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3 December 2020updated 30 Jul 2021 9:28am

The complicated business of investing in Saudi Arabia

Are foreign companies that work with the Kingdom bankrolling a vicious regime, or helping to open up a society and its markets?

By Sebastian Shehadi

In April 2018, Richard Branson welcomed Saudi Arabia’s Crown Prince Mohammed Bin Salman at his Virgin Galactic headquarters in Mojave, California. The two men shook hands and smiled for the cameras against the shiny backdrop of Virgin’s human spaceflight systems.

The meeting was a small part of a wider US tour in which Mohammed Bin Salman – known as “MBS” – charmed Jezz Bezos, Bill Gates, Michael Bloomberg, George Bush, Oprah Winfrey and dozens of others. The young Crown Prince was acclaimed as the pioneer of his country’s ambitious modernisation and economic diversification programme, Vision 2030.

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Six months later, the spell was broken when the Washington Post columnist Jamal Khashoggi was drugged, asphyxiated and dismembered by a hit squad in the Saudi consulate in Istanbul. A six-month investigation by the UN special rapporteur on extrajudicial, summary or arbitrary killings, Agnes Callamard, concluded that the murder was “an extrajudicial killing for which the State of the Kingdom of Saudi Arabia is responsible”. The 99-page report into the killing reveals that “every expert consulted finds it inconceivable that an operation of this scale could be implemented without the Crown Prince being aware, at a minimum, that some sort of mission of a criminal nature, directed at Mr Khashoggi, was being launched”.

Mohammed Bin Salman has blamed the outrage on rogue officials, and eight people have been imprisoned in Saudi Arabia, but the ordeal dealt serious reputational damage to the Kingdom, for a little while at least.

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Virgin Galactic immediately suspended its discussion of a proposed $1bn investment by the kingdom’s sovereign wealth fund. Weeks later, CEOs and ministers dropped out of Saudi’s “Davos in the Desert” conference, the country’s glitzy annual gathering aimed at attracting foreign investment and showcasing the new Saudi Arabia.

But the conference was far from empty. “Lots of companies just sent deputies instead of their CEOs […] many of the dropouts were symbolic,” says Jessica Leyland, senior intelligence analyst at AKE International. “I don’t think there are as many scruples as we would hope in the world of foreign investment,” she adds.

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The following year’s conference, the top brass returned to conduct business as usual. “It’s pretty clear Khashoggi’s killing has not proved a nail in the coffin, or even a significant dent in the armour of Saudi’s economic allure,” says Max Hess, head of political risk at Hawthorn Advisors.

Nor have investors been driven away by Saudi Arabia’s other aggressions, most notably the brutal conflict in Yemen, in which MBS – who is also the Saudi defence minister – has had a leading role. The war has contributed to one of the world’s worst ongoing humanitarian disasters, affecting more than 20 million people. The Saudi-led coalition has been accused of using child soldiers, internationally outlawed munitions such as cluster bombs and white phosphorous, torture, and the deliberate bombing of schools and hospitals. This is just one of many human rights issues for which Saudi is widely criticised.

“Despite the growth of ethical business activities, many investors around the world are content to ignore MBS’s abuses to seek premium returns,” says Jon Truby, director of the Centre for Law and Development at Qatar University.

Such trade-offs are well established and not limited to Saudi; Investment Monitor has tracked foreign investment working its way to authoritarian governments around the world.    

Saudi is so large and so wealthy that investors will inevitably turn up, says Hess. For many of them, he adds, the real bottom line is to obtain Saudi money for themselves.

Masayoshi Son – who is, as the CEO of holding company Softbank, one of the world’s biggest venture capitalists – is one such investor. In 2017, SoftBank partnered with the Saudi state to invest $45bn from the Saudi sovereign wealth fund in companies around the world. Last year, a quarter of the investment in the UK’s growing fintech sector came from this one fund.  

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But while Saudi has dished out money with seemingly wild abandon, foreign direct investment in the Kingdom has not rushed in since the Crown Prince’s meteoric rise to power since 2015, according to data from the World Bank.  

Neil Quilliam, managing director at Azure Strategy, says that despite lavish “roadshows” publicizing the “opening up of the economy” and promoting the country around the world, “Saudi Arabia has not had a great deal of success in attracting investment”.

The extent to which investors are “put off” by the regime is “difficult to estimate”, says Quillam, thanks to another factor: “the global collapse in oil prices from 2014 [that has certainly] been a deterrent”.

