Dennis Horak was Canada’s ambassador to Saudi Arabia and head of mission in Iran from 2009-2012. He retired after a 31-year diplomatic career.
The long-awaited announcement by Saudi Arabia that it will put part of the world’s largest oil company, Saudi Aramco, up for sale next month will have global investors crunching numbers in eager anticipation. But the sale will be more than a simple financial transaction. It will also be, in many respects, a referendum on Saudi Arabia itself. For investors, the range of political challenges facing the kingdom will be equally decisive in assessing whether betting on Saudi Arabia makes sense.
Regional factors will play strongly into the equation, with continuing Saudi-Iran tensions featuring most prominently in investor calculations. While Persian Gulf volatility is nothing new, it escalated to heightened levels this summer with Iranian attacks on oil-tanker traffic and an Aramco oil refinery. Iran has made it clear that it is willing to risk direct conflict and to disrupt the international oil market if its own oil industry continues to be hampered by international sanctions. It was an unprecedented level of brinkmanship that has, so far, gone without a response.
While the deployment of additional U.S. military personnel to Saudi Arabia could give Iran pause going forward, the Trump administration’s willingness to engage in defence of its allies is very much in question these days.
The Aramco share offer could provide Tehran with a new incentive to escalate tensions. The Iranians would like nothing more than an Aramco initial public offering (IPO) that fell flat; it would embarrass their Saudi rivals and provide an additional pressure point. Well-timed additional military action would do just that.
Uncertainty is not confined to the Persian Gulf. Mass demonstrations currently roiling Iraq and Lebanon will remind investors of the risks posed by potentially contagious instability in the neighbourhood. Their demands for improved governance and less corruption will resonate across the region, including the Gulf.
While Saudi Arabia has launched a far-reaching program of important social and economic reforms under its Vision 2030 program (of which the Aramco sale is a key part), the process of transforming the economy and making it less dependent on oil and imported foreign labour has created short-term hardships for millions of ordinary Saudis. The Aramco sale will provide needed funds to help with the transition. The benefits will take time to fully realize, raising internal pressures in the short run. While Saudi citizens can be bought off for a time, their patience for change is not without limits.
But international commentators have raised questions about Saudi stability for decades. The Saudi royal family does two things well: pump oil and protect themselves. Despite the current challenges, that is unlikely to change.
Potential investors in Aramco will also be looking closely at the Saudi leadership, most particularly the Crown Prince, Mohammad bin Salman. MBS, as he is known, is an enigma. He is the driving force behind a reform effort that has produced real benefits, especially for women, since it was launched. He has neutered the conservative religious establishment with the goal of making the kingdom a “normal country.”
But MBS has also cracked down hard on political dissent – real and imagined. He reportedly ordered the brutal killing of journalist Jamal Khashoggi, and he has arbitrarily jailed supposed political opponents, including women’s rights activists who pushed hard for the changes he has implemented. He is the face of the humanitarian disaster caused by the war in Yemen.
Ethical international investors may have a problem pouring money into MBS’s coffers given his record, but there are likely more than enough potential IPO suitors who are more than willing to overlook the Prince’s occasional but horrific personal lapses.
More troubling, though, may be the questions his behaviour has raised about his leadership capabilities and, ultimately, his longevity. Given the nature of Saudi society, if you are investing in Aramco, you are investing in MBS. Given his demonstrated impetuousness and unpredictability, including the bizarre round-up and shakedown of the Saudi business elite and royal relatives at the Ritz-Carlton in Riyadh in an apparent anti-corruption drive in 2017, he is a risky investment.
While MBS is likely to remain in power and eventually succeed his father as king, and his reform efforts are almost certainly so well entrenched and necessary that they would likely survive even if he doesn’t, his volatility makes the risk of leadership-uncertainty a continuing concern going forward.
The Aramco sale will likely succeed. Oil is still king and Aramco is a crown jewel that has long been out of reach. But the risks extend beyond the balance sheet.
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