BY ROB COX

It’s a big week for Saudi Arabia’s Crown Prince Mohammed bin Salman. For the first time since his elevation as heir to the kingdom, he will play host to a Davos-like gathering of the global investing elite. Heavyweights from SoftBank’s Masayoshi Son to U.S. Treasury Secretary Steven Mnuchin are rolling into Riyadh to see at first hand his plans to make the city a regional financial powerhouse. Hanging over the affairs will be the up-in-the-air status of the biggest deal in capital-markets history.

Since the so-called Future Investment Initiative came together a few months ago under the auspices of Saudi’s massive Public Investment Fund, questions about the viability of a planned $100 billion initial public offering of stock in Saudi Aramco, the national oil company, have intensified. Chief among them is the difficulty of reaching the $2 trillion valuation for the group that the ruling family wants, according to news stories. Last week Reuters reported that China offered to buy 5 percent of Aramco in a deal that could circumvent an IPO.

The snag with the Chinese option is that Saudi Arabia has other objectives beyond raising cash to fatten the kingdom’s finances and fund social welfare. The Aramco offering is a key step towards making Riyadh a regional, if not international, capital for capital. It is part of the crown prince’s blueprint for reducing Saudi Arabia’s reliance on oil – a feat never fully achieved by a major resource economy in the modern era.

As noted in a report by State Street Global Advisors on the eve of the FII confab, which kicks off on Tuesday, “the Saudi Aramco transaction should be leveraged in a much more significant way to change the relationship between the Saudi kingdom, the stewards of the economy, its citizens and the international investment community.”

The crown prince is banking on Riyadh’s appeal as a financial hub to meet the extraordinary ambitions of his Vision 2030 plan to move away from hydrocarbons – wise given the accelerating adoption of electric vehicles – towards other industries, including financial services. Transforming the $700 billion economy and better sharing the wealth with 33 million subjects, two-thirds of whom are under the age of 30, is of existential importance for the Saudi monarchy.

Market authorities have taken strides to make the Tadawul, the Saudi bourse, an easier place for foreigners to buy shares and even short them. As a result, Saudi stocks are being considered for inclusion in indexes widely followed by investment professionals. The FTSE Russell is mulling whether to upgrade Saudi Arabia to emerging-market status. So is MSCI, which will decide by next June whether to include Saudi shares in its MSCI Emerging Markets Index. If it does, the country’s weighting, at around 2.4 percent according to State Street, could lead to inflows of around $38 billion.

But the big numbers are those associated with privatizations, with Aramco top of the list. Speaking to Reuters, Vice Minister for Economy and Planning Mohammed al-Tuwaijri estimated there could be $200 billion forthcoming from the sale of various assets ranging from housing and water to telecommunications and even religious-tourism services.

Beyond bringing in foreign direct investment, selling shares to the Saudi public could tighten the monarchy’s grip on the hearts, minds and wallets of its people. As State Street observes in its paper, such deals could involve a “National Privatization Fund”, which like a mutual fund could be offered to citizens at a discount, minimizing “public controversies over the sale of public assets”. In effect it might foster a sense of inclusive capitalism, neutralizing criticism of the royal family’s excesses, like the $500 million Italian yacht the crown prince acquired, according to news reports.

Other innovations could include increased transparency about the ownership of assets that are, effectively, the state’s patrimony. If Aramco incorporates good governance into its bylaws that, too, could help nurture an ownership culture among Saudis and reduce any mistrust of the ruling family. From this could follow other benefits, like the creation of a fixed-income market, albeit one compliant with sharia standards on lending and usury. That in turn would let banks off the hook for much of the risk while channeling capital to small and medium-sized enterprises, and away from state juggernauts.

The FII kicks off with a welcome from the crown prince followed by a panel that includes Aramco Chief Executive Amir Nasser. They need to sound convincing that the IPO of the biggest company ever to go public is on track. If the sale of the oil group is delayed or diverted, it would make the rest of Saudi’s Vision 2030 looks increasingly cloudy, too.

First published Oct. 24, 2017

(Image: REUTERS/Faisal Al Nasser)

BY ROB COX 

The key number to emerge from Saudi Arabia’s big financial confab last week wasn’t a sum of money, or an economic target, but a year – 1979. To thousands of foreign dignitaries, journalists and his own subjects, Crown Prince Mohammed bin Salman vowed to return the kingdom his family has ruled since 1932 to the more moderate society that prevailed before the siege of the Grand Mosque 38 years ago. He may need the global financial community’s help to make it happen.

Saudi has doled out money to global institutions for decades, hoping to generate income for its monarchy. Now the crown prince is turning the tables. At the Future Investment Initiative conference in Riyadh, the heir to the throne exhorted global entrepreneurs, business leaders and money managers to put some of their treasure to work in the kingdom. A precondition for that should be that Saudi modernizes, improving the role of women and establishing a more just criminal justice system.

