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INSIGHTS

FINANCE & BUSINESS DEVELOPMENT MIDDLE EAST

Saudi’s regional relationships

Laura |
January 17, 2022

The iron fist now inside a (custom-made, of course) velvet glove

 

The geopolitical philosophy of Saudi Arabia in 2021 can perhaps best be described as one of quieter assertiveness. The days of robust interventionism, bellicose rhetoric and (in the words of some of the Kingdom’s shriller critics) reckless adventurism, are over. But so, too, are the days of timidity, sloth, and opaque insular quiescence. Whilst, the Kingdom, and its leadership, are still prepared to deploy sharp elbows to secure their new place in the world, Saudi 2.1 is a generally more emollient operator than Saudi 2.0.

With Saudi very much in the lead, the ‘Quartet’ normalised relations with Qatar in January 2021. The Quartet is (was) made up from Bahrain, Egypt, the UAE, and Saudi Arabia. It was always, we confess, a bit of a surprise to us that the Kingdom was so publicly associated with the June 2017 ‘blockade’ of Qatar because, of the four amigos, Saudi always had the smallest real beef with the Qataris. Therefore, it is not surprising that Saudi led the initiative to re-normalise relations with the other three coming along reluctantly behind. Rumours abounded that the UAE, in particular, didn’t know of the plan until very late in the day and was effectively forced into agreeing through gritted teeth.

At the recent Future Investment Initiative conference in Riyadh, a mid-level Qatari delegation was noticeably present and there have been regular photo ops between MBS and Shk Tamim bin Hamad. The mood music is quite warm, but wariness remains in the Qatari camp, and they won’t forget the shock of the blockade any time soon.

Saudi is trying to disengage from the mess it partially created in Yemen. The Shia Houthi continue to make some territorial gains and show no signs themselves of wanting to seek a ceasefire or political solution. The focus for the Kingdom’s military is on protection of Saudi borders, the interception of drones and missiles, and preventing terrorist incursions. For Saudi it was easy to get in, but not so easy to get out – even if that is what they now seriously want. But, until a wider regional peace accord is achieved, the war in Yemen will continue.

And whilst that wider regional peace is still far away, it is much closer than it has been for years. In 2021 diplomats from the Kingdom and the Islamic Republic have met four times, which is more than they have in the previous five years combined. This is good news. Whilst the Saudis are primarily seeking resolution in Yemen, and the Iranians want a wider accord both genuinely want to find a way to cohabit more peacefully in a troubled region. Both can see tangible political and economic benefits in peace. However, particularly in Iran there are powerful factions with strong vested interests in the continuation of low-intensity pan-regional conflict. These factions also have regional allies with similar conflict-prolonging interests in Syria, Iraq, Yemen, and Lebanon. The road to true regional peace will be long and hard.

A sad current example of this is the cold shoulder the Saudis have recently turned to Lebanon following ostensibly mild remarks by the Lebanese minister of information, George Kordahi. When a video clip of Kordahi criticising Saudi’s role in the Yemen conflict went viral, the Kingdom responded by banning Lebanese imports, expelling the Lebanese ambassador, and restricting movement of Lebanese citizens across regional borders. Other members of the GCC followed suit – even usually neutral members such as Kuwait.

Kordahi was hitherto known regionally mostly as the host (on a Saudi-owned TV network) of the Middle East version of ‘Who Wants to be a Millionaire’. As such he was not a leading figure in Lebanon’s colourful and complex politics and the Saudi reaction could therefore be seen to be disproportionate – like the French shelling Dover in retaliation for some particularly fruity words from Jeremy Clarkson. What the response really shows, however, is that Saudi has lost patience in financially supporting a Lebanon increasingly dominated by Hezbollah, the Iranian-backed militia group and arch enemy of the Saudis. Lebanon is in financial, economic, and social meltdown and this exclusion from Gulf revenue will really hurt. Saudi 2.1 still has sharp elbows.

Similarly, the Saudi elbows have been out for the Emiratis at the trade and investment table. Multiple Saudi ministers have used public forums throughout 2021 to lay down a gauntlet to international companies regarding the location of their regional headquarters. If you want Saudi government contracts, they say, then your headquarters must be in Saudi Arabia. Our conversations with people on the ground in Riyadh confirm that this is serious. International companies can’t just have a brass plate office with a few snoozing back-office Indians and a Filipino receptionist. Senior executives (and soon their families too) must genuinely work from Riyadh. Less entertainingly but more importantly, in July Saudi also announced that exports from regional Free Zones will be excluded from preferential tariff regimes. If you want to sell to Saudis, make your stuff in Saudi.

This is a firm indication of the strategy of the Kingdom directly to compete with the Emirates (particularly Dubai) to attract international trade and investment. In recent years the UAE and the Kingdom have had a very close relationship – moving in lock step on regional political and security issues. However, that closeness is relatively new and there is a history of some friction between the region’s two main economies.

With the Saudis breaking from the UAE on Qatar and the UAE breaking with Saudi on Yemen, alongside the increasing economic competition between the nations, this friction has returned. Both sides profess enduring brotherly love, but the scene is set for a much more overtly competitive environment where international companies and investors will need to choose one country as their key strategic partner/market. It won’t be impossible to be based in Dubai and operate in the Kingdom, it will just be harder (and it’s not like it’s exactly easy now!).

In other news

Kuwait’s political crisis continues to bumble on. On 8 November the government resigned, again, meaning that Kuwait has now had 17 governments and eight elections since 2006. Some commentators see the departure of this administration as clearing the way for the passage of legislation to address Kuwait’s financial crisis. We’re not sure we agree.

The government is in a tight cash squeeze as it tries to cover a bloated public budget with an empty current account. Under existing rules, the government can neither borrow on the international markets nor dip into the long-term funds managed by the KIA. It has been limping along with a combination of financial first aid (bringing forward dividends from the state oil company, for example) and good fortune (a rising oil price). However, unless a longer-term solution to the nation’s self-inflicted financial injuries is found soon, the bleeding will continue, potentially resulting in a much more serious crisis not far down the road. Some people in Kuwait want that to happen – they reason that catastrophe is the only thing which can bring change to a broken system.