By Benjamin Lutz

Saudi Arabia’s integration into the world economic system arose with its discovery of its massive oil reserves and the volume of its oil production. It sits on roughly 25 percent of global oil reserves, giving it the overall guiding voice on international and regional organizations dedicated to oil. This Saudi Arabian voice focuses entirely on its foreign policy goals of preserving the state’s independence and the regime’s stability. Around 2014, a massive drop in oil prices raised alarm throughout the Middle East as all countries break-even points exceeded the going rate for oil. This economic scare prompted Saudi Arabia to reevaluate its priorities and in mid 2016, Crown Prince Mohammad bin Salman (MBS) created a plan for economic diversification entitled Vision 2030.

Background

Saudi Arabia follows a conservative and protectionist ideology in its domestic and foreign policy, especially with its stunning economic growth since the discovery of its massive oil reserves. The country helped create the Organization of the Petroleum Exporting Countries (OPEC) in 1960, leveraging the region’s geographic natural resources in order to raise its political and economic relevance. In 1972, Saudi Arabia gained partial control of Arab-American Oil Company (ARAMCO), while OPEC continued to expand rapidly[1]. One year later, the United States involvement with Israel during the October 1973 Arab-Israeli War prompted the Arab countries in OPEC to declare an oil embargo against Western countries. The destabilizing effects of this embargo reverberated throughout the world, setting a powerful precedent for Saudi Arabia’s allies and enemies on the effectiveness of price controls on oil.[2] Soon after the October 1973 Arab-Israeli War the monarchy expanded upon its oil-driven foreign policy initiatives by founding the Gulf Cooperation Council (GCC). The GCC is a consortium of Persian Gulf countries intended to address regional issues and promote cooperation. Today, Saudi Arabia has more than 260 billion barrels of oil and it is the primary organizer of the policy decisions of international organizations focused on oil, especially OPEC and the GCC.

The Gulf monarchies are strongly dependent on oil exports to cover fiscal and external expenditures and produce economic growth. Their macroeconomic performance is highly correlated to the fluctuations in global oil prices, making their economies highly sensitive to substantial decline in oil prices like the one of summer of 2014.[3] Oil dominates the GCC region’s exports accounting for nearly 70 percent of all merchandise exports; furthermore, oil production and exports constitute around 80 percent of export earnings and government revenues in GCC countries.[4] The six GCC members faced two sets of problems during this period of low oil prices. The first was to fund government spending, which is a relatively soluble challenge, and the second was to ensure robust and diversified economic growth, which appears intractable due to their collective and individual reliance on oil revenues.[5] However, Saudi Arabia was well prepared to withstand a period of cheap oil given its vast financial wealth.[6] The continuously cheap oil production put pressure on GCC governments to reform public finances both on the expenditure side (e.g. cut subsidies, public payroll) and on the revenue side (increase share of non-oil revenues, raise taxes). At the same time, this also provided an opportunity to speed up long overdue structural economic reforms in order to reduce overall hydrocarbon dependence.[7] Saudi Arabia’s history of resource dependency and cyclical fiscal policy tied to oil pricing makes it very clear that Saudi Arabia’s economic transformation will not be immediate or easy.[8] The economy, and by extension the functioning of the state, is dependent on oil revenue and will be for some time to come.

Vision 2030 Reforms

On April 25, 2016, the Saudi government presented Vision 2030, a sweeping plan for moving the kingdom beyond oil dependence[9]. This plan includes: the privatization of a portion of the Saudi national oil company ARAMCO; the expansion of the resources and role of the Saudi Public Investment Fund (PIF); the expansion of jobs for Saudi nationals, and the development of the country’s ports, cultural resources, and tourist sites to take advantage of its strategic position at the center of the Arab and Islamic world. Most notably, the end of 2017 saw Saudi Arabia announcing large changes to the social and business culture of the country: allowing women to drive and opening the kingdom to foreign investors for new megaprojects.[10] In general, these changes lead to more long-term goals for Vision 2030. However, unemployment is still high throughout the country, as the process of diversification is taking much longer than MBS seemed to have planned for.[11] MBS is rushing to implement these widespread initiatives in order to hit his 2030 deadline, but his speed does not matching the realities of the economic situation in Saudi Arabia.

These initiatives are in the early stages of implementation, as this 14-year economic project demands the creation of new infrastructure, foreign investments, and an economic culture Saudi Arabia is not accustomed to.[12] The success of this project will best be analyzed in 2030, however, it is important to track the progress of MBS’s ideas for the restructuring of Saudi Arabia’s economy. This plan is, in essence, a complete overhaul of Saudi Arabia’s economic model and this huge change almost guarantees that there will be a modicum of success as certain aspects are prioritized and accomplished. In the same vein, this plan includes vague desires such as “vibrant society, thriving economy, and ambitious nation” which means by MBS’s own measures that these aspirational aspects can be achieved.[13] This dual nature of Vision 2030 is seen as both too big to fail and too big to succeed. Its wide sweeping initiatives deem that some of these initiatives will succeed and others will fail.[14] Furthermore, the rate at which Saudi Arabia is attempting to implement these changes may override the success, as economic changes do not occur overnight.

