Business and Finance

Gulf tensions: Saudi Arabia flexes its economic muscles


When Saudi Arabia abruptly amended its rules for imports from neighbouring Gulf states, executives at an UAE conglomerate had been surprised into motion. They ordered firm vans filled with every little thing from cardboard packaging to metal pallets to return to Dubai from the Saudi border, whereas officers urgently phoned shoppers within the kingdom to ask if they’d settle for the elevated value of tariffs of between 5 per cent and 15 per cent on merchandise that for years had been shipped tariff-free.

“We were in an absolute panic,” says an government on the firm. “We had no idea what to do with the cargo.”

Cross-border commerce was disrupted for every week in July earlier than the corporate’s Saudi-based shoppers agreed to take the monetary hit and transfer on. But it was a stark warning that the cosy relationship corporations based mostly within the United Arab Emirates have loved with Saudi Arabia — the principle market for a lot of Gulf companies — is being shaken up.

The smaller, nimbler UAE has for many years leveraged its proximity to Saudi Arabia and the extra liberal lifestyle it offers foreign executives because it constructed the Gulf’s premier commerce and finance hub. Many of the bankers, consultants, attorneys and producers who serve Saudi Arabia, the Middle East’s largest financial system and the Gulf’s largest client market, fortunately arrange store within the UAE, travelling backwards and forwards to the extra conservative kingdom when wanted.

But as Crown Prince Mohammed bin Salman, Saudi Arabia’s mercurial day-to-day chief, aggressively drives formidable plans to modernise his nation, develop new industries and create jobs for the kingdom’s youthful population, the message from Riyadh is it’ll now not be enterprise as common.

Instead, he has made it clear that if corporations need to do enterprise in his nation, significantly with the state — the principle driver of economic exercise — he wants them operating in the country; using Saudis and boosting his aspirations for reworking the as soon as sleepy kingdom into the area’s dominant economic hub.

Construction of the King Abdullah Financial District
Construction of the King Abdullah Financial District in Riyadh was a part of efforts by the Saudis to each woo and reassure traders © Andrew England/FT

He and his lieutenants are betting that even when Saudi Arabia lacks most of the attributes that present consolation to these settled in Dubai — from the unbiased regulator that oversees the Dubai International Finance Centre (DIFC), to the standard of faculties and array of bars and eating places — measurement does matter.

“The giant is waking up,” says a senior Saudi official. “While this is not against the UAE, it’s like you were asleep and dust was settling on your body. Then you wake up and shake it off.”

Riyadh calling

The “awakening” is reverberating throughout the UAE and the boardrooms of native and multinational companies based mostly within the Gulf state.

In sometimes strong type, Prince Mohammed started the 12 months by setting overseas companies an ultimatum — transfer their regional headquarters to Riyadh by 2024 or overlook concerning the profitable authorities contracts which are the principle prize for a lot of.

Then, Riyadh altered its laws on imports from fellow Gulf Cooperation Council members — the UAE, Kuwait, Qatar, Oman and Bahrain. The adjustments withdrew GCC tariff concessions from items manufactured in free zones, that are exempt from laws together with the requirement to be majority-owned by a nationwide, or produced by corporations the place Gulf staff make up lower than 25 per cent of the workforce.

Riyadh additionally suspended journey to the UAE and several other different international locations, citing coronavirus considerations, however Emiratis interpreted it as one other not-so-subtle message. The UAE ban was lifted two days after Prince Mohammed and Sheikh Mohammed bin Zayed al-Nahyan, the UAE’s de facto chief, spoke by cellphone in September.

Saudi Crown Prince Mohammed bin Salman and Abu Dhabi’s Crown Prince Sheikh Mohammed bin Zayed al-Nahyan
Saudi Crown Prince Mohammed bin Salman and Abu Dhabi’s Crown Prince Sheikh Mohammed bin Zayed al-Nahyan © WAM/Handout through Reuters

Executives in Dubai and Abu Dhabi, the UAE’s capital, say Emirati officers and enterprise folks had been taken unexpectedly. “Initially there was shell shock. Plenty of clients have been told [by officials] to produce in Saudi Arabia and bring in Saudis or ‘I will put a tax on you or ban your goods’,” says a senior guide.

International corporations are additionally grappling with whether or not to heed Prince Mohammed’s name to shift their regional headquarters to Riyadh and upend the lifestyles of executives comfortable in Dubai. Pressure has elevated on corporations to signal licences formalising their plans forward of Saudi Arabia’s flagship investor conference, the Future Investment Initiative, which opens on Tuesday, regardless of the regulatory framework nonetheless not being clear, says one government.

In January, the authorities listed 24 corporations, together with PepsiCo, oil companies group Schlumberger, engineering and building group Bechtel and PwC, the consultants, that had signed provisional agreements to arrange regional headquarters in Riyadh.

Another worldwide banker based mostly in Dubai says if his group was establishing within the area at this time “we would probably base ourselves in Saudi Arabia”. An government at one multinational says his group will downsize in Dubai, and increase their operation in Riyadh due to the quantity of enterprise within the kingdom.

