The persistence of low oil prices is wreaking havoc in oil-producing nations, and no country is as vulnerable to the crude crunch as the Kingdom of Saudi Arabia. With almost three quarters of the government’s budget originating from oil revenues, the prolonged plunge in prices is a mortal threat to the Saudi monarchy.
Leaders are scrambling to secure a prosperous and stable future for the country. But are these maneuvers too late?
The blunt reality is that Saudi Arabia has grown accustomed to high oil prices. At their current level, the regime is facing a $100 billion budget deficit. The gap has forced the Kingdom to cut subsidies and secure its first outside loan in over a decade. Popular sentiment is rapidly shifting as citizens who once enjoyed cushy jobs are facing uncertain futures. Given the state employs two-thirds of native workers and youth unemployment is approaching 30 percent, the risk of social unrest is rising.
30-year-old Deputy Crown Prince Mohammed bin Salman has emerged with a plan to save the day.
Amidst the seemingly inevitable chaos, 30-year-old Deputy Crown Prince Mohammed bin Salman has emerged with a plan to save the day. Dubbed “Vision 2030,” the plan has Saudi Arabia selling shares in Aramco, the state-run oil behemoth, and building a $2 trillion sovereign wealth fund. To put this number in context, it’s worth noting that the world’s largest sovereign fund (Norway’s Government Pension Fund) is valued at approximately $825 billion, according to the Sovereign Wealth Fund Institute.
The hope is to wean the country from its almost complete dependence on oil, enabling the nation "to live without oil" by 2020. To achieve this transformation, the prince wants to completely overhaul the Saudi economy. Key objectives of the plan include growing investment income, increasing small and medium enterprises as a percentage of the economy, and reorganizing and bolstering the domestic military industry.
The young leader is confident. He recently told Bloomberg Businessweek that he doesn’t care about oil prices, noting the Kingdom’s advantage as a low-cost producer. He also wouldn't freeze production levels at the recent OPEC meeting in Doha because Iran refused to be involved.
Critics call the deputy crown prince naive and arrogant, while defenders see him as a youthful modernizer forcing necessary change. He certainly thinks of himself as a modern leader representing a new generation, framing his ambitions with analogies to Bill Gates, Steve Jobs, and Mark Zuckerberg.
To reform Saudi Arabia is no trivial task. To begin, diversifying the economy might require international capital. The Vision 2030 plan acknowledges its ambitions are dependent upon a "capital market open to the world." Specific plans include the build-out of "special zones" with regulations designed to encourage investment. Such investment-seeking hubs are planned for logistics and tourism, among other industries.
But simplistic plans like those announced this week are not going to be enough. Just consider the $10 billion King Abdullah Financial District. With gleaming towers, cutting-edge technology, and a monorail connecting the district efficiently together, this 70% complete special zone has just about everything. The one thing it doesn't? Banks. An April 2016 Bloomberg story noted that "not a single financial institution has agreed to take space in the 73 buildings" being constructed as part of the project. Ooops!
The problem is complex, but it's increasingly clear that liberalizing and modernizing Saudi Arabia requires more than grand economic ambitions.
Liberalizing and modernizing Saudi Arabia requires more than grand economic ambitions.
Social reforms are also needed. The Kingdom severely restricts women’s rights, including the right to drive. Executions this year are on track to double last year’s total. The government employs strict anti-terrorism laws to crush dissent. And academics struggle to understand their role in an illiberal society where criticism can prompt a rapid and harsh backlash.
There are signs of progress, though. Vision 2030 includes plans to raise home ownership and revamp the education system. In mid-April, the government announced that it would curb the powers of the religious police controlled by “The Commission for the Promotion of Virtue Prevention of Vice.” Further, women’s rights have begun to improve, and the deputy crown prince's plan includes boosting female participation in the labor force. (Interestingly, he also cautioned that the country is not yet ready to let women drive).
With Vision 2030, Prince Mohammed also signaled a pivot to openness by planning to offer green cards to foreign Arabs and Muslims, letting them work in Saudi Arabia for an extended period of time. The country is also going to greatly increase the availability of tourist visas, which today are only available to pilgrims. According to the New York Times, "untrammeled beaches, ancient sites and unfiltered local culture are all on offer in Saudi Arabia." Could the Kingdom turn into a tourist hot-spot?
Although progress is being made, the pace and magnitude of reforms may be inadequate to save the country. While the deputy crown prince struggles to modernize the Kingdom, he’s also being buffeted by geopolitical forces increasingly unfavorable to Saudi Arabia.
In the Middle East, the country's rivalry with Iran has stretched its military, and the proxy war in Yemen—championed by the deputy crown prince—has been costly and sloppy. The Kingdom even offered to send ground troops into Syria to support Saudi-funded anti-Assad rebels.
Moreover, Saudi-US relations have been strained. President Obama publicly criticized Saudi Arabia and its neighbors for being “free riders,” stating they needed to “share the neighborhood” with Iran. The US President’s visit to the Kingdom last week was fraught with tension; he arrived in Riyadh as a bill allowing families of 9/11 victims to sue Saudi Arabia gained traction in the US Senate and earned support from both Hillary Clinton and Bernie Sanders.
The mixture of economic weakness, military assertiveness, and a strained relationship with the US is a toxic cocktail. Perversely, it may now be in the country’s interest to provoke a conflict with Iran. Facing such radical uncertainty at home and abroad, the deputy crown prince must be both bold and humble as he implements his plan. He should accelerate modernization, diversification, and liberalization efforts, and while the outcome of such an approach is far from certain, the risks of not doing so are rising every day.
What happens in Saudi Arabia is unlikely to stay in Saudi Arabia.
Saudi Arabia remains an extremely important country in the world. What happens in Saudi Arabia is unlikely to stay in Saudi Arabia and as such, we must pay attention. In the wise words of Yogi Berra, “it’s tough to make predictions, particularly about the future.” Nevertheless, we need to prepare for several possibilities, from the escalation of the cold war between Iran and Saudi Arabia into a hot one, to a collapse of the Saudi monarchy and the chaos accompanying such a development, to the emergence (if the deputy crown prince succeeds with his bold plans) of a renewed economic powerhouse in the Middle East.
One thing, however, is certain: The future of Saudi Arabia ain't what it used to be.