The Coming Fall of the House of Saud: Austerity is in, and the Countdown to Saudi Arabia's Fire Sale is On! [part 2/2]
With austerity policies sweeping the globe it was really only a matter of time before they hit the more affluent parts of the Middle East, although one certainly wouldn't expect the oil-rich kingdom of Saudi Arabia to be so hot on the heels of the "lazy" Greeks. The word "austerity" has however earned a bit of a bad rap with some and so rendered itself rather unfashionable in certain circles, resulting in no astute leader being daft enough to explicitly impose "austerity" on his or her populace. Nevertheless, when your nation's time has come it doesn't matter what kind of language you prefer to use, because when push comes to shove you either do as you're told and send increasing portions of your nation's population down the river or – and as Alexis Tsipras nearly found out – your country earns itself an early ticket to the dark ages (edit 01/01/2018: or in the case of Saudi Arabia, its dark ages get exacerbated even further).
So when the goons from The Economist came a knockin' and asked Saudi Arabia's monarchy if it was ready to impose those-that-shall-not-be-named policies upon its kingdom –
This is a Thatcher revolution for Saudi Arabia?
– the monarchy's representative threw on the biggest smile he possibly could and obediently proclaimed (with the word "assets" standing in for "under-employed and over-subsidized subjects", and the word "grow" standing in for "be sold")
Most certainly. We have many great, unutilised assets. And we have also special sectors that can grow very quickly.
That's not me being facetious, what with said Q&A session coming courtesy of a 2016 interview The Economist had with the then-prince and now crown prince of Saudi Arabia, Mohammad bin Salman (affectionately known as MbS). If you've never heard of MbS then you obviously haven't been keeping abreast with the headlines coming out of the supermarket checkout aisles, what with MbS having induced the greatest amount of upheaval Saudi Arabia has ever seen since MbS' grandfather founded the kingdom in 1932, much of which was covered in the New Yorker's aptly-titled article "Saudi Arabia’s Game of Thrones".
I'll leave you to your own devices though if you'd like to peruse through the tabloids for coverage of all the trashy palace intrigue, but suffice to say that following ongoing re-shuffling by MbS' frail 81-year-old father, king Salman bin Abdulaziz Al Saud, MbS went from being a virtually unknown in the kingdom to next in line to the throne (ahead of all the king's brothers and six elder sons). With MbS having been given carte blanche from his father to do pretty much as he pleases, in April of 2016 the 32-year-old "long-awaited young reformer", who has been venerated by "a rising younger generation that feels its time has come", unveiled his ambitious social and economic agenda to remake the kingdom for the modern age via weaning it from its dependence on oil receipts to being based on mining, tourism (religious tourism) and banking activities.
The ostensible reason for all this can be seen as a page taken from George W. Bush's book, what with MbS having stated that "We have an addiction to oil. This is dangerous". Having also presumably missed out on the memo about which way one is supposed to go through the Kübler-Ross five stages of grief, MbS stated, with what was presumably a straight face, that "I think by 2020, if oil stops we can survive", backed up with "We need it, we need it, but I think in 2020 we can live without oil." Likewise,
Within 20 years, we will be an economy or state that doesn’t depend mainly on oil... We don’t care about oil prices – $30 or $70, they are all the same to us. This battle is not my battle.
MbS is quite possibly another case of the blind leading the blind, but what's more than just a possibility is that MbS is well versed in the dark arts of
CTRL-V, abilities that he used to lift a series of proposals put together by McKinsey & Company. I'll presume you've never heard of McKinsey & Company before, said outfit being the consulting firm that in December of 2015 put together a report entitled Saudi Arabia Without Oil: The Investment and Productivity Transformation. Coincidentally enough the neoliberal transformations outlined in the report parallel what MbS unveiled half a year later as Vision 2030 (formally recognized by the Saudi cabinet as the National Transformation Program), the fashions of the time dictating that MbS should avoid calling it Austerity for Soon-to-be, and Once-Again, Desert Nomads.
While the ostensible purpose of
Vision 2030 Austerity for Soon-to-be, and Once-Again, Desert Nomads is the easier-said-than-done job of balancing Saudi Arabia's budget and transforming it from a petrocratic absolute monarchy to a pluralist, market-based diversified economy, its underlying purpose is to begin the process of cutting off a continually increasing amount of the kingdom's subjects from the teats that spurt blacken milk, teats which are in the process of starting to dry off.
