US President Donald Trump’s choice of Saudi Arabia for his first foreign trip has provoked some criticism.
It is not difficult to understand why.
Whilst the US claims to be the leader of the “free world” the embarrassing reality is that its most important Middle East ally is a repressive autocratic Wahhabist monarchy. Whilst Donald Trump says the destruction of Jihadi terrorism is his priority, Saudi Arabia – as everyone knows – is the country that bankrolls most of this terrorism.
Beyond that there is the fact that many Americans have not forgotten or forgiven the fact that 15 of the 19 9/11 hijackers – as well as Osama bin Laden, the presumed organiser and inspirer of the 9/11 attacks – were Saudis.
The fact however remains that Saudi Arabia is the lynchpin of the whole of the US’s strategic position in the Middle East, whilst Saudi Arabia’s oil exports – and the fact that it sells them for US dollars – serve a key role in underpinning US dominance of the world economy.
Whilst this remains the case the US has no realistic option but to maintain good relations with the Saudis. In that respect Trump’s courtship of the Saudis makes far more sense that Obama’s ill concealed disdain for them, and given the damage Obama did to this crucial relationship Trump’s priority on repairing it – and thus his visit to Saudi Arabia – makes complete sense.
What all the talk of Trump’s visit obscures however is that even as the US seeks to renew its relationship with Saudi Arabia, the Kingdom has embarked on an out-of-control spending spree which can only result in its eventually bankrupting itself.
To understand the scale of what is happening, just consider the outline of the projects that are supposed to be under discussion during Trump’s visit. The Financial Times provides a good summary
Saudi Aramco, the state oil company, signed more than $50bn worth of deals on Saturday, around $22bn of which were new memorandums of understanding, including:
Investing $7bn with Rowan over 10 years to own and operate drilling rigs, creating 2,800 jobs in Saudi Arabia; extending a joint venture with Nabors for oil well services, seeing $9bn of investment over 10 years, creating up to 5,000 jobs in the kingdom; a new joint venture with National Oilwell Varco in Saudi Arabia to manufacture driving rigs and equipment, seeing $6bn of investment over 10 years.
Aramco also said it would boost operations at its US refinery unit Motiva, with a planned $12bn investment with a likely additional $18bn by 2023. The deal aims to create 12,000 jobs by 2023.
Six firms — including Honeywell, McDermott and Weatherford — signed MOUs to expand Aramco’s use of locally produced goods and services, bringing $19bn of investment to the kingdom.
Aramco also signed a deal with GE to deliver $4bn worth of savings via digitisation of the oil firm’s operations. This was part of a GE package of valued at $15bn.
When deputy crown prince Mohammed bin Salman visited Washington earlier this year, the White House estimated that Saudi investment pledges could rise to around $200bn.
In the defence sector, Lockheed Martin signed a $6bn deal to assemble 150 Blackhawk helicopters in the kingdom, supporting 450 jobs.
Raytheon and General Dynamics also signed agreements to support the localisation of defence contracts. The deals support Prince Mohammed’s plans for the world’s third-largest spender on arms to create a domestic industry led by the newly formed company Saudi Arabia Military Industries. The kingdom wants to source half of defence spending locally by 2030 from 2 per cent now.
Saudi Arabia’s $200bn Public Investment Fund, which plans to boost its assets under management to $2tn after the planned initial public offering of Aramco, will also announce its SoftBank vision fund deal, as well as launching another partnership, according to its managing director, Yasir Al Rumayyan. The SoftBank vision fund, the largest private equity fund ever created, is expected to close at more than $90bn, with half of the investment coming from PIF. Around 50 per cent of the fund is expected to be invested in the US, bankers say.
Saudi’s sovereign Public Investment Fund pledged $20bn for a $40bn Blackstone US infrastructure fund, with $20bn to be raised from other parties. Blackstone said it expects, with debt financing, to invest $100bn in infrastructure projects, mainly in the US. “This potential investment reflects our positive views around the ambitious infrastructure initiatives being undertaken in the US as announced by President Trump,” said Yasir Al Rumayyan, managing director of PIF.
