Elephants in the Room
Trump Needs to Start Worrying About Saudi Arabia’s Reform Efforts
The United States has a profound interest in helping Crown Prince Mohammed bin Salman avoid his own worst impulses.
For those of us who have been strong supporters of Saudi Crown Prince Mohammed bin Salman’s unprecedented reform efforts, the past several months have given cause for concern. There’s been a steady stream of bad news, and good news has grown less frequent. I’m certainly not ready to hit the panic button yet—those who thought the process of yanking Saudi Arabia into the 21st century would proceed smoothly, without its share of setbacks, were surely fooling themselves. But there have been enough warning signs now for the Trump administration to start taking greater notice—and, more importantly, taking greater action to curb some of Mohammed bin Salman’s less constructive impulses.
The latest sign of trouble was the news last month that Saudi Aramco, the state-owned oil company, was putting off its long-anticipated initial public offering. Though Khalid al-Falih, the Saudi energy minister, was quick to insist that the government remains committed to selling off a 5 percent stake in Aramco “at a time of its own choosing,” few were convinced. Since Mohammed bin Salman first unveiled the idea with great fanfare in 2016, it’s been one delay and missed deadline after another. Now the deadlines have disappeared altogether. Indefinitely postponed seems to be the most charitable euphemism one could use to describe the IPO’s current status. Collapsed is probably closer to the truth.
Mohammed bin Salman’s father, King Salman, reportedly delivered the coup de grâce. According to Reuters, during the month of Ramadan, which ended in June, the king received a number of complaints from princes, bankers, and Aramco executives about the pending IPO. Their primary concern: Any listing on one of the world’s major stock exchanges would require too much disclosure of Aramco’s financial dealings, potentially exposing irregularities and weaknesses that could embarrass and undermine not only the company, but also the legitimacy of the House of Saud itself.
Observers inevitably perceived the cancellation as a serious blow to Mohammed bin Salman’s reformist credentials. For better or worse, the crown prince had consistently portrayed the selloff as an essential element of his audacious Vision 2030 program to transform the Saudi economy. He insisted that Aramco would be valued at an eye-popping $2 trillion (making it easily the most valuable company in the world) and that the $100 billion raised by the IPO would help cover the enormous costs of the Vision 2030 plan to diversify the economy by reducing its dependence on oil and building a future based on innovation, technology, and a vibrant private sector.
But the importance of the sale went far beyond exploiting Aramco as a convenient cash cow. It was also meant to serve as a massive signal of reassurance to foreign investors whose participation will be essential to Vision 2030’s success. Listing shares of Saudi Arabia’s most important asset on one of the world’s major exchanges was supposed to mark the kingdom’s opening to Western-style standards of transparency, accountability, and the rule of law.
Instead, the IPO’s scrapping has had the opposite effect. Investors rapidly determined that Mohammed bin Salman’s $2 trillion valuation was grossly exaggerated, although insufficient information existed to assess with any accuracy what the real figure should be. The Saudi government has neither offered an authoritative explanation for the IPO’s constant delays nor made any effort to articulate its concerns surrounding the sale. Rather than tearing down the wall of opacity around the kingdom, the IPO process helped reinforce it. And rather than boosting investor confidence, it underscored the extent to which major economic decisions are still subject to the murky political calculations, infighting, and arbitrary interventions of the Saudi ruling elite.
Mohammed bin Salman is now seeking to mitigate the IPO failure by insisting that Aramco instead take on tens of billions of dollars in foreign debt to purchase a controlling stake in Sabic, the petrochemical company owned by Saudi Arabia’s sovereign wealth vehicle, the Public Investment Fund. The fund would in turn use the money from the sale to finance Vision 2030’s reforms. While such a fallback plan might make up for the funds that the IPO was supposed to generate, it would seem a less-than-ideal substitute when it comes to bolstering the kingdom’s attractiveness to global investors. Executives from both Aramco and Sabic have privately made known their lack of enthusiasm for the deal and hinted that the only reason it’s being considered is because of a royal command to do so. Potential investors could be forgiven for thinking that the transaction has the markings of a government-mandated forced transfer of assets.
The IPO’s unraveling may have been the most significant sign of trouble for Saudi reform over the past six months, but it wasn’t the only one. Just weeks before the kingdom lifted its ban on women driving in June—an occasion that should have looked like a moment of great triumph for Mohammed bin Salman—a number of well-known female activists who had long campaigned in favor of the change were arrested. The charges against them included trumped-up accusations of seeking to “destabilize the kingdom” and “mar the national consistency” (whatever that means). They were pilloried as traitors serving foreign interests in a well-coordinated hit job by the state-owned media. The message seemed all too clear: Any societal change flows strictly from the top down, a function of the beneficence and wisdom of Mohammed bin Salman—not through any process of grassroots activism on the part of the kingdom’s citizens. No doubt meant to shore up the crown prince’s power and authority at home, the move to Western eyes came across as heavy-handed and oppressive, driven as much by fear as strength. Not a particularly good look for foreign investors.
The kingdom’s overreaction to a handful of tweets (including one in Arabic) by the Canadian Foreign Ministry that mildly criticized the arrest of two more human rights activists in early August made matters worse. Virtually overnight, Saudi Arabia expelled the Canadian ambassador, canceled flights to Canada, ordered Saudi students home, liquidated investments in Canada, and froze new Canadian-Saudi business trade and investment. Defenders rushed to explain that the move had nothing to do with Mohammed bin Salman’s reformist bona fides and everything to do with shoring up his strength at home. In this telling, precisely to preserve his ability to continue driving the modernization process forward, the crown prince had no choice but to respond vigorously to Canada’s perceived affront to Saudi sovereignty—lest powerful reactionary forces within the kingdom, both tribal and religious, use it to beat him for failing to protect the prestige of the Saudi state. Perhaps. But for Western audiences, including the investor class, the over-the-top response added detail to a growing narrative that portrays Mohammed bin Salman as less a historic reformer than an impulsive authoritarian, prone to temper tantrums and flights of irrational decision-making.
