Below are two articles, which first appeared on theGlobalist.com - first, on November 12, 2017, on the efforts by the Saudi Crown Prince to consolidate power and arrest about 200 of the nation's wealthiest individuals on charges of corruption. Then, second, on November 23, 2017, on further developments on the corruption charges and the big issues of the Kingdom's goal of raising vast sums of cash.
Anti-Corruption: Saudis Use China’s Playbook
Saudi Crown Prince Mohammed bin Salman is playing the corruption card to strengthen his control over the country.
By Frank Vogl
November 12, 2017.
Combine oil and multi-billion dollar investments flowing across the globe with authoritarian power – and you have the classic recipe for grand corruption.
Like so many other dictators who seek to boost their powers through populist appeals, Saudi Crown Prince Mohammed bin Salman, 32, backed by his father, King Salman bin Abdulaziz, is playing the corruption card.
We are just witnessing the first act of a multi-act dramathat could lead Saudi Arabia towards a more diverse economy from its current total reliance on oil. Or it could all end in utter chaos.
Fighting on multiple fronts
MBS, as the Crown Prince is widely called, is arresting princes, military officials and leading businessmen at the very same time as he pursues a war in Yemen against Iranian-backed terrorists.
As if that weren’t enough, he is waging a diplomatic war against Qatar and moving to undermine the influence of Iran-backed Hezbollah in Lebanon.
It seems as if Saudi Arabia’s putative future ruler is just taking on too many battles on too many fronts. Under any circumstances, his domestic purge of actual and potential opponents, now underway, is a battle he must win.
Prominent people are being detained in Saudi Arabia on vague charges of corruption. Their bank accounts are being frozen. Saudi attorney-general Saud al-Mojeb said more than 200 people have been arrested in the last few days with over 1,700 bank accounts frozen with assets of more than $100 billion, the AP reported.
Beyond that, MBS is keen to strengthen his direct control over the nation’s internal security, its military and its staggering hoard of oil-produced cash.
MBS is seeking to build a national base of support among the nation’s youth and here an anti-corruption campaign is likely to have strong appeal. Nepotism and embezzlement by the powerful are widespread complaints by young Saudis.
The Oil Prize
MBS also wants to control the giant Saudi state-owned Aramco oil enterprise all by himself. And it is he who wants to determine whether or not to privatize some of it — and who will get the multi-billion dollar commissions if this happens.
The privatization of Aramco is controversial within the Saudi royal family and the new arrests may have muted some of the opposition.
Financiers in the City of London and on Wall Street, strongly backed by the UK and US governments, are lobbying MBS right now.
After all, Aramco may be worth more than $2 trillion so an initial listing of just five percent of the company would generate vast commissions for the bankers and brokers involved in the deal in the City of London.
Geopolitically, the far more sizzling possibility is that the Saudis will go for a private placement in China. If that happens, it will be a truly earthshaking event. It would be the clearest signal yet of the West’s diminishing allure.
The dictator’s playbook
That commercial possibility is also why MBS’s move to turn to the latest dictator’s playbook – the one written five years ago by China’s president Xi Jinping – is only logical.
Xi used corruption charges very effectively to move against perceived rivals and enemies. MBS is now applying Xi’s medicine to once-powerful princes and some of the most prominent Saudi tycoons.
In 2012, Xi declared war on corruption, knowing well the popular appeal of this cause. The result has been that more than 200,000 Chinese Communist Party officialsand businessmen have been punished.
Today, thanks to decisions at the recent 19th Communist Party Congress in Beijing, Xi is the unrivaled dictator of his nation with hundreds of former politicians and businessmen languishing in prison on charges of corruption.
The Chinese anti-corruption approach involves arresting people and prosecuting them without any form of due process. The same approach will be seen in Saudi Arabia. And, in both countries, there is no clear definition of corruption.
Many of the arrests in China have been made without any public charges being posted.
In Saudi Arabia, King Salman has just created a new anti-corruption committee chaired by MBS, without explaining its terms of reference.
Ruling by decree
The problem with this is simple: Corruption is usually seen as the abuse of public office for private gain, but this definition does not quite mesh with Saudi political realities. Saudi Arabia does not have a governing constitution. The royal family decrees.
With the Saudi people viewed as subjects, the royal family sees all income flowing to the country as its own, to be disbursed as it likes, be it on fleets of Rolls Royces or on public health clinics.
None of that fazes Donald Trump. He forged a personal bond with MBS when he visited Saudi several months ago. Moreover, in the last few weeks, MBS has met at his palace with Trump son-in-law and White House adviser Jared Kushner and with U.S. Treasury Secretary Steven Mnuchin.
No wonder then that, right in the midst of the first news announcements of the arrests, corruption charges and cabinet replacements on November 4 in Riyadh, it was Donald Trump who went online. Trump dutifully tweeted:
“Would very much appreciate Saudi Arabia doing their IPO of Aramco with the New York Stock Exchange. Important to the United States!”