Alongside cutting subsidies, transfer payments, study grants, public sector employment and interest free loans, selling government assets, and reducing if not eliminating low-wage foreign workers, MbS and Company's plan is to also try and convince the average Salam-six-pack that he doesn't want to live the oil-begotten "easy life" but would in fact prefer to be a worker in an insecure market environment. "Congratulations, you're no longer a subject but a citizen now. Freedom at last!"
With 70% of the kingdom consisting of under-30-year-olds who one can presume have recently started watching pirated copies of Dallas, Miami Vice, and Beverly Hills 90210, MbS – who according to one of the advisors appointed by the king is "speaking the language of the youth" – has not only curtailed the power of the police (the religious police, aka The Committee for the Propagation of Virtue and Prohibition of Vice) but has also established an entertainment authority with a whopping $2.7bn budget. As a senior Saudi royal figure put it, "This is about giving kids a social life. Entertainment needs to be an option for them."
To allow for this, Wahhabism (a puritanical interpretation of Islam) is apparently on its way out thanks to MbS having promised to curtail the powers of the Wahhabi clerics as well as promise to return the country to a more "moderate Islam".
Social restrictions that grate the young are also being loosened, but with their underlying premise being increased financial activity it is hoped that while people have more (top-down) fun that they do so at home rather than by traveling abroad. However, while a considerable portion of the one million Saudis that travelled to Dubai alone in 2017 likely did so because they'd be able to buy a beer in Dubai, this is something they still won't be able to in Saudi Arabia and which will likely result in continued travel abroad.
Suffice to say then that MbS and the entertainment authority still need to do a bit of homework into the notion of "entertainment", because although the kingdom will finally be allowing what were previously deemed "corrupting-to-the-soul" cinemas, comedy shows, pro wrestling, and even monster truck rallies, its first music concert not only restricted attendees from getting shit-faced, but was rather disappointingly only admissible by men.
All those allowances (and cutbacks) do of course come with a slew of challenges though, not the least of which is the fact that Saudi Arabia is a society reared on the notion of government handouts as its right. As just one example, significant portions of the public sector don't actually exist to provide services to the public but rather to buy political loyalty from large swaths of the populace with salaries for what is often little more than notional work. The monarchy's attempt to push more people (including women!) into the private sector have been mostly in vain, what with very few of those already employed by the state having any compulsion to give up their free ride for doing actual work – for less pay – in the private sector, while most of everybody else tries to avoid the private sector if at all possible. Meanwhile, the monarchy is hesitant to proactively "trim the fat" lest it alienate those it had bought off, and although privatization could be an answer to this money-losing problem, who wants to buy an organization that pays loads of people to do essentially nothing?
Likewise, with 86% of Saudi Arabians wanting their water and electricity subsidies to remain intact the monarchy has had to tread carefully since it's certainly aware that hiking fuel prices anywhere in the world has always been a sure-fire way to incite civil unrest (which in this case would induce one of those so-called "Arab-Spring" things). And since Saudi Arabians don't pay taxes, the monarchy played it safe by introducing the income tax only upon foreigners, although Saudi subjects-cum-citizens will now be paying basic "sin taxes" upon such things as tobacco and sugary drinks. Although the head of Saudi Arabia's central bank talked the tough game and said that energy subsidies may be disappearing in toto (energy subsidies did, after all, account for a quarter of all government spending in 2011), when it came to petrol the monarchy bashfully increased its price by 40%, that still leaving gasoline at the below-cost price of $0.21 / litre ($0.79 / gallon), the monarchy therefore continuing to endure deficits in order to avoid its "Arab Spring" overthrow.
Alongside the limitations the Saudi monarchy has in regards to reigning in its populace, the monarchy has had equally dismal results in trying to cut back on its usage of low-wage foreign workers – who make up an absurd 9 million out of the 31 million that call Saudi Arabia home – thanks to the fact that Saudi Arabians themselves have little to no interest to work low-end jobs. That's not just innuendo, the passage from John Perkins' jaw dropping book The New Confessions of an Economic Hitman being just as relevant today as it was more than 40 years ago:
In 1974, a diplomat from Saudi Arabia showed me photos of Riyadh, the capital of his country. Included in these photos was a herd of goats rummaging around piles of refuse outside a government building. When I asked the diplomat about them, his response shocked me: He told me they were the city's main garbage disposal system.
