Iran. Is­lamic State. Cheap oil. Saudi Ara­bia’s King Sal­man has his hands full

▶▶The set­back in re­la­tions with Iran is just one of Saudi Ara­bia’s many prob­lems ▶▶“They’re sur­prised when peo­ple have a neg­a­tive re­ac­tion”

Bloomberg Businessweek (Asia) - - Contents - ­Matthew Philips, with Vi­vian Nereim

The col­lapse in Saudi re­la­tions with Iran af­ter the ex­e­cu­tion of a prom­i­nent Shi­ite cleric marks a grim start to the new year for Saudi Ara­bia’s King Sal­man. Since suc­ceed­ing his half-brother, Ab­dul­lah, who died in Jan­uary 2015, the 80-year-old Sal­man has gone to war in Ye­men, faced Is­lamic State-backed sui­cide bomb at­tacks in­side his bor­ders, and watched ri­val Iran sign an his­toric nu­clear ac­cord bro­kered by the U.S., the king­dom’s strong­est ally for the past 50 years. Crude oil, the lifeblood of the Saudi econ­omy, has re­mained cheap, de­priv­ing the coun­try of bil­lions in rev­enue.

On Dec. 28 the Saudi fi­nance min­istry an­nounced big spend­ing cuts for 2016. Ac­cord­ing to Luay al-Kaht­teeb, a vis­it­ing fel­low at the Brook­ings Institution’s Doha Cen­ter in Qatar, one item that did in­crease was mil­i­tary spend­ing, ris­ing to 25 per­cent of the bud­get (vs. 18 per­cent in the U.S.). A week later, the king­dom ex­e­cuted 47 pris­on­ers it la­beled ter­ror­ists, in­clud­ing the Saudi Shi­ite cleric Nimr al-Nimr. Days later, Saudi Ara­bia’s al­ready strained re­la­tions with pre­dom­i­nantly Shi­ite Iran were in tat­ters. Af­ter pro­test­ers set fire to the Saudi em­bassy in Tehran, the king­dom cut re­la­tions with the Is­lamic Repub­lic.

Some an­a­lysts say al-Nimr’s ex­e­cu­tion was a way to bait Iran into over­re­act­ing. That would help the Saudis iso­late the ri­val na­tion, as well as give them an ex­cuse to slow down peace talks on Syria, which the United Na­tions has ten­ta­tively sched­uled for Jan. 25 in Geneva. Now that Rus­sia is at the ta­ble, the Saudis are con­cerned that any deal will leave the Iran- and Rus­sia-backed Syr­ian Pres­i­dent Bashar al-As­sad in power, as forces co­a­lesce around the goal of de­feat­ing Is­lamic State. The Saudis see As­sad as a pup­pet of Shia Iran who rules over a Sunni-ma­jor­ity coun­try. Since the em­bassy was at­tacked, Saudi Ara­bia has ex­pressed con­tin­ued sup­port for the peace talks.

Those who know the Saudis best think it’s un­likely they planned very far ahead. “I ac­tu­ally don’t think the Saudis cal­cu­lated what the im­pact would be on the re­gion,” says James Smith, who served as U.S. am­bas­sador to Saudi Ara­bia from 2009 to 2013. The Saudis lack a cer­tain self-aware­ness,

Smith says. “They don’t stop and think, and then they’re sur­prised when peo­ple have a neg­a­tive re­ac­tion.”

Saudi of­fi­cials say the ex­e­cu­tions were meant to con­vince or­di­nary cit­i­zens of the gov­ern­ment’s re­solve to fight ter­ror­ism. They’re “an­noyed at the level of in­ter­na­tional in­ter­est in the mat­ter,” says Faisal bin Farhan Al Saud, chair­man of Shamal In­vest­ment and a mem­ber of the royal fam­ily. “They ex­pected a re­ac­tion from Iran, prob­a­bly in the sense of blus­tery speeches as usual, but I don’t think they were in­ten­tion­ally send­ing a mes­sage to Iran. I don’t think they nec­es­sar­ily ex­pected a move such as the storm­ing of the em­bassy.”