But some corporations complain of being strong-armed, and cite it as one other instance of Prince Mohammed’s penchant for reverting to the stick somewhat than the carrot. “The feeling is initially we will be penalised,” says the banker, “but it will become the imperative [to move to Riyadh].”

Riyadh at one point suspended travel to the UAE and other Gulf states, citing coronavirus concerns
Riyadh at one level suspended journey to the UAE and different Gulf states, citing coronavirus considerations © Amr Nabil/AP

Local rivals

Longtime allies, Saudi Arabia and the UAE, the GCC’s powerhouses, have a history of testy relations. In 2009, plans for a GCC central financial institution and customary forex had been scuppered when the UAE pulled out as a result of the establishment was to be based mostly in Riyadh, not Abu Dhabi.

Relations flourished, nevertheless, after Sheikh Mohammed, Abu Dhabi’s crown prince, took on the function of supportive ally — some say mentor — to Prince Mohammed as he quickly rose to turn into heir-apparent to his father, King Salman. Analysts say the connection first started to chill after the 2018 homicide of Jamal Khashoggi, with UAE leaders anxious about contagion as Prince Mohammed drew widespread condemnation over Riyadh’s alleged role in the killing.

The UAE then unsettled Riyadh by withdrawing its troops from Yemen in 2019, the place Saudi Arabia has led an Arab coalition in opposition to Iran-aligned Houthi rebels. More not too long ago they briefly fell out over Opec+ oil production quotas.

Observers say the crown princes agree on basic points, such because the threat of Iran and Islamist actions, but it surely was apparent that Prince Mohammed wouldn’t need the dominion to be a junior companion within the relationship.

In Riyadh, officers insist they don’t seem to be focusing on the UAE, merely making an attempt to realize their very own targets.

“This isn’t about the kingdom versus the UAE. Our ambitions go far beyond and Dubai will always be there, but the growth for the region is going to go like this [pointing to the ceiling] and we want to grab most of this,” says the Saudi official. “Our growth will translate into growth and prosperity for the entire region.”

Deliberately or not, the UAE is within the crosshairs. In July, the primary month after the imposition of Saudi Arabia’s new tariffs, the quantity of UAE imports into the dominion slumped by a couple of third. Trade between the 2 in 2019 was $24bn with a $2.8bn surplus in Saudi Arabia’s favour, in line with its official statistics. UAE information places complete commerce, together with re-exports, at $30bn that 12 months, with an Emirati surplus of about $17bn.

The UAE unsettled Riyadh by withdrawing its troops from Yemen in 2019, where Saudi Arabia has led an Arab coalition against Iran-aligned Houthi rebels
The UAE unsettled Riyadh by withdrawing its troops from Yemen in 2019, the place Saudi Arabia has led an Arab coalition in opposition to Iran-aligned Houthi rebels © Hani Mohammed/AP

What will not be disputed is that Saudi Arabia’s $700bn financial system dwarfs the UAE’s output of $421bn, whereas its 33m inhabitants is 3 times that of its neighbour, the place round 90 per cent of the 10m inhabitants are expatriates.

“Saudi Arabia is the size of western Europe and it has two enormous coastlines on one of the world’s main shipping routes. If you did the economic map you would put everything in Riyadh,” says a senior banker within the area. “The UAE always relied on Saudi Arabia never executing [policy and projects], now there’s a chance it could get its act together. But there is a lot of stuff where Saudi Arabia is light years behind — it’s the nimbleness [of the UAE] versus the supertanker.”

Limited urge for food

The economic firepower of Saudi Arabia, the world’s high oil exporter, has been strengthened by Prince Mohammed’s spending spree on megaprojects designed to modernise the dominion. The Public Investment Fund, the $450bn sovereign wealth fund, has pledged to speculate at the very least $40bn a 12 months within the financial system as much as 2030.

Still, some analysts query how the dominion will fund its myriad megaprojects and whether or not its monetary muscle alone shall be ample to lure new companies to the nation. Foreign direct traders have, so far, displayed restricted urge for food for Prince Mohammed’s plans. Since the crown prince launched his Vision 2030 programme in 2016, FDI has been tepid, slumping from $7.45bn in 2016 to $1.42bn in 2017, in line with UN information.

It rose to $5.5bn final 12 months and officers say greater than 400 licences had been issued for overseas traders within the first quarter of 2021. But that was simply over 1 / 4 of the FDI obtained by the UAE and a great distance wanting the $100bn goal for 2030 set by Riyadh in October as a part of its newest funding technique.

Analysts put the reticence all the way down to considerations over the regulatory atmosphere and subdued development lately, in addition to reputational injury the dominion has suffered beneath Prince Mohammed’s rule. They cite Khashoggi’s homicide and the extraordinary 2017 crackdown that led to a whole lot of princes and businessmen — together with overseas traders’ native companions — being detained in the Ritz-Carlton hotel and compelled to switch belongings to the state to safe their freedom.

