Struggle behind Saudi night of the long knives
Arrests of princes and ministers in corruption purge aims to secure heir’s claim and start shift away from oil, writes Andrew Critchlow.
"The evidence of this wrongdoing is very strong and confirms the original suspicions that led the Saudi Arabian authorities to begin the investigation into these suspects in the first place." Sheikh Saud Al-Mojeb, Saudi Arabia's top prosecutor
There is a sense of fear and hope in Saudi Arabia after the arrests of dozens of princes and government ministers in an unprecedented corruption crackdown. It is hoped that the purge, which has been described as a ‘‘night of the long knives’’, will sweep away the old guard of royals accused of cronyism and blamed for draining wealth from the world’s largest oil producer for generations. But handing a younger leadership freerein to push through broader economic and social reforms also brings with it giant risks in the traditionally conservative kingdom.
For the billionaire royals and once powerful technocrats currently being held in the luxurious temporary prison of Riyadh’s Ritz Carlton hotel the future seems bleak despite the opulence of their surroundings. According to the Saudi Attorney General’s office, more than 200 officials were seized and questioned last weekend. Those being held include members of the upper ranks of the kingdom’s Al-Saud nobility. Their bank accounts were frozen as the state moved quickly to begin clawing back billions it alleges has been siphoned out of state coffers.
‘‘The evidence of this wrongdoing is very strong and confirms the original suspicions that led the Saudi Arabian authorities to begin the investigation into these suspects in the first place,’’ said Sheikh Saud Al-Mojeb, the kingdom’s top prosecutor. ‘‘The potential scale of corrupt practices that have been uncovered is very large. Based on our investigations over the past three years, we estimate that at least US$100b (NZ$144b) has been misused through systematic corruption and embezzlement over several decades.’’
More arrests are expected following the first phase of the investigation and overseas banks in the region have been instructed to freeze the accounts of many of those already being held. Private jet flights out of Riyadh have been grounded and palace compounds across the desert kingdom raided in a shocking sting operation.
Oil - the best barometer for stability in the world’s largest exporter of crude - jumped US$2 following news of the arrests, to a new twoyear high close to US$65 per barrel as traders digested the unfolding events.
Some analysts have argued that the crackdown is part of Crown Prince Mohammed bin Salman’s plan to consolidate power before he succeeds his 81-year-old father who is expected to abdicate imminently. The vigorous 32-yearold prince - who is known by his initials as simply MbS - ousted his elder cousin Mohammed bin Nayef to become first in line to the Saudi throne in June. He has now seized control of almost all elements of government from defence to oil production policy and the Mutawa religious police. But of the 11 highranking princes arrested only Mitab bin Abdullah - who was simultaneously removed as head of the National Guard - posed a serious political threat to the current line of succession. However, their sudden incarceration has effectively ended any realistic aspirations any may have had to challenge the new regime.
‘‘This is about consolidating power under Mohammed bin Salman,’’ said Nicholas Krohley, founder of FrontLine Advisory, an emerging market consultancy that specialises in the Saudi market.
The sudden nature of the arrests may cause concerns, along with Saudi Arabia’s poor record on human rights, but a sustained top-down campaign to tackle systemic corruption in the kingdom is probably long overdue.
Scrutinising the finances of the army of Al-Saud princes and hangers on could also help boost the public purse, which is still struggling to come to terms with lower oil prices. Funding of the royal family through a loosely accounted system of royal allocations and monthly stipends has become unsustainable in a country that is being forced to impose austerity measures. A research paper published by the London School of Economics (LSE) Middle East Centre in September, which cited US Embassy reports from the WikiLeaks disclosures, claims that in the Nineties allowances doled out to Saudi royals consumed US$40b annually.
The scale of corruption in the kingdom is unknown but there are worrying holes in its financial reporting of government revenues. The LSE paper by Gulf-based academic Omar Al-Shehabi also claims that Saudi Arabia could be missing a total of US$325b - equal to 60 per cent of its current foreign reserves - in unaccounted cash between 2002 and 2011 based on the difference between the value of its oil exports and officially declared public oil revenues.
