For those of us who have been strong supporters of Saudi Crown Prince Mohammed bin Salman’s unprecedented reform efforts, the past several months have given cause for concern. There’s been a steady stream of bad news, and good news has grown less frequent. I’m certainly not ready to hit the panic button yet—those who thought the process of yanking Saudi Arabia into the 21st century would proceed smoothly, without its share of setbacks, were surely fooling themselves. But there have been enough warning signs now for the Trump administration to start taking greater notice—and, more importantly, taking greater action to curb some of Mohammed bin Salman’s less constructive impulses.
The latest sign of trouble was the news last month that Saudi Aramco, the state-owned oil company, was putting off its long-anticipated initial public offering. Though Khalid al-Falih, the Saudi energy minister, was quick to insist that the government remains committed to selling off a 5 percent stake in Aramco “at a time of its own choosing,” few were convinced. Since Mohammed bin Salman first unveiled the idea with great fanfare in 2016, it’s been one delay and missed deadline after another. Now the deadlines have disappeared altogether. Indefinitely postponed seems to be the most charitable euphemism one could use to describe the IPO’s current status. Collapsed is probably closer to the truth.
Mohammed bin Salman’s father, King Salman, reportedly delivered the coup de grâce. According to Reuters, during the month of Ramadan, which ended in June, the king receiveda number of complaints from princes, bankers, and Aramco executives about the pending IPO. Their primary concern: Any listing on one of the world’s major stock exchanges would require too much disclosure of Aramco’s financial dealings, potentially exposing irregularities and weaknesses that could embarrass and undermine not only the company, but also the legitimacy of the House of Saud itself.
Observers inevitably perceived the cancellation as a serious blow to Mohammed bin Salman’s reformist credentials. For better or worse, the crown prince had consistently portrayed the selloff as an essential element of his audacious Vision 2030 program to transform the Saudi economy. He insisted that Aramco would be valued at an eye-popping $2 trillion (making it easily the most valuable company in the world) and that the $100 billion raised by the IPO would help cover the enormous costs of the Vision 2030 plan to diversify the economy by reducing its dependence on oil and building a future based on innovation, technology, and a vibrant private sector.
But the importance of the sale went far beyond exploiting Aramco as a convenient cash cow. It was also meant to serve as a massive signal of reassurance to foreign investors whose participation will be essential to Vision 2030’s success. Listing shares of Saudi Arabia’s most important asset on one of the world’s major exchanges was supposed to mark the kingdom’s opening to Western-style standards of transparency, accountability, and the rule of law.
Instead, the IPO’s scrapping has had the opposite effect. Investors rapidly determined that Mohammed bin Salman’s $2 trillion valuation was grossly exaggerated, although insufficient information existed to assess with any accuracy what the real figure should be. The Saudi government has neither offered an authoritative explanation for the IPO’s constant delays nor made any effort to articulate its concerns surrounding the sale. Rather than tearing down the wall of opacity around the kingdom, the IPO process helped reinforce it. And rather than boosting investor confidence, it underscored the extent to which major economic decisions are still subject to the murky political calculations, infighting, and arbitrary interventions of the Saudi ruling elite.
Mohammed bin Salman is now seeking to mitigate the IPO failure by insisting that Aramco instead take on tens of billions of dollars in foreign debt to purchase a controlling stake in Sabic, the petrochemical company owned by Saudi Arabia’s sovereign wealth vehicle, the Public Investment Fund. The fund would in turn use the money from the sale to finance Vision 2030’s reforms. While such a fallback plan might make up for the funds that the IPO was supposed to generate, it would seem a less-than-ideal substitute when it comes to bolstering the kingdom’s attractiveness to global investors. Executives from both Aramco and Sabic have privately made known their lack of enthusiasm for the deal and hinted that the only reason it’s being considered is because of a royal command to do so. Potential investors could be forgiven for thinking that the transaction has the markings of a government-mandated forced transfer of assets.
The IPO’s unraveling may have been the most significant sign of trouble for Saudi reform over the past six months, but it wasn’t the only one. Just weeks before the kingdom lifted its ban on women driving in June—an occasion that should have looked like a moment of great triumph for Mohammed bin Salman—a number of well-known female activists who had long campaigned in favor of the change were arrested. The charges against them included trumped-up accusations of seeking to “destabilize the kingdom” and “mar the national consistency” (whatever that means). They were pilloried as traitors serving foreign interests in a well-coordinated hit job by the state-owned media. The message seemed all too clear: Any societal change flows strictly from the top down, a function of the beneficence and wisdom of Mohammed bin Salman—not through any process of grassroots activism on the part of the kingdom’s citizens. No doubt meant to shore up the crown prince’s power and authority at home, the move to Western eyes came across as heavy-handed and oppressive, driven as much by fear as strength. Not a particularly good look for foreign investors.
The kingdom’s overreaction to a handful of tweets (including one in Arabic) by the Canadian Foreign Ministry that mildly criticized the arrest of two more human rights activists in early August made matters worse. Virtually overnight, Saudi Arabia expelled the Canadian ambassador, canceled flights to Canada, ordered Saudi students home, liquidated investments in Canada, and froze new Canadian-Saudi business trade and investment. Defenders rushed to explain that the move had nothing to do with Mohammed bin Salman’s reformist bona fides and everything to do with shoring up his strength at home. In this telling, precisely to preserve his ability to continue driving the modernization process forward, the crown prince had no choice but to respond vigorously to Canada’s perceived affront to Saudi sovereignty—lest powerful reactionary forces within the kingdom, both tribal and religious, use it to beat him for failing to protect the prestige of the Saudi state. Perhaps. But for Western audiences, including the investor class, the over-the-top response added detail to a growing narrative that portrays Mohammed bin Salman as less a historic reformer than an impulsive authoritarian, prone to temper tantrums and flights of irrational decision-making.
All of these unfortunate recent developments, of course, occurred against the stark backdrop of last November’s notorious anti-corruption campaign, in which hundreds of wealthy Saudis, including powerful princes, former government ministers, and businessmen, were arrested, forcibly detained in Riyadh’s Ritz-Carlton hotel, and coerced into surrendering billions of dollars in cash and property. Allegations of physical abuse, even torture resulting in death, were widespread. Needless to say, this has cast a long shadow over the kingdom’s investment climate.
The numbers tell an alarming story. Over the past two years, there has been massive capital flight from Saudi Arabia. Some $80 billion in 2017. Another $65 billion projected this year—and that was before the diplomatic spat with Canada. Reports suggest that the numbers might have been even higher if not for Saudi government measures to stem the rush to the exits. Wealthy Saudis believe their bank accounts are now being monitored. Small cash transfers have been questioned by government officials. Larger transfers have been blocked outright. Efforts to exchange Saudi riyals for other currencies have allegedly been denied, all part of what one Saudi wealth manager described to the Financial Times as “targeted—but huge scale—capital controls.”
