Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets.
Saying there's political risk in the Middle East is rather like saying there's sand in the desert. Trying to draw the lines between friend, foe and those in between creates a mess of spaghetti.
But the latest power play by Saudi Arabia's Prince Mohammed bin Salman – involving the arrest of royals and officials including billionaire Twitter Inc. and Citigroup Inc. investor Prince Alwaleed bin Talal – still feels like uncharted territory. As Gadfly's Liam Denning has noted, it could eventually set off a destabilizing backlash.
The fact that the crackdown was carried out in the name of fighting corruption adds a populist streak to Saudi's reform path and suggests everyone from bankers to billionaires needs to tread more carefully than before in the Gulf.
Saudi Arabia was already a country that demanded loyalty from financiers in the face of diplomatic bust-ups with Qatar. Now it wants probity, at least in the eyes of the state, as well.
Those who believe in Prince Mohammed's long-term plan will say that Saudi Arabia offers an investor-friendly future. The recent lifting of a ban on women drivers and the planned IPO of the national oil company, Saudi Aramco, are stepping stones toward an oasis of capitalism replete with self-driving cars and solar panels. For the bulls, the tighter MBS grips the establishment, the better.
Yet, there's an undeniable short-term cost to this corruption crackdown. It brings company-specific risks, even in an environment of better oil prices and economic recovery. Shares of Al Tayyar Travel Group Holding Co. are down 10 per cent after the reported arrest of a co-founder and board member. And Alwaleed's Kingdom Holding is extending its stock-market fall, even after the company insisted it's business as usual. At best, there's the risk of prominent and bankable people losing influence. At worst, asset seizures could occur.
The problem is that nobody really knows where a corruption crackdown in Saudi will lead to. After inflicting budgetary pain on the people, this is the government's way of soaking the rich.
In all likelihood, it will mean more scrutiny of big-ticket deals such as the Aramco IPO. Initially, it might be a means of deterring speculative middle-men and commission-hunters, but it might also end up hitting foreign bankers and advisers eager to profit as the country tries to diversify away from oil.
It also dents the image projected by Prince Alwaleed of a Saudi Arabia capable of producing Warren Buffett-type investors who can invest freely, speak freely and spend their gains freely without government interference. In the past, Prince Alwaleed has criticized the ban on women drivers, pledged to donate his wealth to charity and offered money to New York after the terrorist attacks of Sept. 11, 2001. His arrest suggests the Saudi government will closely watch his investments and how he manages his wealth.
This is all unfolding as the Saudi story under Prince Mohammed gets a lot of international credit. London and New York are vying for the privilege of hosting the Aramco IPO, while investors and firms including BlackRock Inc. and Apollo Global Management LLC flocked to Riyadh just weeks ago for a conference dubbed Davos in the Desert.
The latest arrests won't end the enthusiasm. But making money from a changing Saudi Arabia has become more complicated. Rolodexes will need to be updated to reflect a more treacherous political environment. Future fees may be less generous. Those digging for gold in the desert will need to work a bit harder.