Saudi Arabia's IPO Drama

two thousand and sixteen. It coincided with a very very big event in finance and markets, and that was when Saudi Arabia first started talking about the potential to list part of its giant state owned national oil company, Saudi Aramco. Now fast forward two years later, we've seen those plans UH really start to get walked back. And in the meantime, we've had all sorts of developments in Saudi Arabia, including a new Crown Prince, Mohammed bin Salman, the thirty two

year old Crown Prince. We've also had a diplomatic rift between the Gulf Cooperation Council nations including Saudi Arabia and catar so really a action packed two years when it comes to Middle East politics with Saudi Arabia really at the center of it all. I've now left the region, so just to book end my time there, today we are going to be diving into all things Saudi and we're going to do that with one of the best analysts on the topic. I think his name is i

Him Kamel. He is the head of Middle East and North Africa research over at Eurasia Group. So I Him, thank you so much for joining me today, a pleasure to be here, and thank you for allsteeing me. So I gotta say when I think back to the start of UM let's say May two thousand and sixteen, and how much excitement we had over Saudi Arabia, the transformation of Saudi Arabia from an oil dependent economy into potentially something different, and it was all pegged to the notion

of the ARAMCO listing. Things have changed so quickly over the course of two years. Just remind everyone why the ARAMCO I p O was important in the beginning and what the rationale was for actually doing the listing. Well, I think Tracy the big attraction for the powerful leader of Saudi Arabia at the time, or the emerging a new leader in the kingdom, Crown Prince Mohammad and Sandman wants to create a lot of excitement. He he needed

flashy ideas. He needed bold ideas to change the kingdom, to change its dependency on oil and transform what has been relatively a large scale economy that is outside the international system or international economy. In many respects, it's a closed economy. The major players are domestic and the dependency on the government and energy revenues was high. He needed to change that, and he needed to present ideas that would create a sense of excitement internationally. Implicitly, the Crown

Prince didn't only focus on the economics. I think that m Haammed binson Man wanted to present ideas that would have him present Hammed Bensman as a young, bold leader capable of changing what the Saudi system has represented for many many decades, transitioning and way from a conservative kingdom into not necessarily a liberal one, but certainly more open social society or or or open kingdom when it comes to liberal rights for women, when it comes for the

rights of employment, when it comes to just social liberties. Also economically, he wanted to change what was an an e stagnating engine. Oil prices were low. He needed the oil income from around Care or from a potential sale of around Call, to fund other ventures in the Kingdom. Right, this is something I completely forgot to mention in the intro. But of course it was really a driving force of a lot of the stuff that we've seen happen in

the Gulf. And that's the fact that in early twenty sixteen, of course oil prices were still relatively low. Eventually you had OPEK get together and agree to curb their crude production in order to boost prices, so kind of a different environment. I'm still curious though, when it comes to the listing itself. You know, Mohammed bin Salman MBS as we often call him, he didn't have to pursue an

I p O. Did he. He had this big set plan vision twenty thirty that really set out how he wanted the Saudi economy to look like in a fifteen or fourteen years time. So why the element of the listing specifically, Well, I absolutely agree, Tracy, and in part the vision was comprehensive. They didn't really need to make the I p O or core part of that plan.

But oil prices were low, and Mahammad bin Salman needed to find a way to generate income to invest in the local economy, to have the public investment fund that really the sovereign fund Wealth Fund of Saudiary. We have more money to invest both domestically and internationally, and that would have have been possible with oil around forty or

fifty dollars a barrel. It's really the opaque non opaque agreement, primarily a deal between hammadans and Man and President Putin of Russia that allowed oil prices to jump high into the seventies and really touched the eighties. Today, Saudi Arabia doesn't necessarily need to rush with an i p O. They have the income they're breaking even when it comes to their budget, they don't need to rush with an

i p O. But the environment was different. I think broadly, I agree with you that Saudi Arabia did not have to make the i p O or core part of Vision twenty thirty. They could have separated the vision and the transformation plan from the I p O. The attachment was probably not appropriate at the time, and I think they're probably paying a price for that connection right right now.

