) in 2018. Aramco is the world’s largest energy company and produces roughly one in every eight barrels of the world’s oil supply. The Crown Prince told Reuters in an interview that the oil giant is estimated to be worth over $2 trillion. If this valuation is correct, the IPO is set to be the largest in history and could raise as much as $100 billion for Saudi Arabia’s Vision 2030.

Prince Mohammed added that the kingdom’s Public Investment Fund (PIF), its top sovereign wealth fund and vehicle responsible for converting the country’s oil wealth into new business, will spend more than $133.3 billion over the next three years after the IPO is launched. In 2015, the PIF was transferred from the Ministry of Finance to the Council of Economic and Development Affairs (CEDA), giving the Crown Prince ultimate control over Vision 2030 at the expense of former finance minister Ibrahim Abdulaziz Al-Assaf.

The Crown Prince has managed to consolidate power in the desert kingdom through a series of strategic moves, the latest of which involves an anti-corruption purge that has detained over 200 prominent officials and business elites since November 2017. Assaf, who is also a board member of the PIF, was arrested on charges of corruption linked to an urban expansion project in the city of Mecca. This ‘new era of transparency and accountability’, [as government officials have characterised the anti-corruption purge], has been instrumental in solidifying Prince Mohammed’s grip on power.

Indeed, the anti-corruption purge seems to be as much about power as it is about replenishing state coffers. Prince Miteb bin Abdullah became the first senior figure to be released from detainment after reportedly agreeing to pay over $1 billion to settle corruption allegations against him. The Riyadh Chamber of Commerce and Industry estimates that the anti-corruption committee could retrieve up to $800 billion in revenue from corrupt officials.

If corruption is defined as private profit at the public expense, as it has been by royal decree, then any anti-graft measures not applied uniformly across all the Kingdom’s elites may appear like selective prosecution. While the Crown Prince leads the same lavish existence as those prosecuted, he has not suffered the same consequences. Despite this apparent double-standard, the anti-corruption purge will be pivotal to the ambitious economic reforms that seek to secure the Kingdom’s stability in a post-oil future.

The Crown Prince has been similarly aggressive on the international front. He is widely known to have been instrumental in spearheading the military intervention in Yemen and the diplomatic blockade with Qatar. However, unlike the anti-corruption purge, the prince’s foreign policy has not run so smoothly, with the blockade against Qatar failing, and the war in Yemen turning into a quagmire.

Some analysts believe Prince Mohammed could be using these quasi-conflicts as a strategic smoke screen to deflect attention from the simmering tensions within Saudi borders. Saudi Arabia’s gerontocracy has struggled with the task of transforming the country into a modern state that is capable of providing opportunities for a population, over 60% of which is under 30. Lasting just two years as Crown Prince, Mohammed bin Nayef was cast aside and replaced by King Salman’s favoured son. This transition has rejuvenated the executive branch of government and marks the first time a Saudi monarch had officially tried a dynastic transfer of power. Deposing Mohammed bin Nayef and placing him under house arrest in June 2017 was an audacious move, one requiring ample distractions.

However, the new Crown Prince’s bold policies at home and abroad may not be conducive to stability, at least in the short term. Gregory Gause, head of the international affairs department at the Bush School of Government and Public Service at Texas A&M University, said he was surprised by the wave of arrests and called the timing “puzzling”.

“If this means a new definition of ‘corruption’ in the Kingdom, I think that it will take a while for both the domestic private sector and foreign investors to figure out what is going on,” he said. “In the meantime, I think they are going to be cautious about investment. And investment and private sector growth are what Vision 2030 are all about.”

An alternative view, however, posits that the anti-corruption purge could bolster confidence among investors, particularly if the measures show progress in moving towards a more transparent economy and society. It seems the Crown Prince is willing to endure temporary setbacks to secure long-term investment. By extorting hefty settlements from corrupt officials and encouraging foreign direct investment, this purge (both directly and indirectly) funds Vision 2030.

Regardless, investors will be looking closely at developments with the Saudi Aramco IPO and wider economic reforms. Many Saudi experts, who believe Saudi Aramco’s books hide large payments to the royal family, doubt that Mohammed bin Salman will be able to make the offering transparent enough for international investors. This has created speculation over a private deal with Chinese or Russian companies.

Overall, the Aramco IPO is unlikely to alter Saudi Arabian, and by extension, OPEC oil policy. Saudi Aramco will continue to lead production cuts between other OPEC members. By curtailing production, Saudi Arabia drains oil supplies and reserves, thereby increasing their price level. Recently, OPEC members have agreed to extend this arrangement until the end of 2018.

Prince Mohammed has said that even after the listing the Saudi government would retain sole control over Aramco’s oil and gas reserves and would decide on production levels. Saudi Aramco will have a concession to monetize those reserves. “The Saudi government will decide on the production ceiling. It is in the interest of the Saudi government to increase the production not reducing it,” said the Crown Prince.

Now that the oil price has crept back up to over $70 a barrel, there is the risk that US shale producers may swing back into action and flood the market again, which was the main cause of the price collapse in 2014. Despite this possibility, many Saudi experts believe that increasing demand will compensate for the increase in shale oil. Analysts at J.P. Morgan agree; the 2018 price forecast for Brent crude, the international benchmark for oil prices, has been raised to $70 this year. Demand-driven growth is expected to raise oil prices for the first half of the year, while an increase in the supply from US shale producers may lower prices during the latter half.

So, the OPEC deal and higher oil prices may be good for the Saudi economy but what are the implications for the Crown Prince’s other pressing concern – the Aramco IPO? If oil prices remain steady at $70 for the rest of the year, a deal is all but certain. Some analysts speculate that higher oil prices could make the need for funds from an IPO obsolete. However, this view underestimates the symbolic importance of the Aramco deal to Prince Mohammed’s national transformation programme, Vision 2030.

The Kingdom of Saudi Arabia is undergoing a seismic dynastic revolution, which is already having profound effects on social policy and the economic sector. Although the Crown Prince’s domestic reforms have largely been welcomed in the West, it remains to be seen whether they will be a success. The House of Saud may be entering a period of prolonged uncertainty.

Image courtesy of Alshareefsn (Own work). [CC BY-SA 4.0 via Wikimedia Commons]