27.05.2020 Author: Viktor Mikhin

Saudi Arabia and its Uncertain Future


The unprecedented scale of the Coronavirus pandemic; the sudden fall in oil prices, caused by Riyadh’s incompetent policies, and the looming economic crisis have all resulted in enormous losses for Saudi Arabia’s economy, and dealt a severe blow to its state budget. These developments have also prompted the rest of the world to lose confidence in the ability of the Kingdom’s current rulers to not only govern effectively but to also keep the situation in Saudi Arabia, once the richest country in the world, more or less under control.

Evidence suggests that Crown Prince Mohammad Bin Salman Al Saud, who has completely taken over the reins of power on account of his father’s illness, is leading his nation down a blind alley. And the only way out may lead to the collapse of the Kingdom and the creation of several new countries in place of it.

Saudi Arabia, which supplied many of the world’s nations with oil (i.e. ‘black gold’) earlier on, no longer knows what to do with this gift from Allah. At present, there is an enormous problem as storage space for already produced oil is lacking. Recently, the Goldman Sachs Group forecast that by the end of May, all the existing storage facilities, including tankers, will be completely full. South Korea, Singapore and India no longer have any room for excess oil. The situation in the United States is similar. All the oil terminals are completely full. Global media outlets have been publishing numerous photographs of Saudi tankers drifting at sea. And operators of these ships simply do not know where to go to unload their cargo. After all, they cannot just discharge it into the water. The combined volume of oil currently stored in the cargo hold of such tankers increased two fold over the past 2 months and at present, exceeds 160 million barrels. And Saudi oil that is yet to be sold accounts for the majority of it.

Naturally, all of this has led to a sudden increase in costs of hiring tankers. Ship operators, such as Teekay Tanker and Frontline, have increased their freight prices as soon as they realized that Saudis (their customers) would use them for storage. This means that, at present, transporting oil by sea across the Atlantic or the Pacific oceans is not economically feasible. For example, in March 2020, very large crude-oil carriers’ (VLCC) time charter rates for floating storage were around $18,000 per day. Nowadays, according to data from the consulting firm Rystad Energy, such rates for a medium-sized supertanker with storage capacity of 2 million barrels is $300,0000. In other words, keeping a barrel of oil on-board a VLCC for a month costs $4.5, which makes the price of Saudi black gold less competitive in comparison to that of Russia’s crude oil transported via pipelines.

At present, Saudi Aramco is in an extremely difficult position, as there are no buyers or storage space for its goods, and slowing down crude production is costly. If no other options are available, the excess fuel will simply have to be burned. And apparently, some Saudi leaders have expressed willingness to do so. After all, they are desperate to resolve the difficult situation they have found themselves in, primarily, because Mohammad Bin Salman Al Saud has proven to be an ineffective leader of the Kingdom, which used to be the richest nation in the world. The problem is that once a well is shut down, it is very hard to get it back up and running again. The process requires a lot of effort and money, and Riyadh simply does not have any available funds at present. For instance, shutting down an average oil well costs 1 arbitrary unit, while restarting it will be three times as expensive.

Global media outlets have attributed the possible cancellation of Hajj to Saudi Arabia’s economic losses and the blow dealt to the nation’s image on the international arena. In March, Saudi Arabia halted Umrah (sometimes referred to as the ‘lesser pilgrimage’) because of the Coronavirus pandemic. And every day it is becoming more likely that the Hajj pilgrimage (which is supposed to start on July 29 this year) will be cancelled. Although lockdown measures across the nation started to ease as far back as April, according to the latest reports, the 24-hour curfew in the city of Mecca is still in place. It is also important to remember that the Saudi King’s official title is the Custodian of the Two Holy Mosques in Mecca and Medina (or Servant of the Two Noble Sanctuaries or Protector of the Two Holy Cities). Hence, he needs to live up to it in the eyes of the Muslim world. In fact, earlier on, this title was held by members of the House of Hashim, which had ruled Mecca continuously from the 10th century until its conquest by the House of Saud. Hence, King of Jordan Abdullah II bin Al-Hussein has a much stronger claim to the title as a member of the Hashemite dynasty. And a number of media outlets have already started asking the question “Does the King and Saudi Arabia itself live up to the title of Protector of the Two Holy Cities?”.

Since Hajj is viewed as a religious duty commanded by God (Fard), an Islamic institution, common to all Muslims, should be in charge of any profits earned from the pilgrimage. And according to Sharia, this responsibility should lie with an Islamic state. This caliphate has to manage all the finances related to Hajj, including spending and earnings, and to decide what projects to allocate profits from the pilgrimage to. At present, a small group of people, i.e. members of the House of Saud (first and foremost the King and his relatives) and few employees of companies that collaborate with the royal family on the pilgrimages, receive all of the revenues from Hajj and Umrah. The Egyptian newspaper Al-Ahram has stated that profits go to a small number of people, who, in the end, invest this money into foreign projects that Islamic institutions and common Muslims do not benefit from.