So what's your sense of how much domestic support there is for the transformation plan, including the around co listing, because of course, you know, every once in a while we would hear a little bit of Saudi grumbling that maybe the country, the kingdom was selling off it's it's prized assets at an inopportune time. Is that still the case and where those um where those grumblings ever serious

enough to force the authorities to rethink that plan. I think that that there was and there still remains resistance in Saudi Arabia. True I p owing or or putting any piece of around called the crown jewel of the country as many people see it floated, be it in

internationally or domestically. There are two elements of this. I think the public part of the public has been against it, but also members of the ruling family that's so disclosure or more transparency as a threat to their income sources. It's very clearly an engine that funds the Saud family in the kingdom, and members of the ruling family did not want to see those numbers exposed or how much they would receive on an annual basis from the state.

So I think the pressure was probably higher amongst members of the ruling family, but the public also did not see what the rationale was, at least at the very beginning. So definitely not not a popular move, and I think the the leadership in Saudi Arabia reconsidered partly because they don't need it, and partly because the political cost of putting around call on on the talk exchange would have

been relatively high. What I would emphasize over here, I don't think that this is out of the way completely.

I think that Mammad bunsan Man doesn't need it right now, and he's going to reassess whether he needs it three, four or five years down the line, if the appropriate conditions emerged, if he needs the money, and if there's a right global stock exchange that can host the I p O. And that has been a big problem for the company right well in terms of the messaging on this, you know, even though we've had several stories not just from Bloomberg but elsewhere in the world talking about the

Saudi's really scaling back plans for the I p O, the authorities there have been sort of reluctant to admit that it might be on ice, at least for the time being. Why do you think that is Is the i p O so essential to um you know the Saudi story at the moment, This this notion that here you have a market that was to date very very closed and now it's beginning to open up. Is it that important that they can't walk it back? No, I don't,

I don't. I don't necessarily think so. I think the core idea here is that the leadership hasn't fully thrown these plans in the bin, and they're not convinced that they might not have to resort to some form of of a sale of part of around calling the future. But they certainly don't see the conditions right now, be at the market conditions or the political conditions in Savidi Arabia, primarily the resistance to the i p O as appropriate.

Right in the future, they might have to still do some form of i p O or sale of around called completely abandoned in their plans, and then a few years down the line announcing an i p O would not make any sense. There is there is really very limited cost to saying that this i p O is on but not now, as in not fully abandoning the plans, and if they need to do so in the future three or four or five years down the line, and to really say that an I p O is no

longer part of our reformed story. We don't need it. We have alternatives. They certainly do that, but at in the meantime there is very little value add politically or economically to announce the di PO is off. Alright, Well, let's zero in on the man behind the I p O, Mohammed bin Salman. It's so rare that we get to talk about palace intrigue on the Odd Thoughts podcast, So I'm going to take every opportunity that i can get here.

But you know, this really interesting figure thirty two years old has a very specific economic and social policy, a social policy that many people would um describe as liberalizing at least compared to what other Saudi rulers had in place before. But on the foreign policy side, quite hawkish, quite aggressive. Saudi has been fighting this war in Yemen for some time now. How would you characterize Mohammed bin Salman's ruling style over the past two years or so.