When the Saudis Need Cash
Crown Prince Mohammed bin Salman wants to sell shares in state-owned oil giant Aramco to fund the grandiose reinvention of Saudi Arabia.
By Frank Vogl
November 23, 2017.
What a letdown for the Saudis. They are no longer at the commanding heights of the global economy. Instead, they find themselves annoyed by the Norwegians, anxious about potential international investors, uncertain about Chinese intentions – and worried about cash.
To finance the grandiose reinvention of Saudi Arabia and attempt to shape a productive, prosperous and peaceful post-oil economy, the Saudis want to raise staggering sums in coming years in international markets.
The presumed public listing of Saudi Aramco is the linchpin in that regard. Success in that venture will demand extraordinary political and financial skills by Saudi Crown Prince Mohammed bin Salman and his advisors.
But “MBS” – as he is often referred to – really has no choice. Declines in world oil prices have put a dent in Saudi government finances in recent years. The country’s budget deficit could reach $80 billion this year. Even by Saudi standards, this is unsustainable in the long term.
In addition, the Crown Prince’s Vision 2030 plan, among its many elements to modernize and diversify the kingdom, calls for a new city, Neom, that has an estimated cost of $500 billion. In late October, MBS presented the plans to more than 3,000 potential investors who were invited to Riyadh for the “Future Investment Initiative.”
While international finance today knows no borders and (almost) no real limits, it can also be fickle. One day investors may love a prospective deal; the next day they may just walk away.
Their minds and their actions are driven by their perceptions of confidence and uncertainty. And, in this game, the Saudi Crown Prince is a novice and prone to making major errors.
Against that backdrop, the Crown Prince recklessly arrested dozens of Saudi tycoons on charges of corruption. The Financial Times reported that the detained billionaires are being forced to make deals, said to involve giving up to 70% of their wealth, to gain their freedom. This may raise $100 billion.
But playing this corruption card has also rattled the nerves of investors. Can they still be confident that the Crown Prince can run a stable ship? And, if they choose to invest, can they be sure to maintain control of their investment?
Or will they possibly find themselves exposed one day to politically motivated charges by Saudi authorities?
International investors have been shaken. After all, many of those tycoons who were arrested were not just prominent in the rolodexes of the world’s biggest investment banks and fund managers. They are also major investors in topflight Western corporations.
The damage to confidence may make it all the harder for the Saudi government to achieve its stated goal of raising cash by selling shares in the state-owned giant oil company, Aramco. Saudi officials have valued it at around $2 trillion in total.
However, this valuation may now be in doubt, thanks to market worries about the Crown Prince’s grip on power – and thanks to the Norwegians.
Norges Bank, managing Norway’s sovereign wealth fund – the world’s largest with assets of around $1 trillion – looks at world oil prices. Its analysts see the prospect of lower oil price levels for some years to come (due in part to increasing U.S. oil and gas production, plus the rise of solar, wind and other energy alternatives).
As a result, Norway’s fund has announced that it will be selling all its shares in giant oil companies, such as Exxon-Mobil, Shell and BP, currently valued at around $35 billion.
The sell-off damages the valuations of all oil companies, including ARAMCO. To initially raise $100 billion, as they have planned, the Saudis will probably have to sell significantly more than 5% of the company and they have to offer handsome commissions to those who can broker the sale.
Only the London and New York stock exchanges are big enough for a public offering of this scale. Both are competing for the deal, but their basic transparency and governance standards may be just too demanding for the secretive Saudis.
Singapore’s sovereign wealth fund might be interested, but it is a shrewd investor and may share the same views on the oil outlook as the Norwegians.
The Saudis could seek to gather all their private equity and investment banking friends from London, Zurich and New York, to make a huge private placement of stock, but this will require a new effort to restore confidence.
There is speculation that the Chinese will buy the Aramco shares in a private placement. Such a transaction would not just be a political signal by China’s president Xi Jinping to support the Crown Prince and a further indication of China’s vitality on the global investment front.
It could also signal a pivotal Saudi realignment vis-à-vis the United States. What may stop the transaction from happening is that it might produce tensions between Iran and China that Xi may not want to unleash.
Xi also has to consider whether a huge foreign investment of this kind is a priority for his government. He has already committed to making vast investments in infrastructure across Asia in the coming decade.
Moreover, China’s all-powerful leader also needs to tackle an increasingly dangerous domestic debt issue. The national debt-to-GDP ratio stands at over 280%, vast credit extension by the country’s commercial banks and firms persists in the shadow banking system, and the mountains of debt by state-owned enterprises, construction companies and municipal governments are still rising further.
From seeking to consolidate political and military power at home, to hitting fellow princes up for cash, the Crown Prince is thus engaged in a high-wire act.
His endeavors are all the more risky given his simultaneous moves against Iranian-backed forces in Yemen and Lebanon, while confronting Qatar.
Investors are watching, and they are wary.
#these and other articles by Frank Vogl have been published on theGlobalist.com