David Butter, associate fellow at Chatham House’s Middle East and North Africa Programme, says it is likely that low oil prices – alongside other economic factors – have played the greatest role in keeping investors at bay, far more than MBS’s actions, since the vast majority of investment to the Kingdom continues to target petrochemicals and other traditional sectors.

And where the impulses of the Crown Prince have weighed on investors’ minds, it is not the human rights of the Saudi population or the bombing of Yemen that are a concern, but MBS’s destabilisation of the Saudi ruling class and the country’s business elite.

“Concerns remain that partnerships held with the Saudi businesses and high-profile local interlocutors could be at risk, given the penchant of MBS to make arbitrary arrests of established business leaders and the seizure of their assets,” says Quilliam.

The most prominent example of this took place in 2017, when Riyadh’s Ritz-Carlton hotel became a gilded prison for hundreds of Saudi royals, businessmen and government officials who were detained, questioned, and relieved of tens of billions of dollars that the Saudi government claimed had been the proceeds of corruption.

“Peoples’ trust in the reliability of Saudi enterprises may prove flawed,” says Jon Truby, “with Aramco looking overpriced and investors realising the companies they invested in are very much dependent on the maintenance of good relations with certain factions of the royal family.”

Canada’s General Dynamics discovered this in 2018, when one tweet about Saudi human rights abuses by the Canadian foreign minister upset a $13bn military contract – which remains under review two years later. The deal is unpopular with the Canadian public, but supports hundreds of well-paying jobs.

Jessica Leyland says certain kinds of investors are safer than others.“If they’re offering things the Kingdom does not have, such as in tech, they feel relatively assured that it’s going to be a lauded breakthrough partnership – a vanity project for MBS, too – thereby giving them some sort of protection.”

But there are few of the safeguards found elsewhere. “MBS has done little to ensure the independence of the judiciary, or deliver much-needed regulatory reform”, say Truby, “to provide potential investors with confidence that they can access the market competitively and be treated fairly in any commercial dispute”.

That said, the Crown Prince can be credited for opening up the country’s tourism market to international visitors, cinemas to Saudi citizens, and the stock market to foreign investors. The decision, in June 2018, to allow women in Saudi to drive cars is a reminder of how very low the starting point is for such achievements.

“The country is so gigantic and has so many untapped opportunities now opening up, that a lot of investors are sometimes almost blindly attracted to that,” says Dr Mazdak Rafaty, an adviser to the joint Emirati-German Chamber of Commerce.

“Moreover, MBS is very young. So, assuming there is no coup, he guarantees decades of rulership under a more liberal, reforming and open framework than the last thirty years,” he adds.

Saudi’s liberations, however basic, help detoxify its reputation. “Western media celebrates improved women’s rights in Saudi, thereby allowing Western countries to justify selling weapons and defence goods to the Kingdom,” contends Rafaty.

Such uncomfortable allowances are found in the UK’s foreign policy towards Saudi, which simultaneously sanctions individuals and condemns Khashoggi’s killing, while also permitting the sale of billions of pounds’ worth of arms to the country, which deploys them in Yemen.

David Butter describes the UK’s justification of these sales as “weak and farcical”, based on such assumptions as the idea that “if we don’t do it, then other people would”, or the grim notion that “if it’s our equipment, we can make sure the [missile] targeting is properly done”.

At the same time, investment in less troubling sectors “does have the opportunity to create a more healthy society” in Saudi Arabia, says Butter. “I’ve done a lot of work on Egypt. Does one not do business with the entire country because you don’t like things that [President] Sisi has done? In the real world, most countries and businesses hold their noses, and keep going.”

And while the influence of environmental, social, and corporate governance (ESG) is growing in the world’s capital markets, Jessica Leyland points out that “there are always other investors – namely from China and Russia – who are ready to take the place of those who would be concerned about the ethics of investing in Saudi. In fact, we can see Riyadh turning east to look for investors there”.

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This trend may accelerate following President Trump’s defeat in the US elections. “If the US President came to my country and did a ceremonial sword dance with me, I’d think I could get away with anything,” says Mazdak Rafaty.

Unlike many authoritarians, Mohammed Bin Salman has formally acknowledged and congratulated Biden on his victory, albeit after almost all other countries in the region. But Biden is unlikely to sword-dance with MBS. Whether this will temper the Crown Prince’s less noble qualities and lead to more Western investment, or rather drive Saudi further east, is a question that will have ramifications around the world.

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