"No self-respecting Saudi would ever collect trash," he said. "We leave it to the beasts."
So thanks to being unable to galvanize many of its subjects to work low-end jobs, lacking the trained populace to work the high-end jobs, and presumably unable to persuade its freeloading population of goats to chauffeur women around in wingless vehicles, the monarchy had little choice but to not only roll back several of its Austerity for Soon-to-be, and Once-Again, Desert Nomads platitudes in early-2017, but to throw Saudi Arabians and their "entrenched poor work ethic" (I wonder where they got that from?) another set of bones. These compensations included announcing in September 2017 that women would be permitted to drive themselves come June 2018 (so as to rid the kingdom of the 1.4 million money-draining foreign chauffeurs), and then a month later announcing the kingdom's plans for the (pie in the sky) $500bn futuristic city NEOM in which high-end workers would be compelled to flock to Saudi Arabia from overseas while the low-end jobs would be performed by robots.
But with said facets of Austerity for Soon-to-be, and Once-Again, Desert Nomads already floundering, and oil still priced below Saudi Arabia's 2017 break-even point of roughly $74, where in the world is the monarchy supposed to find $500bn for a city that it hopes to not only pay for itself but to also cover its already-evident shortcomings? The answer to that, in short, is that the monarchy is planning to undertake what will ultimately be the greatest
equity sale fire sale the world will ever see.
With the intentions of raising its Sovereign Wealth Fund (SWF) to $2tn from the $160bn it currently sits at, what the monarchy has in mind is to create the largest wealth fund in the world, a sizable nest-egg for its end-of-oil days. While this includes the usual humdrum privatizations of state assets like health care, education, and even parts of the military, it also means the erstwhile unfathomable notion of selling the goose that lays the blacken eggs itself, Saudi Aramco.
Heralded as the most valuable company in the world (according to Bloomberg more valuable that even Apple, Google's parent Alphabet, Microsoft, and Berkshire Hathaway combined), Saudi Aramco is not only inherently the world's largest oil company but by being wholly state-owned allows the monarchy to control the entirety of the country's oil development (and thus windfalls). Estimated by analysts to be valued somewhere between $1tn and $10tn ($2tn is the figure estimated by the monarchy itself), since Aramco and the kingdom's oil reserves are Saudi Arabia's lever for geopolitical and strategic power the monarchy of course isn't about to float and sell off the entirety of Aramco but rather offer up a 5% stake in the hopes of raising $100bn.
Your guess is as good as mine as to why they're doing this – be it to raise some needed cash, the first steps taken before much larger chunks of Aramco are sold off and the monarchy attempts to fleece the populace by making a run for it with the loot, or to simply add some transparency to the kingdom's operations so as to settle the nerves of those hesitant to invest in Saudi Arabia's incipient market economy (listing on the London or New York exchanges would require divulging data about its closely guarded reserve levels, less so if it listed on its own exchange in Riyadh, the Tadawul, and even less so if it just skipped the IPO altogether and took up China's offer to buy up the entire 5%). Regardless of where the truth lies, somebody with a keen sense of smell has noticed a potential deal:
Would very much appreciate Saudi Arabia doing their IPO of Aramco with the New York Stock Exchange. Important to the United States!— Donald J. Trump (@realDonaldTrump) November 4, 2017
The sought after $100bn from Aramco's partial sale are of course dependent on a $2tn valuation, that in itself being dependent on the price of oil. To guarantee it's able to garner as much from its IPO as possible – initially slated for 2018 but delayed for now until at least 2019, perhaps so that oil has a chance to appreciate in price a bit – the Saudi Arabian monarchy has not only undertaken such activities as joining the rest of OPEC (and Russia) to cut production levels by 1.8 million barrels through to the end of 2018 in hopes of raising oil's price, but it has also cut the amount of income tax Aramco pays from 85% to 50% in hopes of sweetening the deal for private investors.
On top of things like NEOM being a soon-to-be major letdown, the totality of this recent Saudi Arabian escapade can not only be taken as too little too late, but one in which MbS is simply the personification of the age-old pre-revolutionary scenario in which an expiring regime attempts to reform right before it all comes crashing down. The degree of desperation can be seen via November's absurdities in which MbS proceeded to cement his position as the most powerful prince Saudi Arabia has ever had.