The at­tack raises ques­tions as to whether Iran is ready to re­join the global econ­omy af­ter years of sanc­tions; it also strength­ens the feel­ing among the Saudis that they’re un­der siege. “Sal­man views him­self as a wartime king,” says Robert Jor­dan, U.S. am­bas­sador to the coun­try from 2001 to 2003. The Saudis also feel aban­doned by the Obama ad­min­is­tra­tion. “There is a real sense of en­cir­clement they’re feel­ing,” he says. “They are bit­ter and frus­trated at the U.S. for walk­ing away and seem to be lash­ing out.”

Saudi anx­i­ety about the U.S. be­gan when Amer­i­can for­eign pol­icy at­tempted its pivot to Asia; that was ag­gra­vated by the 2011 fall of Egyp­tian Pres­i­dent Hosni Mubarak, whom the U.S. had sup­ported for decades. Con­ster­na­tion grew af­ter Obama drew a red line over As­sad’s al­leged use of chem­i­cal weapons, then failed to fol­low through on the threat. “It was per­ceived as proof that the word of the United States is no longer of value,” Smith says.

For all the talk of aban­don­ment, Saudi Ara­bia re­mains by far the U.S.’s top weapons cus­tomer. Sales have ramped up sig­nif­i­cantly un­der Obama, says Wil­liam Har­tung, di­rec­tor of the Arms & Se­cu­rity Project at the Cen­ter for In­ter­na­tional Pol­icy. From Oc­to­ber 2010 through 2015, the U.S. has ap­proved sales of $111.3 bil­lion of arms to Saudi Ara­bia, in­clud­ing $29 bil­lion for 84 F-15 war­planes—more than three times the arms sales ap­proved to the U.S.’s sec­ond-big­gest cus­tomer, South Korea.

A lot of that fire­power is be­ing used in Ye­men. The 10-month bomb­ing cam­paign against the Iran-backed Shia rebels, the Houthis, has been sloppy. The UN es­ti­mates that 2,600 Ye­men civil­ians were killed from March to Oc­to­ber, in­clud­ing 1,600 in Saudiled airstrikes. To pay for the war, the Saudis have been dip­ping into shrink­ing for­eign cur­rency re­serves. “The only thing it ac­com­plished is to cre­ate a ma­jor hu­man­i­tar­ian cri­sis,” Har­tung says. The air cam­paign has been led by the king’s 30-year-old son, Mo­ham­mad bin Sal­man, the youngest de­fense min­is­ter in the world. “They should be wor­ried about ISIS, but in­stead they’re spend­ing all their blood and trea­sure in Ye­men as some kind of anti-Ira­nian mea­sure,” Har­tung says. “And it’s a dis­as­ter.”

The Saudis are also en­gaged in an oil war—one in which they’re strug­gling to bal­ance con­tin­ued pro­duc­tion and fall­ing prices. Iran says it will sell an ex­tra mil­lion bar­rels of oil a day by midyear, in­creas­ing cur­rent out­put by more than a third. There’s so much crude for sale that even rash ac­tions by two of the world’s big­gest sup­pli­ers don’t trans­late into higher prices— which isn’t good for the trea­suries of Tehran and Riyadh. As Iran pre­pares to reen­ter the mar­ket, the Saudis are offering huge dis­counts to cus­tomers in Europe and Asia in hopes of keep­ing them from buy­ing Ira­nian oil.

Al­though Saudi Ara­bia re­mains the world’s largest oil pro­ducer and can get oil out of the ground more cheaply than Iran can, in some ways Iran is bet­ter po­si­tioned to weather low prices. Sanc­tions, which may end in March, have forced the Ira­ni­ans to live with­out oil and di­ver­sify their econ­omy, whereas oil ac­counts for 80 per­cent of Saudi Ara­bia’s rev­enue. Ac­cord­ing to In­ter­na­tional Mon­e­tary Fund es­ti­mates, Iran can bal­ance its bud­get with crude at $70 a bar­rel, while the Saudis need $95. Omi­nously, the IMF predicts that if the Saudis don’t lower spend­ing, and if oil stays at $50 a bar­rel, they’ll burn through their for­eign cur­rency re­serves by 2020. Be­ing a wartime king is ex­pen­sive.

The bot­tom line Saudi Ara­bia is bat­tling rebels in Ye­men, spar­ring with the Ira­ni­ans, and try­ing to fix its bud­get deficit.

“They should be wor­ried about ISIS, but in­stead they’re spend­ing all their blood and trea­sure in Ye­men as some kind of anti-Ira­nian mea­sure.” —Wil­liam Har­tung, Cen­ter for In­ter­na­tional Pol­icy

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