I would say that Mohammad batson Man's character is evolving. It is changing the man that we've known two years ago is probably a different one today. He has made mistakes, and in private conversations he would even admit that he has made some in Yemen or elsewhere. I think part of the challenge here from Hammad binson Man is that he's trying to do so much in a very short

period of time. I think he recognizes this that the system in Saudi Arabia is broken, and he does not like people or advisors or counselors that tell him no. He wants bold ideas and he wants to move forward with these ideas as fast as possible. I think part of his the challenge or the problems with his plans is that their contradictory. Uh. That's certainly the case when it comes to the foreign policy agenda that directly contradicts

the domestic agenda. Saudi Arabia needs for investment, needs to liberalize its economy, and is diversifying effectively in very small steps. But the foreign policy agenda, which is very hawkish, as you have mentioned, beat against Iran or against the Hothy rebels in Yemen, that is compromising regional stability or creating additional tensions. Very difficult to in my view, to convince the investors to put more money in Saudi Arabia or

put any money at all given these challenges. So I think part of really the critical problem that the Saudi leadership and Hammad Binson Man needs to address is how effectively is he going to manage these contradictions. And you can find these contradictions across the board, even in the local economy, so there are no easy solutions or Saudi Arabia. That's something that he has, I think, to begin to

accept as a reality for the kingdom. The kingdom is clearly a big energy producer, but getting it to become a diversified economy is going to be a completely different transformation than anything Saudi Arabia has witnessed in the last five or six decades, and he needs to accept that there will be painful steps along the way, and in certain times he needs to recalibrate or reconsider elements of

his his strategy. Right, what do you think is the biggest roadblock when it comes to that transformation or diversification project. And do you think NBS has a sort of end state goal in mind or an idea of what he wants Saudi to look like in terms of an entertate. I think he does have an idea here. He wants to see a more powerful Saudi Arabia regionally, he wants to see a more open and diverse economy, one where the Saudi labor force is not actually employed by the

government only, but also by the private sector. He wants to see a more open society, but not necessarily open in a in a Western way. He wants to see women at work, but he also realizes that there are conservative values in the kingdom that he needs to preserve himself. So it's really about modernizing the state rather than liberalizing it. So he has an idea on on what he would like Saudi Area to be, not now, but ten fifteen

years down the line. What I think he does not appreciate at times is the challenge or the series of challenges he faces. The country hasn't changed much over the last three or four decades, and the steps, the series of reforms and that he's introduced, you see or divisit, they're creating enemies for him. They're creating or exposing contradictions in Saudi society, and that's something that that he has

to manage very carefully. So in my view, it is not really about the strategy, but it's how he gets there and whether he accepts that along the way there would be no voices or there'll be voices that tell tell him to slow down, that things cannot be done that quickly. It's finding the right balance of pushing your head but also moderating when he needs to do so.

So it's interesting that you mentioned making enemies just then, because, of course a large part of the Saudi economy and society basically operates on the principle of a social pact, which is that Saudia's get a lot of money from the state, either in terms of gifts or you know, guaranteed employment at large government firms or entities. And I remember when they announced that Mohammed bin Salman was becoming

Crown Prince. It was a few months after the king had decided to roll back some of the payments for government workers, which of course was very controversial, and when they made the announcement, they said they were reinstating those payments, so they seem to, you know, on the one hand, they were promoting this prince who had a very strong agenda of economic reform, but on the other hand, that same day they were going back to the old ways of just sort of dolling out government handouts. It seems

like a really difficult line to be walking. Absolutely. I think that's where you see some form of contradiction between the domestic agenda and the really the economic agenda. Hammad Bin Saman wants to be king of Saudi Arabia. It's not popular for a new emerging leader, even a new crown prince, to begin to to really cut the benefits

for Saudi citizens across the board. So I think he walked those back, or the leadership did walk those back, because it would have compromised his domestic standing and made it very difficult for Saudis to support him or to support his rise over the long term. I think what he needs to do is begin to introduce more concrete

changes to the Saudi welfare state. Now, there is a problem here, which is that Saudi Arabia's citizens are also not ready to hear the message that there is less, that there is less now and there's going to be less in the future, and that the welfare state cannot survive over the long term, be it in Saudi Arabia or any other economy, any other country in the world.

