Tuesday, 26 April 2016

Saudi Arabia’s storm approaches

Saudi Arabia is not in a good space, geopolitically speaking. Of the four major powers in the Middle East-North Africa (MENA) region, Saudi Arabia is the weakest and getting weaker. Iran, Israel and Turkey all outstrip the kingdom militarily and in stability, although perhaps not in oil wealth.

Yet even as oil reaches a new 2016 high this week of $US44 on the West Texas Intermediate (WTI) benchmark, that price is nowhere close to what Saudi Arabia needs to maintain its heavy social spending and to fund its foreign policy. The above sum is the delivered price. The actual price a producer receives is even less. And now, more than ever, Saudi Arabia needs the money.

According to official figures, the country ran a deficit of 21.6% of GDP in 2015, a drastic rise from only 3% the previous year. Riyadh hopes the IMF’s forecast of a 20% deficit in 2016 is wrong, and is aiming for 13% instead. To cover the shortfall, it has already spent $US100 billion in cash over the last few years – another US$100 billion will disappear in 2016 if the IMF’s forecast is correct. Cash reserves now stand at $US650 billion, and at this rate could run out by 2020.

Saudi Arabia is attempting to raise capital by selling off portions of its most valuable asset, the nationally-owned Saudi Aramco – perhaps the world’s largest company – in a potential 5% IPO. The company’s total worth is unknown, but estimates range between $US1.25 and $US10 trillion, so it might be just the lifeline Riyadh needs (if it can find the buyers).

The company is an artefact of Saudi Arabia’s history of domination by the US and British when it emerged from the Ottoman Empire. The relationship created the Arabian-American Oil Company – Aramco – and earned the kingdom plenty of money in the 1980s when it was nationalised. Now, it seems, the US and British are about to pick up where they left off. Time really is like Schopenhauer’s flat circle.

The US has already retaken the mantle of world’s-largest oil producer, a privilege it hasn’t had in over a century. In fact, one cause of the low oil price is the introduction of new oil plays in the US. Some even speculate the Saudi-dominated OPEC cartel purposefully forced down oil prices to drive competitive US producers from the market, although that conspiracy theory doesn’t fit all the facts.

Nevertheless, Riyadh has bills to pay. It funds free healthcare, education and public pensions for all its citizens. It subsidises their water and electricity, and there is no income tax because nearly 90% of Saudis are employed by the government, often at higher wages than the private sector offers. If oil prices remain low, it will need to cut these spending requirements which will risk fomenting unrest.

Outside of its painful fiscal troubles, Saudi Arabia has been begrudgingly involved in proxy wars in both Syria and Yemen, supplying weapons to rebel groups in Syria and using its own ground and air forces in Yemen. Neither war is going the way Riyadh wants and that fact is beginning to take a toll.

In Syria, whether Saudi Arabia ever funded jihadist groups such as al Qaeda and the Islamic State (IS) is largely irrelevant because rebel forces haven’t been able to unseat the Syrian regime. And now IS is turning its attention to the kingdom itself, conducting a growing number of terror strikes in both Sunni and Shia majority regions, trying to stir the aforementioned unrest. Riyadh’s security services may struggle to contain IS’ expansion.

In Yemen, a year-long intervention by Saudi Arabia against a former president and his Iranian-backed tribal allies’ attempt to retake the government has stalled. Despite requesting military help from Egypt and Pakistan, both countries declined and Saudi Arabia was compelled to conduct the fighting with only a handful of smaller Gulf allies. Power-sharing negotiations are now taking place but that is not the outcome for which Riyadh hoped.

On a broader geopolitical level, Saudi Arabia’s regional adversary Iran is shaking off crippling sanctions, bringing its own oil production back online and unsettling the already unsettled dynamics across the Middle East. A nuclear deal last year between Iran and the US also warned of a change in the special relationship Saudi Arabia has enjoyed with Washington, which flustered the regime.

If this isn’t a storm, it’ll suffice until the storm gets here. Should Riyadh be unable to fund its domestic expenses (let alone its foreign policy and proxy war commitments) and its pending leadership transition doesn’t go smoothly, the kingdom’s troubles could spill over and become global trouble.

The other three regional powers do not want Saudi Arabia to dangerously collapse, but they would appreciate a weaker Riyadh so they won’t do much to prop it up either. Iran may soon take serious control of Iraq’s political structure and its Yemen proxies are bleeding Saudi Arabia in the south. Turkey has its own emerging plans for the region and Israel will be looking for openings too.

An existential crisis in Saudi Arabia has not yet happened, but it is a risk. Internal dissent will weaken an already fragile regime, outside state and non-state influence will wish to encourage dissent and civil conflict in the kingdom is possible. All of this was unthinkable a few years ago, but any country built by history’s most volatile commodity was always playing with fire.

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