Billed as a corruption purge, guests as Riyadh's Ritz-Carlton were given the boot just before midnight on November 4th in order to make way for the rather opulent detainment of 11 princes and about 200 businessmen. Some of the detainees at the Ritz-Carlton shakedown were indeed allowed to leave, but only after agreeing to sign over assets procured via what have been suddenly deemed corrupt practices. Others, however, still remain incarcerated, most notably prince Alaweed bin Talal, stakeholder in Twitter, Citigroup Inc., and more
It may very well be that the anti-corruption campaign was undertaken in order to rectify ill-begotten gains and so establish faith in Saudi Arabia's transition from a corrupt petrocratic absolute monarchy to a (corrupt oligarchic) market economy, implying that business dealings would no longer require payoffs ("the Dubai model [being] the template here", as put by a senior Saudi official). That being said, there's also the possibility that Saudi Arabia's coffers were deemed to be running a bit too dry and so in need of a top-up, while it is of course also possible that this was a coup of sorts undertaken by MbS in order to further consolidate his power and make sure that no possibility existed for an armada of armed guards to perform a coup of their own.
The latter-most is perhaps the most plausible case of all, what with MbS now in control of the four pillars of state power – the economy, the military and security, the religious establishment, and the media. Furthermore, there is in fact one other notable person besides prince Alaweed that has yet to relinquish any of his riches, that of course being MbS himself, owner of a €500m yacht and a $300m French chateau, the latter said to be the most (monetarily) valuable
home house in the world.
To add to all the fractious shenanigans in the upper echelons of Saudi society there's also the ongoing incursions from not only the exteriors (earlier this month Yemeni rebels launched a second ballistic missile towards Riyadh, this time aimed at a palace of king Salman) but also problems of dissent from the interior courtesy of its very own people. In the attempt to deal with the results of cutting off Saudi Arabians from their "addiction to oil" (MbS' words, not mine), it not only turns out that Saudi Arabia is one of the world's largest purchasers of Western weapons, but that after introducing the first stages of its austerity policies it also decided to allocate the largest part of next year's budget to what Bloomberg calls "defence and security". That rather unsurprisingly included a 10-year, $350bn deal in mid-2017 with its long-time Petrodollar partner, which was a follow up to purchases of Canadian-made military equipment, a country of which it can claim to be one of its largest customers.
Calls have been made for good-cop prime minister Justin Trudeau to nix the $142m Saudi Arabian arms deal due to reports that the monarchy has been using said equipment against its own people (military equipment is the coercive "stick" that internal security uses to placate those not fortunate enough to have received oil-fuelled payoffs from the monarchy), although Trudeau has stated that he will refrain from backing out of the deal that bad-cop (former prime minister) Stephen Harper signed with the Saudis:
People have to know that when you sign a deal with Canada, a change in governments won’t immediately scrap the jobs and benefits coming from it.
Nonetheless, it was stated by Canada's ministry of global affairs that
If it is found that Canadian exports have been used to commit serious violations of human rights, the minister will take action.
No word on what that action would be, so I'll just go ahead and presume it means that any of the planned and already built 100 Saudi Arabian Tim Hortons locations would be cancelled and shut down, forcing Saudi Arabians to find their caffeine fix elsewhere.
Anyhow, with the fattening of the SWF still a while's away, its corollary – the Public Investment Fund (PIF) – has already become active via the purchase of strategic financial and industrial assets abroad, including such acquisitions as a 38% stake in a South Korean construction company as well as a $10bn investment in a Russian investment fund.
In the meantime, and although he had to turn a blind eye to Saudi Arabia's slave-like migrant labour conditions, Richard Branson has become the first international investor to invest in a PIF-funded construction project. That project would be the one to develop 50 islands over a 34,000 sq/km portion of the Red Sea, the monarchy reciprocating with plans of its own to invest $1bn in Branson's Virgin Galactic. (Count that as two winners!)
But with the ultimate purpose of Vision 2030, the SWF, and the PIF being to completely wean the kingdom off of oil proceeds and have it instead rely on little more than foreign financial and industrial assets, I'm a bit stupefied as to how in the world those foreign and financial assets are supposed to operate without their foreign inputs, most notably the rather crucial "input" otherwise known as Saudi Arabian oil.