I think it's very difficult to break that message to to your citizens or for the leadership to promote an idea that we have to live with less, not more in the future. Certainly much more difficult for a leader that wants to become king. Is there anything he can do to soften that blow to the domestic population? Is

there anything that could offset that. I think part of it could could offset that is really the social liberalization measures, which don't appeal to everyone, certainly not to conservative Saudi Is, but part of the youth population sees that as a positive,

having more liberty and ability to experienced life entertainment. The social reforms aren't aren't really something that the government needs to fund, but they do matter for for a big part of Saudi Arabia's population, the youth population, So I

think that might help along the way incrementalism. The the benefits were reintroduced, but only on a temporary basis, So I think he has to deal with it in terms of shocks, doing it over a few steps rather than one big one along the way, and at the end of the day, I think it's going to be still challenging even if you create them very clear strategy and

implemented perfectly. I think the message is going to be difficult and it's it's certainly not going to be popular for a large base of Saudi Arabia society that is not ready for modern employment in some respects or I don't necessarily see as this as a good deal from this state, or that the state should be cutting their benefits in the future. Right as we're talking, all these big Saudi or GCC developments are sort of um filtering

up in my mind and jogging my memory. And one thing that I just remembered is we are coming up pretty close to the one year and a versary of

the corruption crackdown, or the alleged corruption crackdown. This is when Mohammed bin Salman and the Saudi authorities arrested a bunch of Saudias, lots of businessmen, lots of royals and accused them of corruption in various ways and stealing from the state, imprisoned them in the Ritz Carlton where they had just been having a big investment forum that was largely aimed at foreign investors getting them to invest in

the country. A year on from that, or almost a year on from that, what do we think the point of that exercise was Was it about rooting out corruption, Was it about sending a message about dissent. Was it about recouping some money, because of course the authorities were said to have gotten about a hundred billion dollars as a result of those actions. What do we think? I am?

I think this is about dealing with corruption. It is about sending a message to Saudis society that there's a new leader in town, Hammad binsan Man, that is willing and able to consolidate power. And it is about finding revenue or new sources of of funding that could help the Public Investment Fund put some money in the domestic economy and into international projects. But I think what matters here more than anything is that Saudi Arabia isn't trying

to build a Western style capitalist society. I think that when when it comes to Hammad binsan Man, he doesn't look at the U S or Europe as examples. He wants to build a state capitalist structure in which he or the state have influenced over the decision making process of the private sector. Think China or Russia, one where the leader of the state isn't necessarily outside the private sector and has extensions and has an ability to influence

what the private sector does in its everyday affairs. So it's I think the idea that Saudi Arabia was ever going to be a European style economy or US study economy was probably a mistake. And we can see that

already with Hammad bunsen Man and the style that he's introducing. Well, let's focus on the the US relationship for a second, because even if Saudi Arabia doesn't want to replicate the US economic model, it's certainly seems to be developing closer ties with the US as a political ally, or maybe I should say with um with one US politician in particular,

and that is, of course Donald Trump. And we saw him make that visit to Saudi Arabia where we had a lot of memorable imagery such as him holding the glowing or the king. And there's a sense that Donald Trump and his friendship with the Saudi rulers may have emboldened some of Saudi's foreign policies, certainly the anti Iran part of it. Do you think that view is justified? Absolutely?

I think it would be very difficult to imagine Saudi Arabia introducing adopting and committing to such hawkish policies against Iran, the Yemen War included. Had it not been for an explicit message of support from President Donald Trump. There's a

marriage of convenience here. Trump was hosted in Saudi Arabia, was presented with multiplion dollar arms agreements that helped him domestically, and the Saudis wanted something back or in return, And we do have a relationship that works at least between

these leaders. Transactional politics is effective. It's not necessarily about long term strategy or stability in the Middle East, but certainly the two sides see something to win from each other over the short term, and that that means that the relationship with the US has improved, at least with the current administration. I wouldn't necessarily say that over the long term the Saudi US relationship does not face critical challenges.