All of these misfortunes that have befallen Saudi Arabia will, this year, result in a budget deficit of at least 3%, according to the International Monetary Fund (IMF). In the past, the Kingdom enjoyed budget surpluses.  The Crown Prince’s poorly thought through reforms will, first and foremost, affect those citizens of Saudi Arabia who are not particularly rich. The Kingdom has raised the value added tax threefold (from 5 to 15%) and suspended the cost of monthly living allowance (which amounted to approximately 250 EUR).  Saudi Arabia’s leadership hopes to save around 100 billion riyals (24.61 billion EUR) with the aid of such financial measures.  Approximately 50% of the state budget is spent on salaries of Saudi Arabia’s fairly unproductive government employees. However, there has been no talk about cutting their earnings (an oil price of $80 per barrel is needed to balance the state budget).  According to reported financial results for the first quarter of 2020, Saudi Arabia’s fiscal deficit reached $9 billion. The Kingdom’s austerity measures included the decision to cut funding for 13 programs of Saudi Vision 2030.  Saudi Arabia’s foreign exchange reserves have decreased almost three fold since 2014. In March, they fell by almost $27 billion, “the largest one-month decline for at least 20 years”.

Saudi Arabia, which used to be one of the wealthiest nations in the world, has resorted to borrowing money. The Kingdom’s Minister of Finance, Mohammed Al-Jadaan, has stated that Riyadh may have to borrow $60 billion to cover the nation’s huge budget deficit. Speaking to the Al-Arabiya TV news channel, the minister explained that Saudi Arabia “might have to take painful measures to counter the economic repercussions of the Coronavirus pandemic and the collapse of oil prices”.  After Mohammed Al-Jadaan made his statement, Saudi Aramco’s shares fell by 6.8 %. A Saudi company, Jadwa Investment, has estimated that the Kingdom’s budget deficit will amount to $112 billion this year.  In April 2019, the IMF predicted that the Saudi economy would contract by 2.3 %. Meanwhile, Capital Economics, a London-based research consultancy, stated that the Kingdom’s economy would shrink by at least 5% “as a result of its dependence on oil sales”.

The leadership’s unprecedented decision to increase the value added tax and suspend a number of benefits enjoyed by government employees clearly shows that Saudi Arabia is experiencing serious financial problems nowadays. The financial crisis may prove quite costly to Crown Prince’s ambitious plans, which entail diversifying the economy and the Kingdom taking on a leading role in the Middle East. Saudi Arabia’s neighbors were quick to take advantage of the difficult situation that the Kingdom currently finds itself in. The internal struggle for power and influence may also intensify and the number of individuals who are dissatisfied with the course adopted by Saudi Arabia’s de facto ruler Mohammad Bin Salman Al Saud may grow.

While addressing the decision to increase the value added tax from 5 to 15 % starting on July 1, Saudi Arabia’s Finance Minister Mohammed al-Jadaan said that the Kingdom was willing to take painful but necessary steps to mitigate the impact of the unprecedented crisis stemming from the Coronavirus pandemic and to ensure public financial and economic stability. In addition, Saudi Arabia’s Ministry of Human Resources and Social Development decided to allow private sector companies to “cut salaries by up to 40 percent with the possibility of terminating contracts”. The $270 monthly cost of living allowance for government employees has also been suspended.

Poorly implemented and not particularly well-coordinated measures to combat the COVID-19 pandemic resulted in the spread of the Coronavirus among migrant workers, Saudi Arabian citizens and even members of the House of Saud. According to the Iran News, as many as 150 family members of the ruling dynasty are believed to have contracted the Coronavirus over the past weeks. Citing information from Saudi hospital operators as well as sources close to the royal family, The New York Times has reported that Saudi prince and the governor of Riyadh region, Faisal bin Bandar Al Saud, who is over 70, is in intensive care with the coronavirus. The article also said that during the pandemic King Salman, 84, had “secluded himself for his safety in an island palace near the city of Jeddah”, while the Crown Prince had retreated to a “remote site on the Red Sea coast”.  Over a month ago, Saudi health officials warned the public that “the epidemic was just getting started”.  And according to the official Saudi Press Agency, several weeks ago, Minister of Health Tawfiq al-Rabiah said the number of infections would “range from a minimum of 10,000 to a maximum of 200,000”.

It is quite clear that such unpopular measures and most importantly, the Crown Prince’s far from successful policies literally “on all the fronts” have resulted in a rift within the ruling family. These divisions were on full display at the beginning of March, when members of the royal family were arrested on orders from Crown Prince Mohammad Bin Salman Al Saud immediately after the OPEC deal collapsed and oil prices plunged. Western media outlets reported that the most influential members of the House of Saud had been detained and included Prince Ahmed bin Abdulaziz (the younger brother of the 84-year-old King), former Crown Prince Mohammed bin Nayef (the King’s nephew) and Prince Nawaf bin Nayef. However, this is only the tip of the iceberg when it comes to dissatisfaction felt in Saudi Arabia.

In such a context, it would not be surprising if the current economic crisis were to turn into a political one. According to modern theories of revolutions, a financial crisis is one of the key factors that could lead to a coup. As a rule, the other two are foreign policy defeats and a rift within the ruling elites. And based on numerous facts, both these factors are currently evident in Saudi Arabia. The price war on the global oil market certainly did not bring a victory to Saudi Arabia. However, the possibility that the Kingdom will continue to take measures to dampen oil prices remains. Nevertheless, Saudis appear to be losing the poker game “Who Will Blink First”, and numerous analysts are forecasting an uncertain future for the Kingdom.

Viktor Mikhin, corresponding member of RANS, exclusively for the online magazine “New Eastern Outlook” .


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