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The Saudi Purge will Spook Global Investors and Unsettle Oil Markets

Outside the kingdom, the impact will be felt in business, finance and oil markets.

DOING business in Saudi Arabia has long involved accepting a trade-off between stability and sclerosis. Although power-sharing among the ruling family has kept the kingdom united, rule by elderly monarchs and a corrupt system of cronyism, or wasta, has made change agonisingly slow.

Last weekend’s purge of princes, officials, billionaires and businessmen by King Salman and his 32-year-old son and crown prince, Muhammad bin Salman, tears the old rulebook to shreds. Some businessmen welcomed it, hoping that a reduction in graft and cronyism will create space for young entrepreneurs. “This is the closest thing in the Middle East to glasnost,” says Sam Blatteis, a former head of public policy in the Persian Gulf for Google.

But others drew wary parallels with the assault by Russia’s president, Vladimir Putin, on oligarchs for political ends. Above all, they expressed concern that it would make the prince the sole arbiter of important economic transactions in the kingdom, as he rushes to transform the economy and sell a 5% stake in Saudi Aramco, the world’s biggest oil company.

Outside the kingdom, the impact will be felt in business, finance and oil markets. Foreign businessmen are puzzled by the arrest of Prince Alwaleed bin Talal, an outspoken multibillionaire whose holdings include Citigroup; Twitter, a social-media site; and Lyft, a ride-hailing service. Some put it down to rivalry; intriguingly, the Saudi state’s Public Investment Fund has backed Lyft’s competitor, Uber.

The effect on his $16bn net worth is potentially dwarfed by that on the financial system in general. The Wall Street Journal reports that the Saudi government is targeting cash and assets worth as much as $800bn. As many as 1,800 accounts have already been frozen. That—and questions about how fair the justice system will be towards the detainees—will worry investors, such as petrochemical companies, that Prince Muhammad is trying to woo into Saudi Arabia.

Another shock for global businessfolk is the detention of Adel Fakeih, the economy and planning minister. His office, nicknamed “The Ministry of McKinsey” last year, oversees an army of foreign consultants who helped draw up plans to move the kingdom beyond oil. Analysts speculate that his arrest may be linked to his former role as mayor of Jeddah, where devastating floods occurred in 2009. But it also casts a pall over the kingdom’s bold economic reform plan, known as Vision 2030.

Financially, the ramifications are likely to be amplified by the kingdom’s growing dependence on foreign sources of capital. The Tadawul stockmarket, where Prince Muhammad hopes to entice foreigners to take an early tranche of Aramco shares, has been shaken by the purge, and prices of bonds—sold by the kingdom to offset the impact of falling oil revenues—have also declined. Some fear capital flight and downward pressure on the riyal, Saudi Arabia’s currency.

Oil prices have surged above $63 a barrel (for Brent crude) since the crackdown, partly because of heightened regional tensions. Prince Muhammad may be pleased; pricier oil would make Aramco more attractive to investors and hence more valuable. Provided, that is, minority investors are not put off by a reformer who, instead of winning over opponents by the force of his arguments, locks them up and seizes their assets.

This article appeared in the Middle East and Africa section of the print edition under the headline "Princely sums"

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Parvin Faghfouri Azar
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The Saudi Purge will Spook Global Investors and Unsettle Oil Markets

Outside the kingdom, the impact will be felt in business, finance and oil markets.
Parvin Faghfouri Azar
DOING business in Saudi Arabia has long involved accepting a trade-off between stability and sclerosis. Although power-sharing among the ruling family has kept the kingdom united, rule by elderly monarchs and a corrupt system of cronyism, or wasta, has made change agonisingly slow.Last weekend’s purge of princes, officials, billionaires and businessmen by King Salman and his 32-year-old son and crown prince, Muhammad bin Salman, tears the old rulebook to shreds. Some businessmen welcomed it, hoping that a reduction in graft and cronyism will create space for young entrepreneurs. “This is the closest thing in the Middle East to glasnost,” says Sam Blatteis, a former head of public policy in the Persian Gulf for Google.But others drew wary parallels with the assault by Russia’s president, Vladimir Putin, on oligarchs for political ends. Above all, they expressed concern that it would make the prince the sole arbiter of important economic transactions in the kingdom, as he rushes to transform the economy and sell a 5% stake in Saudi Aramco, the world’s biggest oil company.Outside the kingdom, the impact will be felt in business, finance and oil markets. Foreign businessmen are puzzled by the arrest of Prince Alwaleed bin Talal, an outspoken multibillionaire whose holdings include Citigroup; Twitter, a social-media site; and Lyft, a ride-hailing service. Some put it down to rivalry; intriguingly, the Saudi state’s Public Investment Fund has backed Lyft’s competitor, Uber.The effect on his $16bn net worth is potentially dwarfed by that on the financial system in general. The Wall Street Journal reports that the Saudi government is targeting cash and assets worth as much as $800bn. As many as 1,800 accounts have already been frozen. That—and questions about how fair the justice system will be towards the detainees—will worry investors, such as petrochemical companies, that Prince Muhammad is trying to woo into Saudi Arabia.Another shock for global businessfolk is the detention of Adel Fakeih, the economy and planning minister. His office, nicknamed “The Ministry of McKinsey” last year, oversees an army of foreign consultants who helped draw up plans to move the kingdom beyond oil. Analysts speculate that his arrest may be linked to his former role as mayor of Jeddah, where devastating floods occurred in 2009. But it also casts a pall over the kingdom’s bold economic reform plan, known as Vision 2030.Financially, the ramifications are likely to be amplified by the kingdom’s growing dependence on foreign sources of capital. The Tadawul stockmarket, where Prince Muhammad hopes to entice foreigners to take an early tranche of Aramco shares, has been shaken by the purge, and prices of bonds—sold by the kingdom to offset the impact of falling oil revenues—have also declined. Some fear capital flight and downward pressure on the riyal, Saudi Arabia’s currency.Oil prices have surged above $63 a barrel (for Brent crude) since the crackdown, partly because of heightened regional tensions. Prince Muhammad may be pleased; pricier oil would make Aramco more attractive to investors and hence more valuable. Provided, that is, minority investors are not put off by a reformer who, instead of winning over opponents by the force of his arguments, locks them up and seizes their assets.This article appeared in the Middle East and Africa section of the print edition under the headline "Princely sums"
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