Saudi shakeup

How will reforms affect business?

In a region torn apart by conflict, Saudi Arabia stands apart for its relatively stable domestic politics.

Saudi Crown Prince Mohammed bin Salman meets with France’s Foreign Minister Jean-Yves Le Drian, in Riyadh, Saudi Arabia, November 15, 2017. Saudi Press Agency/Handout via REUTERS

In a region torn apart by conflict, Saudi Arabia stands apart for its relatively stable domestic politics. This month that calm was definitively shattered in ways both obvious and subtle.

The first ballistic missile to reach Riyadh since the Gulf War was intercepted near the airport, and a large group of wealthy businessmen and princes were arrested on charges of corruption.

The attempted missile strike can be seen as a direct result of the Kingdom’s increasingly muscular approach to regional affairs.

The conflict in Yemen has been repeatedly escalated by the Kingdom’s leadership, traditionally reluctant to become too entangled abroad but now seemingly intent on countering Iran at any cost.

The unfolding dramas in Lebanon and Qatar are also closely linked to Saudi attempts to reduce Iranian influence in the region.

More conflict is likely to follow.

The new approach threatens the stability that businesses and investors have come to expect from the GCC. This means that geopolitical risk has risen significantly in a single week, and that future moves by Saudi Arabia will be very difficult to predict.

Domestically things are likely to continue as before, at least for the time being.

However, the arrests could present some serious problems for businesses small and large, foreign and local.

The most obvious is guilt by association, since well-established business families and royals control much of the economy, and foreign firms generally must have local partners. In the old system, anyone highly placed required little due diligence to be trusted as a partner. Now everything has changed.

Less pressing in the short term, but ultimately more significant, is the fundamental shift that the arrests represent. Since the founding of the country in 1932, the royal family has ruled by consensus, with many branches of the family wielding influence in decision-making at a state level. Last week the final moves were made to consolidate economic, military, and policy-making power within the Salman branch.

This may lead to an unpredictable domestic situation characterized by exactly the sort of political infighting that the Kingdom has been relatively free of for decades.

For business, this shift must be watched closely. It brings with it consequences that could affect more than just immediate profits. The way that decisions are being made at the highest levels of government has fundamentally changed.

There are positive aspects to the change though. While predictable, in recent years the Kingdom has been dangerously stagnant and somewhat ineffectual in managing its economy. Mohammed bin Salman’s consolidation of power may improve his chances for implementing reforms, which face considerable resistance from entrenched interests.

If they succeed, the opportunities for the private sector and the streamlining of government processes would be beneficial for many businesses.

Additionally, Mohammed bin Salman’s approach to change is often consultative. Saudi CEOs and some international firms interviewed by TBY often report being asked by state officials about changes in their sectors. TBY has documented centers of excellence that are being set up within government ministries to better handle affairs in the Kingdom. These are often staffed by accomplished professionals from the private sector.

Young and dynamic ministers have been appointed, like Nabeel Al Amudi, Minister of Transport, and Abdullah Al-Swaha, Minister of IT, and are encouraged to dynamically transform these sectors.

The question now is whether domestic reforms can move quickly enough to outpace the effects of rising instability in the Gulf and the wider region.