Saudi Arabia’s 500 Billion Dollar Gamble

A move to liberalism or authoritarian power moves?

Mohammed Bin Salman and Klaus Kleinfeld working together

Waves of socioeconomic changes have come with the ascension of the new Crown Prince of Saudi Arabia. Most recently, Mohammad Bin Salman Al Saud (MBS), lifted the ban on women driving in the kingdom and has many believing that this is only the beginning of addressing inequality and even empowering women. But let’s not get too crazy, after all, Saudi Arabia still has a long way to go in addressing inequality as it’s known for its strict religious code and human rights violations, yet this looks to be a promising start. lifting the ban on women driving, gives women a great opportunity to be more involved and active in society, thus diversifying the work force and creating a modern economy. Mohammad Bin Salman welcomes these reforms as it not only is in line with his Vision 2030, a new initiative that looks to turn Saudi Arabia into a modern state and bring in foreign investments.

It also offers a distraction to the economic woes of Saudi Arabia. Ever since oil prices fell in 2015, the kingdom has experienced a loss of jobs as unemployment reached 12.8% last year. It also helps cover over the internal conflict within the state in which it arrested and extorted over 500 individuals including prominent Saudi princes and politicians that were detained in the glamorous Ritz Carlton hotel. This is not to mention the involvement in the Yemeni war and war crimes of Saudi Arabia along with a diplomatic and military blockade on Qatar. Also, the need for Saudi Arabia to transition into a state that is no longer dependent on oil which is becoming increasingly urgent for Riyadh. A possible solution for these challenges comes in the form of building a new mega city. The city of NEOM is a way for MBS to create an all in one fix. While these plans are certainly ambitious, they don’t come without the massive geoeconomic and geopolitical challenges.

The Ascension to Power

Mohammed bin Salman’s ascension to the throne started in 2013, when he was appointed as head of the Crown Prince’s Court, with the rank of minister. In January 2015, King Abdullah bin Abdul Aziz died, and Prince Salman bin Abdul Aziz Al Saud assumed the position at the age of 79. He had at once, made a couple of decisions that surprised observers, naming his son minister of defense and Mohammed bin Nayef deputy crown prince. Bin Nayef became the first of the grandsons of Ibn Saud, the founder of the kingdom, to move on to the line of succession. Mohammed bin Salman’s first acts as defense minister was to jump start a military campaign in the conflicted state of Yemen in March 2015. A block of several Arab states was formed including the United Arab Emirates, Egypt, Jordan and others after the Yemini president evacuated due to the Houthi rebel movement. The campaign has made infantile progress over the past few years and has seen Saudi Arabia and its allies being accused of human rights violations coupled with manufactured a humanitarian crisis in the Arab world’s poorest country.

King Salman ended months of speculation in June by appointing his son MBS as Crown Prince of Saudi Arabia. In doing so he was removing Mohammed bin Nayef from all positions, including the role as head of the interior ministry. This brought all of Saudi’s security forces under the control of the royal court and MBS and Mohammed Bin Nayef was reportedly placed under house arrest. After MBS had cleaned house and all the chess pieces had fallen into play, he could now move to consolidate his grab for power. This opens many doors for his social and economic liberalization of the kingdom, and NEOM is his next initiative. To allow Saudi Arabia to move into the modern world and cast away the conservative darkness that has had it chained for decades.

Since then, MBS created bold plans with his Vision 2030, seeking an increase in non-oil revenue to 600bn riyals ($160bn) by 2020 and 1trn riyals by 2030. This plan for diversifying the economy gave Salman a boost of popularity and envy at the same time. The prince said he wanted to create “the world’s largest sovereign wealth fund,” worth up to $3trn, with money generated by privatizing a small part of the state oil company, Saudi Aramco. The plan also looks to change the educational system, increasing women’s participation in the workforce, and investing in the entertainment sector to help increase job opportunities for younger people.

The question is, will Saudi Arabia truly move to become a liberal state in the coming years, or is this another “red herring” where all is promised, and nothing is delivered? We only need to look back at history to realize that every attempt of Saudi Arabia to modernize has failed. For example, the King Abdullah Economic city had begun construction in 2005 and a budget of 100 billion dollars. Construction was expected to be complete by 2010 yet the project is still ongoing needing additional funding. Similar fears loom around the new city of NEOM, it’s up to Salman to ensure confidence and stability for this daring venture.

New Future? NEOM

Promising words from the Crown Prince of Saudi Arabia

The new project NEOM was revealed by Crown Prince Salman during the Future Investment Initiative on October 24th, 2017. The city takes its name combining neo from ancient Greek meaning new, and the letter m from the Arabic word for future mustaqbal (مستقبل), creating the translation of “new future.” This city looks to accommodate a variety of industries and services including bio technology, advanced manufacturing and artificial intelligence. Another crucial part of NEOM is to have commerce’s focused on renewable energy such as solar, wind and other ecofriendly sources that will help power the city. This will help create an environment free from dependence on oil and a diverse economy, both of which Saudi Arabia desperately need.

The city will also have other commerce’s that focus on media and even entertainment, allowing the economic reforms to be followed by social reforms. Disruptive technology will be heavily integrated into to the city and will take care of repetitive tasks along with transportation in the form of autonomous vehicles and much more. This project may seem like MBS is overly ambitious even hubris, yet it is much easier to construct this city and design it with the technologies at its core rather than integrate new technologies into old crumbling infrastructure. This mega city will be a great gamble, needing a sum of 500 billion dollars and some of the very best businessmen to spearhead it.