The re-rising of global oil prices since the 2014 slump has bolstered MBS’s progress towards these goals. This allows Saudi Arabia to allocate its oil revenue shares into the aspects of development it champions within Vision 2030. However, this largely stalls its desire to diversify as it now re-relies on its conglomeration of oil deposits.[15] When Vision 2030 was first announced, global oil prices were below Saudi Arabia’s breakeven points, triggering this kneejerk response to diversify.[16] Now that Saudi Arabia is comfortably atop the rise of oil prices, it has slowed down its implementation timetable and focused on more strategic long-term partnerships and investments. This long-term plan may prove more successful, however the volatility of oil prices might force Saudi Arabia to speed or slow its timetable in accordance to its revenue streams.[17] This economic rollercoaster can scare off the foreign investment that Saudi Arabia desperately craves, halting the entire progress of Vision 2030. Saudi Arabia has some serious short-term economic problems, like job creation, and some long-term challenges, including a radical realignment of its workforce to meet productivity demands of a global high-tech economy, and the understanding of how wealth is generated and shared between the state and its citizens.[18]

Specific Reforms: Land Tax, PIF, and Neom

One of the few implemented initiatives thus far centers on Saudi Arabia’s new domestic taxation policy. The country has created taxes on consumption while reducing its generous social spending.[19] This creates more opportunities for the country to focus its spending on development, instead of supporting every citizen in its grandiose fashion. These reforms directly reflect the newfound understanding on how to manage wealth throughout the country. Furthermore, these reductions were spring boarded from Saudi Arabia’s “white land tax”, taxing owners of large empty tracts of land in urban centers for lack of development.[20] This is a way to capitalize on empty land in prime locations in order to invest in more infrastructural projects. This tax is a reversal of Saudi Arabia’s lax attitude towards the wealth and land ownership of its elite citizens demonstrating its seriousness in finding new non-oil ways to generate revenue.

The other major success so far in Vision 2030 is the Public Investment Fund (PIF), which is central to MBS’s efforts to diversify the economy. The fund was set up in 1971 to support projects of strategic significance to the Saudi economy and for most of its history focused mainly on its home market. It has made headline-making investments around the globe with current assets of about $230 billion.[21] PIF is cherished by MBS as an orchestrator of its economic growth, as it is able to spend and invest in projects throughout the kingdom and the world.[22] The fund is currently in a spending spree in order to generate revenues. In a twist of accounting gymnastics, the PIF may sell its stake in the petrochemicals giant SABIC to ARAMCO. This would inject cash into the PIF, which currently owns 70 percent of SABIC shares.[23] This is the equivalent of a state-owned entity selling another mostly state-owned entity to raise capital to spend on state projects. PIF is a firm part of Vision 2030 as is follows the mantra “spend to grow” as it attempts to raise non-oil revenue in development projects.

The most flagrant example of PIF’s expenditures is a $500 billion city called Neom, which will be located alongside the Red Sea (near Jordan and Egypt).[24] Neom is the quintessential aspect of the MBS’s Vision 2030. This megaproject aims to be the prime and main example of the newest “generation of cities. Neom will be powered by clean energy and will have no room for anything traditional.”[25] MBS wants to dedicate 25,900 square kilometers of land to this urban city modeled on the free economic zone concept, where the city has its own regulation and laws, as well as an attractive hub for foreign investment and technological advancements.[26] This city’s plans are just beginning to form since the announcement in October of 2017, but with the exorbitant backing from the PIF, this city’s infrastructural and technological plans have a large pool of funds to achieve its lofty goals.