The pitch is sinking in. “The opening up of Saudi Arabia – to try to take things back to before 1979 – is brave, it’s bold,” Richard Branson said at the so-called “Davos in the desert” hosted by the country’s Public Investment Fund last week. The Virgin Group founder is considering backing tourism enterprises along Saudi Arabia’s unspoiled coastline on the Red Sea. “Young people want it, the women want it and I think most sensible men want it too.”

Nobody seems to want it more than the crown prince, who at 32 is closer in age to more of his subjects than his father, King Salman bin Abdulaziz. Reforming the economy is existential for the House of Saud. If the country cannot provide a hopeful vision for the 33 million people – just under two-thirds of whom are under the age of 30 – the current king could very well be the last. Balancing Islamic traditions and foreign innovations and money – without a bloody revolution – is a demanding transfiguration.

This is why the crown prince’s reference to 1979 was huge – not just because it came during a panel led by a female American journalist. “We will not spend 30 years of our lives dealing with extremist ideologies. We will destroy them today and immediately,” he said to thunderous applause. “Saudi was not like this before 1979. Saudi Arabia and the entire region went through a revival after 1979. All we are doing is going back to what we were: a moderate Islam that is open to all religions and to the world.”

Some history helps to understand the importance of that statement. Just a few weeks short of 38 years ago, armed religious militants stormed and occupied the Grand Mosque of Mecca – the holiest place in the Muslim world – and demanded the overthrow of the royal family. The siege lasted for two weeks and was resolved with the assistance of French commandos who converted to Islam so they could enter the mosque, according to Lawrence Wright’s account in the “The Looming Tower: Al Qaeda and the Road to 9/11.”

Following the siege, and public beheadings of 63 rebels, King Khalid bin Abdulaziz doubled down on religion. He expanded the role of conservative religious clerics in Saudi life and allowed Wahhabi leaders to impose sweeping restrictions on cinemas, musical performances and the mingling of genders, among other things. Last week, the crown prince effectively called the last 38 years lost.

The prince must move cautiously enough to accommodate hard-liners, but fast enough to keep his youthful people from rebelling against Saudi’s income inequality. Already the country’s religious police have seen their powers curtailed, and in September the government said it would relax the prohibition on women driving. Though attendees of the conference, arriving in chauffeur-driven Mercedes, applauded talk about making Saudi moderate again it’s not evident they reflect the will of the masses.

That explains NEOM – the city on the Red Sea that the crown prince promised to build from scratch with $500 billion of oil booty. NEOM’s laws and rules will be different from Saudi Arabia’s and determined by the entrepreneurs who populate it, the crown prince says. Though that may not include lifting the prohibition on alcohol, or removing the death penalty for cases of homosexuality or blasphemy, it appears to be a way for him to offer an alternative to the more conservative lifestyle that has governed Saudi since 1979.

NEOM will need global validation – and money. The Vision Fund, in which the kingdom has said it would invest $45 billion alongside SoftBank and others, has already stepped up, pledging to take a stake in the Saudi Electric Co, a utility that will help power NEOM. Though it’s an odd way to channel some of the state’s own money back into the country, bringing along foreign investors could be seen as a validation of the kingdom’s plan.

The crown prince, in an interview, denied that there is any quid pro quo for global investors, like SoftBank, to reinvest funds into Saudi Arabia. “We don’t want to squeeze investors. If we cannot offer good opportunities in Saudi that means no one would come,” he said. “We think we really have great opportunities in Saudi Arabia. We want to shape it and to invest in it ourselves and also to allow people all over the world to invest in it.”

His charms are having an effect. BlackRock and Blackstone Group, with whom the kingdom has invested $20 billion in a fund dedicated to infrastructure, are opening offices in Riyadh, the crown prince told Breakingviews. That should be a sign that their leaders, Larry Fink and Steve Schwarzman, respectively, believe in the crown prince. But there is a flip side to this.

Should the crown prince fail to dismantle the gender apartheid of his predecessors the money managers – and indeed other investors like SoftBank or Branson’s Virgin – could find themselves needing to explain to their own shareholders and customers why they are invested in the kingdom. With the two Wall Street firms alone commanding $6 trillion of assets, that’s a pretty strong incentive for them to help keep the crown prince to his word.

First published Nov. 2, 2017

(Image: Yuri Kadobnov/Pool via REUTERS)

BY ROB COX 

Is global finance complicit with Saudi Arabian tyranny? Following the alleged assassination of a journalist critical of the kingdom, that’s the question leaders of the world’s biggest banks and investment firms must ask themselves before they fuel up their jets and head to Crown Prince Mohammed bin Salman’s “Davos in the Desert” in just over a week. From a strictly moral perspective, if they believe a scintilla of what has been put forward by Turkish authorities, they should bow out as JPMorgan’s Jamie Dimon did Sunday night.