Lower profile arrests proceed as a part of what Saudi officers describe as an anti-corruption purge.

A corruption crackdown in 2017 led to hundreds of princes and businessmen being detained in the Ritz-Carlton hotel in Riyadh
A corruption crackdown in 2017 led to a whole lot of princes and businessmen being detained within the Ritz-Carlton lodge in Riyadh © Giuseppe Cacace/AFP through Getty Images

“Reputational risks are still a concern for some foreign investors,” says the senior guide. “There is excitement about the level of business and some will chase the money, but there are those who have social concerns or have shareholders who are concerned.”

‘Simply look at the map’

Saudi officers insist they’re taking motion to deal with investor worries, from luring worldwide colleges to the dominion — the UK’s King’s College has agreed to open a department in Riyadh, as has Spain’s SEK Education Group — to finishing building of the King Abdullah Financial District.

First introduced 15 years in the past, the KAFD — which is nearing completion — has turn into the showpiece growth for Riyadh. It is meant to be a “special investment zone” to draw overseas teams, and shall be thought of an offshore centre from a tax perspective. The authorities are nonetheless engaged on the regulatory framework. It can also be constructing a $27bn transport community for Riyadh, together with a six-line metro that’s nearing completion, though work on it has slowed due to a dispute over funds involving contractors and Saudi authorities, in line with folks acquainted with the venture.

Arguably Riyadh’s largest problem shall be luring the producers it craves, to the dominion, together with automotive, aerospace, client items, biotechnology, prescription drugs and inexperienced vitality corporations.

Dubai offers a template of modernity that Saudi Arabia is keen to emulate
Dubai provides a template of modernity that Saudi Arabia is eager to emulate © Kamran Jebreili/AP

Khalid al-Falih, funding minister, insists Saudi Arabia has benefits starting from ample land, to low cost vitality, Red Sea ports that allow cargo to keep away from the Strait of Hormuz chokepoint within the Gulf, and an enormous petrochemicals business that may present inputs for producers.

There are additionally plans to develop free zones all through the dominion — a mannequin efficiently deployed by the UAE. Lucid, the electric vehicle company, has agreed to start manufacturing within the kingdom from 2024, however it’s majority owned by the PIF.

Speaking in Riyadh, Falih says the mannequin of “buying a company and bringing it here” was an possibility, however says the main focus is on providing corporations a spread of incentives. “We are going to convince companies about the kingdom’s attractive value proposition,” Falih says. “The ambition is not simply to substitute imports, we want people to look at the kingdom as part of global supply chains.”

When requested how Saudi Arabia might count on to compete with the UAE, which has a decades-long head begin, Falih says: “We can grow with the UAE side-by-side, and we have an advantaged location. Simply look at the map”.

A western government believes it might be attainable for Saudi Arabia to draw better FDI if there have been ample incentives and “you are able to employ cheap foreign labour, have low taxes and subsidised utilities, but a lot of that is going away”, he says, referring to cuts to subsidies and strain on corporations to interchange overseas staff with dearer — and at occasions decrease expert — native hires.

He provides that there’s typically confusion between totally different ministries which have been set targets as a part of Prince Mohammed’s plans that battle with one another.

“There’s just huge inconsistency; when you talk to people at the investment ministry it sounds like an investor’s paradise. And you talk to companies living it day in, day out and it’s hellish,” the manager says. “Part of the picture is very good and some reforms are wonderful; they are serious about deregulation and privatisation. But a lot of old habits [from late payments to unwieldy bureaucracy] are there.”

A Lucid Motors all-electric ‘Air’ vehicle on display at the Future Investment Initiative conference at the Ritz Carlton hotel in Riyadh
A Lucid Motors all-electric ‘Air’ car on show on the Future Investment Initiative convention on the Ritz-Carlton lodge in Riyadh © Javier Blas/Bloomberg

The UAE will not be ready to see how Riyadh’s plans unfold. Officials have already taken measures to counter the brand new competitors, together with providing longer-term visas for expatriates and permitting foreigners to completely personal corporations. While rumours abound that Saudi Arabia might legalise alcohol in sure areas, just like the KAFD and Red Sea tourism initiatives, there’s hypothesis that the UAE might decriminalise homosexuality and alter its working week from Sunday to Thursday, to Monday to Friday.

A former western diplomat says Saudi Arabia’s neighbours should adapt, and factors out that given the dominion’s place within the Gulf, economically and politically, all “share a stake in the crown prince’s programme being successful”.

But they can even be warily watching Prince Mohammed’s subsequent transfer.

“Saudi Arabia’s neighbours used to worry about what would happen if the kingdom imploded, now there’s concern about what happens if it starts to push its weight around,” says Kristin Smith Diwan, senior resident scholar on the Arab Gulf States Institute. “There is definitely a sense that Saudi Arabia’s leadership is not afraid to play hardball when it comes to economic competition”.

Source Link – www.ft.com

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