Challenges and Political Implications

Throughout the summer of 2018, Saudi Arabia faces some immense tests to the strength of these reforms. The Ritz-Carlton Crackdown, its diplomatic clash with Canada, the Yemeni war, and the failure to sell 10% of ARAMCO’s IPO. Each of these events have casted doubts on the effectiveness of the timeline that MBS has proposed. Firstly, the Ritz-Carlton Hotel in Riyadh briefly became a jail for hundreds of rich and once-powerful Saudis, who were detained in what the government called an anti-corruption campaign.[27] The arrests have created a climate of fear, obscuring the image of an era of change that MBS is attempting to usher in as a young reformer. Cinemas are open, genders mix more freely and women are allowed to, but there’s an increasingly authoritarian side to his leadership. This is seen most clearly in the diplomatic spat with Canada. A seemingly innocent plea by Canada’s Global Affairs Ministry to release peaceful female human rights activists in Saudi Arabia was met with a decidedly undiplomatic response. The reaction was immediate and swift—and unexpected in its ferocity. MBS expelled the Canadian ambassadors, suspended all flights between the two countries, revoked visas, and ordered the liquidation of all Canadian assets.[28] A Saudi youth group went as far as to post a disturbing image of an airliner colliding with the CN Tower in Toronto in an apparent 9/11 style attack. This violent imagery is all too vivid for Saudi Arabia as they continue to engage in the Yemeni conflict, causing immense international pressure to end its aggressive campaign. Its leadership in a coalition against the Houthis in Yemen has pushed the already impoverished country to the brink of famine.[29] Politically, Saudi Arabia’s international image has worsened as a result of the shifting leadership style of MBS. These three major events of the summer of 2018 have showcased his reaction to crises, worrying some investors for the protection and strength of their investments.

In addition to these diplomatic spats, Saudi Arabia has reportedly called off the ARAMCO IPO and disbands its advisors. As a result of the resurgence of oil prices, Saudi Arabia is not as urgent to sell shared of its energy giant ARAMCO on the stock exchange.[30] An IPO from ARAMCO is expected to be the largest ever (valued around $2 trillion) and is at the center of MBS’s ambitious plan to overhaul the Saudi economy. It is worth noting why MBS is delaying the foundational aspect of Vision 2030. His shifting of priorities due to Saudi Arabia’s dependence on oil highlights his own reluctance to implement the massive Vision 2030 reforms at the same rate as he proposed in 2016 when Saudi Arabia was in the middle of an international oil glut. Currently, even with the raising doubt internationally as a result of the events of Summer 2018, Saudi Arabia is in a very comfortable spot and is able to slow down the implementation of their plan as they continue to rely on their hegemonic control of oil production.

In short, Vision 2030 is a monumental undertaking for Saudi Arabia, largely because of the immense challenges with overcoming its dependency on oil. The sheer multitude of reforms that Mohammad bin Salman aims to accomplish is quite daunting, as he wants to completely overhaul Saudi Arabia’s current resource-based economy into a modern, bustling, and investment-friendly zone. The white land tax and strategic investments of the PIF are strong signs showing the first stages of implementation for Vision 2030’s ambitious goals are underway. But the country’s reliance on oil, especially as the global prices have increased, may make full implementation difficult. Vision 2030 was born out of a time of economic hardship in Saudi Arabia, but as the country is now reinvigorated due to high oil revenues, the desire to diversify and the speed to which new initiatives are implemented is shown to be slowing down. MBS must rank and prioritize the most crucial aspects of Vision 2030 to ensure long-term success in his plans for economic revitalization and development. These two years since the original announcement have seen large promises and big dreams, but the next twelve years will designate if MBS is able to mobilize the international community to invest and shape the new Saudi Arabian economy into an economy that can survive the post-oil era.

[1] Al-Mawali, N., 2015. Intra-Gulf Cooperation Council : Saudi Arabia Effect. Journal of Economic Integration 30, 532–552.

[2] Ulrichsen, K.C., 2015. Resource Security in Saudi Arabia: Domestic Challenges and Global Implications, in: The New Politics of Strategic Resources: Energy and Food Security Challenges in the 21st Century. Brookings Institution Press, pp. 168–186.

[3] Raghu, M.R., 2015. How GCC states’ break-even oil prices stack up. The National. https://www.thenational.ae/business/how-gcc-states-break-even-oil-prices-stack-up-1.19805

[4] Al-Mawali, N., 2015. Intra-Gulf Cooperation Council : Saudi Arabia Effect. Journal of Economic Integration 30, 532–552.

[5] Mills, R., 2015. The Gulf’s Castles of Sand. Foreign Policy. https://foreignpolicy.com/2015/09/08/the-gulfs-castles-of-sand-oil-prices-saudi-arabia-iran/

[6] Körner, K., Masetti, O., 2015 GCC In Times Of Cheap Oil: An Opportunity For Economic Reform And Diversification. https://docplayer.net/16945288-Gcc-in-times-of-cheap-oil-an-opportunity-for-economic-reform-and-diversification.html

[7] Barma, N.H., Kaiser, K., Minh Le, T., Vinuela, L., 2011. Rents To Riches? The Political Economy Of Natural Resource-Led Development. The World Bank, Washington, D.C.