With this whole escapade therefore being little more than complete nonsense piled on top of complete nonsense, some of it has nonetheless seemed to have gotten even the more astute of us confused. For as Kurt Cobb stated on his blog Resource Insights following the mid-2016 Vision 2030 announcement,
The world's largest exporter of crude oil, the Kingdom of Saudi Arabia, recently announced a plan for its post-oil future. If a country almost synonymous with the oil economy can see the need for such a plan, how can the rest of the world, particularly the United States, the world's largest consumer of petroleum, not see the necessity of such foresight?
Vision 2030 Austerity for Soon-to-be, and Once-Again, Desert Nomads counts as foresight as opposed to the plans of a faction within the kleptocratic monarchy to triage its subjects into oblivion as well as throw its fellow tribesmen under the bus?
The Saudi move toward a post-oil economy ought to be one of the strongest messages ever that the world is moving closer to a peak and decline in world oil production. The kingdom's actions are telling us that the world's largest crude oil exporter feels it must start today to plan and implement a post-oil economy.
Having put it that way, and if the whole shebang can be taken as a rule, what "the kingdom's actions are telling us" is that the big-wigs planning for a post-oil economy have nobody's interest in mind other than their own, and that the rest of us should seriously distrust any large-scale attempt to implement one.
Furthermore, what Vision 2030's greatest accomplishment will ultimately be is the creation of a grandiose scapegoat – in the form of MbS – to pin Saudi Arabia's collapse on. As The Economist put it in preparation of scapegoating MbS and exonerating itself, "If his ambitious plans falter, Saudis will know whom to blame."
The faltering of Vision 2030 will by no means be MbS' failt though. As I put it in my review of Nafeez Mosaddeq Ahmed's book Failing States, Collapsing Systems: Biophysical Triggers of Political Violence,
While Saudi Arabia went on a crash course several decades ago to increase its wheat production in order that food couldn't be used as a weapon against it in the same way that it withheld oil from the West (for a while Saudi Arabia, a desert country, was actually one of the world's largest exporters of wheat), its depleting aquifers have been recently putting an end to production that was also using up 18 percent of its oil revenue. While the state-sponsored Saudi Arabian wheat production is now kaput, Ahmed points out that 80% of Saudi Arabia's food is purchased through subsidies. Along with that, he states that 70% of Saudi Arabia's domestic water supplies are procured through desalination, an extremely energy-intensive process that estimates state burns through about half of its domestic oil consumption.
In other words, Saudi Arabia doesn't need any help from MbS or Vision 2030 in order to precipitate its collapse.
With a third of Saudi Arabia's youth already unemployed, hundreds of thousands of young Saudis entering the job market every year, and so things bound to get a whole lot worse, the House of Saud's days are numbered. And while the Saudi kingdom will undoubtedly fracture into an array of fragments, The Economist will nonetheless live to tell another obfuscation.
To somewhat remedy the present and future obfuscations I'll start off by extending the passage from the previously quoted senior Saudi royal figure:
This is about giving kids a social life. Entertainment needs to be an option for them. They are bored and resentful. A woman needs to be able to drive herself to work. Without that we are all doomed. Everyone knows that – except the people in small towns. But they will learn.
"The people in small towns"?
Well, I've never been to a small Saudi Arabian town, but it doesn't surprise me that some of them may be so "backwards" that they've yet to learn that the only worthwhile "entertainment options" are the top-down entertainments that one ultimately has to pay for. Moreover, I can't help but wonder whether or not they're so "backwards" that while having yet to latch on to the promises of what you might call the modern Dubai model that they've been stubborn enough to hold out for what you might call the classic Dubai model.
For as stated many years ago by the United Arab Emirates' first prime minister, Rashid bin Saeed Al Maktoum:
My grandfather rode a camel, my father rode a camel, I drive a Mercedes, my son drives a Land Rover, his son will drive a Land Rover, but his son will ride a camel.
All the best to those small-town Saudi Arabians (or whatever they'll be called once the House of Saud falls). And to the NEOM-esque Saudi Arabians attracted to the bright lights of the big cities, a few words of advice. With all apologies to John Michael Greer –
Get your camel now, avoid the rush!