So, where and how will Bin Salman get this massive sum of cash together? Well, he will have to sell a part of the state-owned oil company Saudi Aramco, with a net worth of about two trillion and a net income of 33.8 billion (2017) Salman can afford to part with a piece of Aramco. This money will then go into the treasury of the public investment fund which is Saudi Arabia’s sovereign wealth fund. Using that as a solid foundation, MBS can then finance the rest of the funding and attract investors to the project.

Klaus Kleinfeld the CEO of Siemens AG, a German conglomerate company headquartered in Berlin and Munich and the largest industrial manufacturing company in Europe will oversee the NEOM project. Kleinfeld will bring in the private investors to fill in the gaps as the first stage of the construction is to be done by the end of 2025. The Japanese Multinational Soft Bank Group has already agreed to buy a significant stake in the state controlled Saudi electric company that will provide the renewable energy. Other possible investors might be European or markets from Israel, as the latter already has a high speed railway project in the works that will traverse the Straits of Tiran to Aylat a port city by the Gulf of Aqaba. This would be complimentary to the NEOM project and is of exceptional value to Israel. The bilateral Saudi-Israeli cooperation would pave the way for global investors like China as it has outstanding relations with both Saudi and Israeli governments and others.

Geopolitical Challenges

As with any massive project, there comes massive challenges, especially with the surrounding neighbors of Saudi Arabia. The NEOM project will operate independently from the Kingdom of Saudi Arabia, the city could have its own regulations, taxes and laws. This is similar to policies found in Dubai or Singapore. By developing this industrial and financial mega-hub that is located near maritime choke points and an active trade active area carries great potential. The NEOM city will be placed at the entrance to the Gulf of Aqaba and would connect to Egypt and Jordan across the Straits of Tiran. The straits are a narrow passage between the Sinai and Arabian peninsulas. Egypt had accepted the Saudi Sovereignty over the islands of Tiran in exchange for billions of dollars in aid.

With that taken care of, the construction of a 10-kilometer bridge and causeway will be needed to connect the three states. However, a 1979 peace treaty between Egypt and Israel guarantees Israel’s access to the Red Sea and this causeway would violate that treaty by denying Israel access to the sea. This falls under the United Nations Convention on the Law of the Sea (UNCLOS), as Israel has been firm on its stance regarding the straits. In fact, in 1967 Egypt had closed the straits to Israeli shipping, and that turned out to be one of the major catalysts for the Six Day War. This means that Israeli involvement in the project is critical to avoiding any conflicts. This project will likely result in Saudi Arabia’s formal recognition of the State of Israel.

As mentioned earlier, this project would prove quite valuable for Israel and would benefit their ongoing railway project. This not only offers economic incentives but more importantly, a golden opportunity for Israel to reconcile with its Arab counterparts. Since reconciliation is fundamental to Israeli geopolitical interests, the support of the United States of America would follow suit for the NEOM project. Of course, all negotiations would go through the “back channels” that exist between the Saudis and Israelis. A public debate would only result in outcry and social and political retaliation from the Arab states. The Saudi’s must also come up with a solution to the ongoing Qatari embargo as support from the surrounding Arab states has grown. An air, sea and land blockade were imposed on Qatar by four Arab countries in 2017: Saudi Arabia, the United Arab Emirates (UAE), Bahrain and Egypt. “Qatar suffers daily from the measures that have been taken, families have been separated because of the crisis. We talked about the crisis and we agree that it must be solved through dialogue,” Macron had told reporters after the Friday meeting with Emir Sheikh Tamim bin Hamad Al Thani. Saudi Arabia has been accused of committing several human rights violations and must address the growing international call for the end of this blockade. If both projects were to succeed, it would bring Saudi Arabia into the post-oil era and would make the kingdom a leader in developing mega cities with disruptive technologies along with mending relations with its gulf neighbors and the international community.

Broken Promises or Real Reform?

While this may be grand and promising, the fact of the matter is there is nothing that guarantees its success. The citizens know all too well the familiar buildup of socioeconomic change only to result in false promises. Every time a new ruler like MBS comes around they want to enrich themselves and solidify their position. At the same time, they seek to keep the population happy and increase their approval rating in the kingdom. Ambitious plans like NEOM or King Abdullah Mega City are used as propaganda tools to excite until the budget has been allocated. Then the buzz and excitement die down and the money allocated for the projects disappear along with it.

The human rights violations must be solved, and Saudi Arabia must not only reform economically but socially. This would mean the end of the Qatari blockade and ending all involvement in the Yemeni war. Finally, the liberal policies at home must be implemented and enforced as the rights of the people of Saudi Arabia. Otherwise there might be social unrest as the promises are broken. MBS must prove to not only the investors and his people, but to the world that he is able to deliver on his promises as the leader that will usher in a new Saudi Arabia. Bin Salman’s young age means he will rule the country for decades and that puts the task of finding ways to find enough sustainable wealth as it is the primary purpose of the NEOM project. If he fails to do so, the consequences will become a painful thorn in Salman’s side. In essence, Bin Salman will either make or break Saudi Arabia.