[8] Young, K., 2018. Spending to Grow in Saudi Arabia. Arab Gulf States Institute in Washington. http://www.agsiw.org/spending-grow-saudi-arabia/

[9] Vision 2030. 2018. Foreword | Saudi Vision 2030. http://vision2030.gov.sa/en/foreword

[10] Ibish, H., Diwan, K.S., Young, K., Gause III, F.G., 2017. Rising Stakes in Saudi Arabia’s Transformation. Arab Gulf States Institute in Washington. http://www.agsiw.org/rising-stakes-saudi-arabias-transformation/

[11] Diwan, K.S., Ibish, H., Young, K., Salisbury, P., 2017. Driving in a New Direction: Sweeping Changes in Saudi Arabia. Arab Gulf States Institute in Washington. http://www.agsiw.org/driving-new-direction-sweeping-changes-saudi-arabia/

[12] Wald, E. R., 2018. Saudi, Inc.: The Arabian Kingdom’s Pursuit of Profit and Power. Pegasus Books

[13] Stratfor, 2018. Saudi Arabia’s Vision 2030 Plan Is Too Big to Fail — Or Succeed. Stratfor. https://worldview.stratfor.com/article/saudi-arabias-vision-2030-plan-too-big-fail-or-succeed

[14] Ibid.

[15] Sfakianakis, J., 2015. Saudi Arabia’s pockets are deep enough to weather oil price slump. The Telegraph.

[16] Raghu, M.R., 2015. How GCC states’ break-even oil prices stack up. The National. https://www.thenational.ae/business/how-gcc-states-break-even-oil-prices-stack-up-1.19805

[17] Stratfor, 2018. Saudi Arabia: The Kingdom Sharpens Its Business Sense. Stratfor. https://worldview.stratfor.com/article/saudi-arabia-kingdom-sharpens-its-business-sense

[18] Young, K., 2018. Spending to Grow in Saudi Arabia. Arab Gulf States Institute in Washington. http://www.agsiw.org/spending-grow-saudi-arabia/

[19] Young, K., 2018. A Home of One’s Own: Subsidized Housing as a Key Lever of Gulf Domestic Policy. Arab Gulf States Institute in Washington. http://www.agsiw.org/a-home-of-ones-own-subsidized-housing-as-a-key-lever-of-gulf-domestic-policy/

[20] Barnard, L., 2015. New Saudi Arabia land tax to trigger sales flurry. The National. https://www.thenational.ae/business/property/new-saudi-arabia-land-tax-to-trigger-sales-flurry-1.53453

[21] Algethami, S., 2018. What Now for Saudi Arabia’s Planned $2 Trillion Fund? Bloomberg.com. https://www.bloomberg.com/news/articles/2018-08-08/what-now-for-saudi-arabia-s-planned-2-trillion-fund-quicktake

[22] Young, K., 2018. Privatization in Saudi Arabia: Vision 2030 Ready to Sell. Arab Gulf States Institute in Washington. http://www.agsiw.org/privatization-saudi-arabia-vision-2030-ready-sell/

[23] Young, K., 2018. Spending to Grow in Saudi Arabia. Arab Gulf States Institute in Washington. http://www.agsiw.org/spending-grow-saudi-arabia/

[24] NEOM, 2018. The World’s Most Ambitious Project. NEOM http://www.neom.com/.

[25] Shahine, A., Carey, G., Nereim, V. 2017. Saudi Arabia Just Announced Plans to Build a Mega City That Will Cost $500 Billion. Bloomberg.com. https://www.bloomberg.com/news/articles/2017-10-24/saudi-arabia-to-build-new-mega-city-on-country-s-north-coast

[26] Young, K., 2017. Saudi Arabia’s Neom: State-Led Growth Meets New Global Capitalism. Arab Gulf States Institute in Washington. http://www.agsiw.org/saudi-arabias-neom-state-led-growth-meets-new-global-capitalism/

[27] Nereim, V., Martin, M., and Carey, G. 2018. Ritz-Carlton Crackdown Still Haunts the New Saudi Arabia. Bloomberg.com. https://www.bloomberg.com/news/articles/2018-06-15/ritz-carlton-crackdown-still-haunts-the-new-saudi-arabia

[28] Polczer, S. 2018. Canada’s Saudi spat and oil’s new world order. Petroleum-Economist.com. http://www.petroleum-economist.com/articles/politics-economics/north-america/2018/canadas-saudi-spat-and-oils-new-world-order

[29] Nebehay, S. 2018. Saudi Arabia admits coalition ‘mistakes’ in targeting in Yemen. Reuters. https://www.reuters.com/article/us-yemen-security-saudi-children/saudi-arabia-admits-coalition-mistakes-in-targeting-in-yemen-idUSKCN1MB3O4

[30] DiChristopher, T. 2018. Saudi Arabia reportedly calls off Aramco IPO and disbands advisers. CNBC. https://www.cnbc.com/2018/08/22/saudi-arabia-calls-off-aramco-ipo-and-disbands-advisers-reuters-reports.html