But business doesn’t generally like the instability that has been caused by the rapid pace of change, or the uncertain future of some of the kingdom’s most prominent business leaders. High-profile international investor Prince Alwaleed bin Talal - owner of the Savoy hotel in London and once a major owner of Citibank stock - is also amongst the royals currently being investigated. His arrest is perhaps the most surprising of all. The prince - famous for his obsession with financial markets and Twitter - posed no threat to the political establishment. Shares in his Kingdom Holdings investment company plummeted 10 per cent immediately after the arrests became public. Calls and messages sent to his advisers for comment weren’t returned.
‘‘The business community will not like the uncertainty being caused around the succession and the surprising nature of the arrests,’’ said Timothy Grey, who was chief executive of HSBC Saudi Arabia for almost a decade. ‘‘But any way you cut it Saudi Arabia is still a monarchy and from an investor’s point of view it’s probably not concerning.’’
MbS has time to steady the ship. The first major test of confidence in the new Saudi Arabia being shaped will come in its plan to sell a stake in state oil driller Aramco. The world’s largest single producer of crude is bigger than Exxon Mobil, Royal Dutch Shell and BP combined. However, its plans to list a 5pc stake in the company by the end of 2018 on an international stock exchange such as London or New York have met with a cool response. The initial public offering - which is expected to value the company at US$2 trillion - is the brainchild of Mohammed bin Salman and a central pillar of his scheme to diversify the kingdom’s economy.
However, preparations for the float have been mired in controversy. Achieving a valuation that would bring in around US$100b from the sale is also unlikely while oil prices remain rooted below
US$70 per barrel. Instead of an international listing the company’s shares could be sold initially on the local Tadawul stock exchange, or a stake could be offloaded in a private placement to either a sovereign wealth fund or a Chinese partner. However, both options would look like a failure for MbS personally and the kingdom, which could be forced to sell off its crown jewel piecemeal. The detention of Aramco board member Ibrahim Al-Assaf in the graft inquiry also raises concerns over the IPO and the challenge facing investors to conduct due diligence. Aramco’s advisers declined to comment.
The Aramco float is vital to a wider plan known as Vision 2030, which calls for increasing non-oil revenues to 1 trillion riyals
(NZ$385b) by the end of the next decade, up from 163.5bn riyals in
2015. Another aim is to pump
US$500b into building a new economic city known as NEOM along its Red Sea coast. The futuristic metropolis will be powered by solar energy and partly populated by robots. Ironically, the project was unveiled in a lavish international investment forum held last month in the same hotel where the Al-Saud royals accused of corruption are all currently being detained.
‘‘Economic cities are no panacea for Saudi Arabia. Selling the stake in Aramco will give them some cash to diversify but Saudi Arabia will still be an economy dependent on oil, gas and petrochemicals for some time,’’ said Grey.
The biggest immediate impact of the upheaval in Saudi Arabia and the consolidation of power under MbS could be on long-term oil prices and policy. The prince has signalled his wish to see the Organisation of the Petroleum Exporting Countries (OPEC) extend its agreement with Russia and other major producers to limit output by 1.8m b/d. That deal has helped push crude prices closer to the US$70 per barrel figure that Saudi Arabia requires to balance its budget and pursue its expensive proxy-war against Iran and its Houthi rebels in the mountains of Yemen. Oil exports still account for three quarters of the kingdom’s export revenues.
‘‘Above US$60 per barrel Brent provides a much better enabling environment for many of the MbS key vision 2030 initiatives,’’ said Helima Croft, head of commodity strategy at RBC Capital Markets in New York. ‘‘Given all the internal issues at the moment, I don’t think he has appetite for another oil price downturn.
‘‘I think the interesting question is what would he do if the increased regional tensions in light of Lebanon propel Brent past
US$70. Would he opt to cap the upside to prevent a full scale US shale revival or savour the additional revenue.’’
Those higher prices will also be crucial to solving some of the kingdom’s pressing economic problems. Plans to cut unemployment to around 7 per cent, from 12 per cent at present will require more funding and provide more opportunities for women to participate in the workplace.
‘‘I’ve felt a mixture of anxiety and excitement in Saudi especially amongst younger people over what is happening,’’ said Frontline’s Krohley.
Andrew Critchlow is head of energy news, EMEA, at S&P Global Platts.