Dow Chemical, whose chief executive Andrew Liveris co-chaired the Saudi-US CEO Forum on Saturday, agreed to invest more than $100m for a polymers manufacturing plant, while studying a proposed investment in silicones production.
This comes on top of a $300 billion (!) deal to buy arms from the US over a period of 10 years, of which $110 billion (!) is to be spent up front.
These gargantuan arms deals oil rich Arab states regularly make are not primarily intended to strengthen their defence capacity. The quantities of weapons these oil rich Arab states buy is by many orders of magnitude greater than they can ever use. Rather these deals are bribes, intended to buy the favour of the country from whom these oil rich Arab states buy these arms, whilst simultaneously buying the favour of useful politicians and businessmen by recycling some of the money to them through kickbacks and commissions.
The US – and Britain and France – have long since become accustomed to this practice, and have no illusions about it.
In the 1970s, when Muammar Gaddafi’s Libya did the same thing with the USSR – buying vast quantities of arms from the USSR which it was never going to use – the Russians did not understand it, and were baffled by it, especially as they saw most of the sophisticated weapons they were supplying vanish into Libyan storehouses (many of them were still there, rusted and decaying, in 2011 when Gaddafi fell). Today the Russians have also come to understand it.
Needless to say what Gaddafi and the Libyans did with the Soviets in the 1970s is completely dwarfed by what the Saudis regularly do, and even that is dwarfed by the Homerically vast arms deal the Saudis have struck with the US just now.
All of this spending is being driven by the grandiose and out-of-control ambitions of Saudi Arabia’s actual ruler, the 31 year old Deputy Crown Prince Mohammed bin Salman, who seems to believe that instead of working hard to develop its own industrial and technology base Saudi Arabia can simply buy itself one wholesale.
Moreover at the same time that Prince Mohammed bin Salman has launched Saudi Arabia onto this gigantic domestic spending spree, he is doubling down on Saudi Arabia’s hugely over-ambitious and massively costly foreign policy, waging (and losing) war in the Yemen, intervening in Syria, bankrolling Pakistan, Turkey and Egypt, and confronting Iran, a country far more powerful than Saudi Arabia, with resources Saudi Arabia cannot match.
This is exactly the opposite route to the one Saudi Arabia should be following.
If Prince Mohammed bin Salman were familiar with his history (he obviously isn’t) he would know that Saudi Arabia and the other oil rich Arab states have been trying to buy their way to industrialisation since at least the 1960s. Since this is never done by developing the economy organically and indigenously the attempt has always failed, as the plants and factories imported from Europe and North America need supplies and technicians from abroad to keep them going, and are ill-adapted to local needs.
Repeating this approach, which in the past has always failed, but doing so on a gigantically greater scale, is simply going to make the failure far greater, littering Saudi Arabia with flashy new factories that consume more in resources than the value of the goods they produce.
By contrast, if Prince Mohammed bin Salman were ever to put aside his sectarian prejudices (something which is probably impossible for him) he could do worse than look at Iran, which since the fall of the Shah in 1979, and despite many setbacks and Western sanctions (or possibly because of them) has managed through careful industrial training and management, and by relying on its own resources, to do what Saudi Arabia and the other oil rich Arab states have consistently failed to do, which is build up a significant industrial and technology base of its own.
As for where the funding for this megalomaniac spending programme will come from, the Financial Times article makes it all too obvious: from privatising Aramco, Saudi Arabia’s state owned oil company, the historic cash cow of the Saudi economy, which as a result is going to be lost forever.
All this combined with a bizarre fancy that Saudi Arabia’s financial resources can be increased by using the sale of Aramco to leverage up the paper value of the assets managed by its Public Investment Fund (ie. its sovereign wealth fund) from $200 billion to $2 trillion.