We still have that, but certainly over the short term it's working with the US and the Trump Mohammad binsa Man relationship is very positive. It's not just the real visit. It's coordination between the two sides on a host of different issues, and the Iran strategy the hawkish Iran anti Iran strategy that we're seeing from Saudi Arabia really was just an introduction to what we've seen from the US. The US with rowal from the nuclear agreement with Iran

and the introduction of sanctions against Tehran. This is this is the era of the return of containment against Iran, and what the Saudis did would have not been possible without US support. Just to try to tie everything together.

Is there a oil price component in that transactional relationship between the US and Saudi, because, of course we saw Donald Trump tweeting about the oil price recently that gas prices at the pump were too high as a result of the OPEC production cut agreement, And then we did see the Saudi's respond or appear to respond to that tweet with the energy minister. They're saying that they would do whatever it takes to balance the market. Is there a sense that Saudi is now be holden maybe two

US wishes when it comes to gas prices. Well, I think that the Saudi leadership has always been careful in terms of dealing with the US and US interests, giving the strategic nature of the relationship and the dependence on the US for security, but I think with with the Trump administration, this is much more important given that Hammad binsan Man is planning his rise in the Kingdom and and his consolidation of power across different institutions in the Kingdom.

Accommodating Trump, I think was a natural choice for the Saudia leadership finding a way really not to bring prices or oil prices down to sixty or or sow a barrels, but to push it below eighty two, to keep it in the seventy two eighty dollars range. Given that the Trump is administration is introducing sanctions, sanctions against Iran, given that every Iranian barrel that leaves the market is probably going to go to either Saudia, a b or Russia.

There was also a win in the process. So definitely, I think that there is an oil component, a willingness to really accommodate what is a challenge in the mid mid term election in the US or supporting Trump and hoping that oil prices lower oil prices prices would help him in the mid term elections. They've done that, and I think in the future they'll try to accommodate different priorities for the Trump administration. Alright, so I'm going to try to survey, you know, the past two years and

just think again. When I arrived in the region, it was right after the Saudi Aramco announcement, so many foreign investors were excited about the Saudi story, this narrative of opening up. And since then we've seen some successes, especially on the social side, such as women now allowed to drive. We've seen some setbacks. The Yemen War continue to drag on. The Iranian relationship is getting worse. Um. The corruption crackdown, in some eyes, was done without the rule of law

and it wasn't really clear what was achieved. We have oil prices that have certainly recovered, um, but we have an overriding question mark about the future of OPEC itself. We have the catch are blockade uh, and I'm probably forgetting something else. But really, any number of things have happened in a short amount of time. So net Net, putting it all together, are you bearish or bullish on

the Saudi story? I think I'm mildly bullish on the Saudis story, as in the new system is by definition going to be a better system than the old one. Because the old one, where the Saudi state would remain dependent on hydrocarbons and the welfare state remaining as it is, would have imploded the old system where where conservative preachers dominated the system, would have also created a lot of security challenges for the world over the long term. The

new one won't be much better. It will probably be a model through for Saudi Arabia and the economic transformation will be very difficult. So mildly bullish, but with a lot of risks emerging as Mamma bin Saman tries to change this very complex place called Saudi Arabia. All right, I think complex is exactly the right description. I am Kammel, the head of Middle East and North Africa research for

Eurasia Group. Thank you so much for joining us. Thank you so much for walking us through really a laundry list of things that have happened in Saudi in a relatively short amount of time. Thank you so much for holsting me and I've explited. So that was another episode of odd lots, uh really book ending a two and a bit your experience in the Middle East. We will be back to our regular scheduling next week, but in the meantime, You can follow me on Twitter at Tracy Alloway.

You can follow my co host Joe Wisenthal at The Stalwart, and you can follow our producer tofor Foreheads at fore haas T. And you should follow Francesca Leave, the head of Bloomberg Podcasts, at Francesca Today. Thanks for listening to