The top American, European and Japanese banks and investment firms do business with many governments and regimes their executives can’t be particularly proud of at dinner time with the family. They rationalize the work by saying if they don’t do it, someone else will; and, anyway, they’re in no position to judge the political systems of other nations. These are potentially defensible arguments that can be applied to many clients associated with China, Russia and other countries accused of human-rights abuses.

The Saudi case adds a complicated wrinkle to this calculus. First, the Saudis deny involvement in the disappearance of Jamal Khashoggi, who entered the kingdom’s consulate in Istanbul and didn’t come out, Reuters reported. Second, there is little guidance from above on how to proceed. President Donald Trump has expressed dismay over the alleged killing by Saudi agents. But Trump, who has branded the U.S. press as “enemies of the people,” also said he didn’t want the matter to affect a $110 billion sale of arms to Saudi.

The imposition of sanctions, like those applied by the United States and European Union to Russia after the annexation of Crimea, would make it an easier decision for executives like BlackRock’s Larry Fink, or the bosses of France’s two largest banks to skirt the second installment of the Future Investment Initiative next week in Riyadh. Though banks may still act for some Russian companies, their executives now mostly skip public events like the St. Petersburg International Economic Forum. They do not want to be accused of renting out the public reputation and dignity of the organizations they run to a regime that, in the Saudi case, allegedly sanctioned the high-profile murder of a subject. It has been over a week since Khashoggi’s appearance and the Saudis have failed to provide evidence to refute Turkish allegations he was captured, killed and dismembered.

Even before Khashoggi, there were reasons to consider passing on the crown prince’s sophomore showing, as my colleague George Hay argued last week. After wrapping up 2017’s event, the prince known by the initials MbS rounded up hundreds of subjects on corruption charges without due process in the same hotel where the conference took place. Saudi has also been engaged in foreign-policy actions that have stoked instability in the Middle East and beyond, like the blockade of Qatar. Arguably worst has been the ongoing prosecution of a proxy war in Yemen that has left three-quarters of Yemenis, or 22 million people, needing humanitarian assistance or protection, according to the United Nations.

Of course, accusations that China similarly commits human-rights violations hasn’t stopped banks from investing in the country. Last year’s death of a Nobel Peace Prize laureate in a hospital under heavy guard didn’t stop executives from Standard Chartered, Société Générale, Blackstone or Mizuho from attending the China Development Forum in March.

Then there’s the money. This year, Saudi Arabia generated $247 million in fees from selling securities, arranging loans and advising on deals, according to Refinitiv. And that’s without the mother of all deals taking place. The now-shelved stock offering of Saudi Aramco, the national oil company which MbS contends is worth $2 trillion, could produce $200 million alone.

The biggest recipients have been banks whose executives were scheduled to grace the stage at the crown prince’s fiesta. The agenda was scrubbed from its website last week. Dimon’s company leads the league tables, or the rankings Refinitiv compiles based on estimated fees, with $22 million this year and $81 million over the past six. Though HSBC trails JPMorgan in 2018, the London bank captained by John Flint has earned $110 million from the Saudis since 2013, more than its rivals.

Citigroup, Standard Chartered, Goldman Sachs, Mitsubishi UFJ, BNP  and Crédit Agricole fill out the peloton of top fee earners. Goldman executive Dina Powell was expected to show up. So were BNP Chairman Jean Lemierre and Frédéric Oudéa, chief executive of France’s second-largest bank, SocGen. StanChart boss Bill Winters was also expected in Riyadh.

There’s nothing wrong, in the legal sense, with any of the work these institutions have done for the Saudis. Until recently, it could have been argued there was nothing unseemly about it. At his debut last year, MbS presented a convincing image of a reformist from another generation willing to stand up to conservative clerics, let women drive and young people who make up two-thirds of the population go to movies and concerts.

While this hardly offset the beheadings in Deera Square and virtual absence of the rule of law, financiers, policymakers – even journalists like myself – saw hopeful signs of a more liberal and humanistic Saudi Arabia. The consensus was that while MbS has absolute powers, he understood the desire of his people for more freedom – and with clarity envisioned a future where the lifeblood of his nation’s economy, oil, would deplete.

If Khashoggi’s alleged killing was sanctioned by the Saudis, whether to clumsily silence a critic or brazenly transmit the crown prince’s resolve to erstwhile enemies, every bank that benefits from the rule of law at home should reconsider taking the stage next week. The presence of their senior executives may send a message that they – and their employees, directors and owners – endorse a regime potentially responsible for murdering a journalist.

Bankers may balk at sticking their necks above the parapet individually. But there’s a workaround. If all the banks and big investors due at this year’s event made a joint decision to withdraw, the scope for individual firms to be penalized by Riyadh in terms of future work would be limited. The heads of the relevant groups should be organizing some conference calls – and fast.

First published Oct. 14, 2018

(Image: Bandar Algaloud/Courtesy of Saudi Royal Court/Handout via REUTERS)