Needless to say this is not going to be anywhere near enough, and it is only a matter of time before runaway spending at this rate causes Saudi Arabia to run out of money.
That all sense of reality is being lost is shown by the extraordinary extravagance of the reception Prince Mohammed bin Salman is laying on for President Trump. A leaked report shows that the Saudis are planning to spend an astonishing $68 million on his visit.
In reality what Saudi Arabia needs to do is not engage in a gigantic programme of over-spending which can only make the country’s economic situation worse, but on the contrary cut back radically on its existing spending, so that it can finally start to live within its means.
That means thinking of how to end the vast system of subsidies and privileges that are distorting and stifling the economy, and which are robbing it of vitality because they are unearned since they are paid for from oil revenues and are not paid for by taxes.
It means working towards ending the peg between the Saudi riyal and the US dollar, which is exaggerating the problems of the country’s budget at a time of low oil prices, and which is increasing its non-oil trade deficit by stifling the competitiveness of the non-oil part of the country’s economy.
It also means reining back on the country’s ludicrously over-ambitious and inherently destabilising foreign policy, which has achieved nothing save to spread terrorism throughout the Middle East, including in Saudi Arabia itself, whilst locking Saudi Arabia into an arms race with Iran, which because of Iran’s vastly superior resources Saudi Arabia can never win.
As for the vast sums Saudi Arabia spends on arms – which it cannot use and often doesn’t intend to use – Saudi Arabia would be far better advised spending them instead on educating its people so as to prepare them for a genuine role in the country’s government.
As well as improving the national education system – which by all accounts is in an extremely poor condition, blighted by bigotry and prejudice – that means providing scholarships to young Saudis – men and women – from poorer families to study in universities abroad.
Objectively all this is possible, and it is not too late to do it. If it were done then in 10 to 20 years time Saudi Arabia would be transformed vastly for the better.
In reality none of this is going to happen, and most likely it would not happen whoever was Saudi Arabia’s ruler. Prince Mohammed bin Salman’s peculiar genius is to accelerate the now inevitable collapse, so that it will all happen far more quickly than it otherwise would have done, and at supersonic speed.
Patrick Cockburn, that most insightful of commentators on Middle East affairs, has compared the cost and extravagance of Prince Mohammed bin Salman’s reception of President Trump to the similarly empty and inflated pomp of the Shah of Iran’s Persepolis Party of 1971.
That event together with the Shah’s runaway spending on a manic and unsustainable industrialisation programme eerily similar to the one now planned by Prince Mohammed bin Salman led eventually to the 1979 Iranian Revolution and the fall of the Iranian monarchy. If the same thing happens in Saudi Arabia the results will be far more bloody.
In the meantime all sorts of people are making hay whilst the good times last. In the words of the Financial Times
……dozens of chief executives from Saudi Arabia and the US were convening at a forum where they discussed Saudi financial flows into America, and how the US could help diversify the kingdom’s oil-reliant economy. “The government is taking a back seat and putting the private sector as the locomotive to drive the economy,” said Khalid al-Falih, the Saudi energy minister. “There will be risks, but we will work with you to mitigate it.”….
At the close of the Saturday morning forum, about 70 senior Saudi executives and US chief executives boarded buses outside the Four Seasons hotel, bound for lunch with King Salman and Mr Trump at the royal court.
The elite business delegation is set to hold postprandial talks with prince Mohammed, architect of the kingdom’s reform plans. Around 30 US executives were approved to attend the lunch, including names such as Larry Fink of BlackRock, Michael Corbat of Citigroup, Roy Harvey of Alcoa, Adena Friedman of Nasdaq and financial adviser Michael Klein.
Amid tight security, royal guards took the executives’ phones, before they boarded the coaches.
As the horizon darkens, all that is left is to wish these gentlemen bon appetit.
The post Trump comes to Riyadh as Saudi Arabia bankrupts itself appeared first on The Duran.