All of these unfortunate recent developments, of course, occurred against the stark backdrop of last November’s notorious anti-corruption campaign, in which hundreds of wealthy Saudis, including powerful princes, former government ministers, and businessmen, were arrested, forcibly detained in Riyadh’s Ritz-Carlton hotel, and coerced into surrendering billions of dollars in cash and property. Allegations of physical abuse, even torture resulting in death, were widespread. Needless to say, this has cast a long shadow over the kingdom’s investment climate.
The numbers tell an alarming story. Over the past two years, there has been massive capital flight from Saudi Arabia. Some $80 billion in 2017. Another $65 billion projected this year—and that was before the diplomatic spat with Canada. Reports suggest that the numbers might have been even higher if not for Saudi government measures to stem the rush to the exits. Wealthy Saudis believe their bank accounts are now being monitored. Small cash transfers have been questioned by government officials. Larger transfers have been blocked outright. Efforts to exchange Saudi riyals for other currencies have allegedly been denied, all part of what one Saudi wealth manager described to the Financial Times as “targeted—but huge scale—capital controls.”
The flight of money out of the country has coincided with a collapse of incoming investment. A report issued by the United Nations Conference on Trade and Development in June provided the gory details. In 2017, new foreign direct investment plunged to a 14-year low. Since 2016 alone, FDI dropped more than 80 percent, from $7.5 billion to $1.4 billion—making Vision 2030’s target of attracting $18.7 billion in FDI by 2020 appear to be a pipe dream. Even Jordan, oil-poor and perennially teetering on the economic abyss, and Oman, a country with an economy a tenth the size of Saudi Arabia’s, attracted more foreign inflows than Saudi Arabia did last year. And while Saudi FDI was in freefall in 2017, Qatar—the target of a devastating Saudi-led economic boycott—actually saw a small increase in foreign investment.
As worrisome as these mounting difficulties may appear, the right reaction from Washington shouldn’t be giving up on Mohammed bin Salman and Vision 2030. It remains the case that the United States has a profound interest in seeing the kingdom successfully reform. Whatever his shortcomings, in recent years Mohammed bin Salman has taken a series of unprecedented liberalizing steps that—for many longtime observers of the kingdom—once seemed unthinkable. Their significance shouldn’t be easily dismissed or taken for granted. With breathtaking speed, Mohammed bin Salman has launched groundbreaking changes to challenge extremist ideology, empower women, loosen cultural restrictions, reduce budget-busting subsidies, and impose taxes. In the process, he’s almost certainly alienated and angered powerful domestic constituencies—especially within the ruling family and Wahhabi religious establishment. His domestic politics are no doubt real and complex. Calculating when to press ahead and when to retreat, when to steamroll opponents and when to appease them can’t be easy—in particular for an inexperienced 33-year-old seeking to transform one of the most hidebound and consensus-driven governing systems in the world. Mistakes, even serious ones, are inevitable.
That said, as Saudi Arabia’s most important ally, the United States should be working actively but quietly to help Mohammed bin Salman avoid needless errors where possible, while mitigating the consequences of those already made. U.S. President Donald Trump, to his credit, moved early on to repair ties with key Middle Eastern partners, especially the Saudis, that had badly frayed under his predecessor—in particular, by adopting a much tougher posture toward Iran. The president and his senior advisor and son-in-law, Jared Kushner, also bet heavily—and correctly—that Mohammed bin Salman would rapidly emerge as the country’s dominant decision-maker, and they conspicuously conferred U.S. backing for his meteoric rise.
Although the administration has occasionally used its increased leverage to press the Saudis on several discrete issues—such as buying additional U.S. weapons and pumping more oil to reduce gasoline prices—it has largely demurred when it comes to systematically engaging Mohammed bin Salman on his historic reform agenda. Indeed, there’s a widespread perception that the administration’s Saudi policy has been on autopilot. In turn, the crown prince has been left alone, flailing at times, without the benefit of sustained U.S. counsel on the wide array of growing challenges that he confronts—not just at home but regionally as well, including the costly quagmire of the war in Yemen and the divisive conflict with neighboring Qatar.
That should change as quickly as possible. The administration needs to recognize Mohammed bin Salman’s escalating difficulties and quickly develop a strategy to bring U.S. advice and interests to bear on his decision-making. The aim should be to encourage and support his best impulses, while tempering the worst ones. In other words: more economic liberalization, empowerment of women, and promotion of moderate Islam, and fewer arrests of sympathetic human rights activists, diplomatic blowups with industrialized Western democracies, and poorly executed foreign-policy adventures.
In this regard, the fact that the administration has still not named an ambassador to Saudi Arabia nearly two years in is a serious failure. Getting a new U.S. envoy to Riyadh in short order, one with deep experience and whom both Trump and Mohammed bin Salman hold in high regard, should be a top priority. The administration should also resurrect the high-level U.S.-Saudi strategic dialogue, with the aim of better coordinating approaches on key shared interests—especially with respect to Saudi reform and regional security.
Saudi Arabia’s trajectory could be one of either great promise or great peril for the future of the Middle East and vital U.S. interests. The issue is too important for the United States to leave to Mohammed bin Salman alone. It’s time that the Trump administration got off the sidelines and into the game.