international analysis and commentary

Saudi Arabia’s changing path: ambition and fear

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Since King Salman took power in January 2015, Saudi Arabia has undergone major internal changes. However, in the past few months, the reforms introduced in the Kingdom have been even more significant, due to the dip in oil prices, but also to the rising power of Deputy Crown Prince Mohammad bin Salman. Countries in the region are thus wary of the wider impact developments in Saudi Arabia might have.

In early May, the government was restructured for the third time in a year, and the major reshuffle involved a change in ministers as well as the creation of new ministries, such as the Energy, Industry and Natural Resources Ministry and the Commerce and Investment Ministry. The main shift was the replacement of 80-year-old Oil Minister Ali al-Naimi, who had been in charge of the Kingdom’s energy policy since 1995, with Khaled al-Falih, former chairman of the state-owned oil giant Aramco. This shake-up indicates a degree of continuity with the policies advanced by the Kingdom, given the position of Al-Falih, but also suggests that 30-year-old Prince Mohammed bin Salman will have a very active role in Saudi Arabia’s future.

Since his father succeeded to the throne, Mohammed bin Salman has become the world’s most powerful millennial as he was appointed defence minister and was given the responsibility for all regional dossiers, including Yemen. He is also the author of “Vision 2030”, an ambitious  government strategy announced on April 25 which involves substantial economic reform.

The strategy aims at addressing the Kingdom’s “addiction to oil”, which, particularly in light of the drop in global oil prices, has put the monarchy under strong financial pressure, leading to a rapid growth in the government’s budgetary deficit to 15% of GDP and pushing the country to request a 10 billion dollar loan to international banks for the first time in 25 years. Through Vision 2030, Mohammed bin Salman rethought the way that Saudi Arabia’s government and economy should function, framing a series of steps to widely diversify the country’s productive and financial sectors.

Some of the key elements of the plan entail an increased role for the private sector, which would also involve the areas of healthcare and education; about 5% of Aramco would be privatized and the ownership transferred to a sovereign wealth fund; energy subsidies would be cut and the economy diverted to expanding investment and boosting non-oil revenues – for instance, one of the goals is to increasing the number of foreign pilgrims and quintuple the overall number of tourists. Mohammed bin Salman’s vision for Saudi Arabia under this plan is, by 2020, “to live without oil”.

While, in the words of the IMF, Vision 2030 is “bold and far-reaching”, in the best scenario it would take years for the plan to produce major practical effects and, in the meantime, it is likely to raise significant discontent domestically, given that Saudi citizens are used to incentives such as fuel subsidies, generous spending and no taxes. While these benefits are easily deliverable in a rentier state in which 73% of state revenues comes from oil, it is unclear whether the new policies  would enable the Kingdom to avoid raising domestic prices or adopt a “normal” taxation system.

In any case, the recent reshuffle was most probably intended precisely to facilitate Mohammed bin Salman’s implementation of Vision 2030.

Al-Naimi was arguably the main person responsible for the fall in oil prices that started in 2014. He led the OPEC countries to refuse cutting oil production in spite of the increase in US shale output, which led to an upsurge in the global supply. In the past few months, as oil prices continued to drop reaching 30 dollars a barrel, Saudi Arabia, together with Russia, Venezuela and Qatar, discussed options for an oil freeze that could help stabilize the output level and therefore trigger a price increase. Al-Naimi seemed open to an agreement with the other OPEC and non-OPEC countries, regardless of whether Iran, one of the main major oil producers, also accepted to curb its production – clearly a a politically charged issue, given the level of enmity between the two regional powers. In contrast to Al-Naimi, Mohammed bin Salman was dismissive of any agreement which did not include Iran (whose influence he actively sought to roll back, particularly in Syria and Yemen), even at the expense of continued low oil prices. In fact, persistently low oil prices made the case for economic reform and for the reduction of oil dependency more compelling and urgent.

By picking a new Oil Minister and restructuring some of the bigger ministries, King Salman thus appears to have chosen to support his son’s position on the country’s energy policy, hampering the chances for an oil freeze and, in turn helping the case for Vision 2030.

Countries in the region see this path as both understandable and worrisome. Most Gulf monarchies (particularly Bahrain, the UAE, Qatar and Kuwait) recently cut subsidies or underwent reform plans similar to Vision 2030, and therefore share the Kingdom’s concerns about the impact of oil prices on the region’s economy. At the same time, they fear that the reshuffle might entail an extension of Mohammed bin Salman’s provocative foreign policy, which would further intensify the clash between Saudi Arabia and Iran, politicizing global oil prices and influencing negatively the stability of the oil market.

Following the recent reshuffle, Iran’s news outlets have been downplaying Saudi Arabia’s capacity for reform, arguing that the young prince will not be able to overcome internal disagreements and obstructions, nor get rid of dependence on oil within just a few years. Iranian Oil Minister Bijan Namdar-Zangeneh also stated that the change of one Minister would not alter the “unwritten war with Saudi Arabia” over oil production and export. However, the need for economic reform in the Saudi Kingdom might, in fact, provide an opportunity for rapprochement between the two countries. An Iranian delegation has recently been invited and travelled to Riyadh for discussions over the Hajj pilgrimage, an issue which has remained unsolved since January, when Saudi Arabia cut diplomatic ties with Iran following the attack on its embassy in Tehran. It is widely known that non-oil income, as outlined in Vision 2030, will have to heavily rely on foreign pilgrims, including Iranians.

Thus, while the recent changes in the Saudi monarchy increase short term concerns of further instability in the oil market and escalation of tensions with Iran, the ambitions behind Mohammed bin Salman’s Vision 2030 could drive the Kingdom toward a more conciliatory and pragmatic path – at least in the longer run.