Saudi Arabia is opening up, revealing its enduring challenges

The House of Saud is opening up its books. With last month’s $17.5bn bond issue and the planned initial public offering of a small portion of state oil giant Saudi Aramco, the outside world is learning more about the finances of one of the most important states in the Middle East – the protector of the holy cities of Islam and possessor of oil reserves that rank among the world’s largest. In the process, we are reminded of Saudi Arabia’s unique dynamics.

Oil wealth and the people

King Abdulaziz al-Saud, or Ibn Saud, brought together the Bedouin tribes and towns of the Arabian Peninsula to create the modern state at the beginning of the twentieth century. Ibn Saud carried the traditional notions of generosity and patronage throughout his lifetime. This made for a hugely successful leader and a badly run state. The nation’s wealth was simply the royal purse, available for traditional displays of wealth and favour as well as for defence and civil spending. Ibn Saud’s long-running treasurer Abdullah al-Sulaiman kept the show on the road, despite being described by a British contemporary as “the only finance minister I ever met who drank methylated spirit”.

With the arrival of oil wealth, the expanding royal family tended to build palaces rather than public infrastructure. Under King Faisal (who reigned from 1964 to 1975) some of this shortfall was made up with five-year fiscal plans, the first of which kicked off in 1970. Faisal was also the originator of a sprawling welfare state, which offered benefits, medical treatment, housing, scholarships and even cash gifts for weddings. “The state became a gatekeeper that mediated the existence of all citizens,” wrote historian Madawi Al-Rasheed in her history of the kingdom.

With the fall in the oil price in the 1980s, the country was forced to cut back on projects and even impact Saudis’ standard of living. Funding of regional wars and public subsidies again left the state in deficit at the end of the century, before the rising oil price again allowed a loosening of the purse springs.

The current push to reduce public wages and other spending projects, and to shrink the role of the state, are intended to reassure would-be bondholders. The country’s Vision 2030 programme promises non-oil government level will rise from 163bn Saudi riyals (£36bn) to 1tn and that government efficiency will be improved in global rankings. These promises should be seen as part of a longer-term challenge to modernise a country highly exposed to a core commodity, where social harmony has come with a price tag and royal spending remains lavish. Arguably, the balance has not yet been struck.

The Sauds v the clerics

Saudi Arabia is often presented as a religious-political monolith. In fact, the tension between the House of Saud and the Islamic tradition of Wahhabism, which provides it with religious legitimacy, has characterised its history. The House of Saud and the religious establishment have at times supported each other, and at other times changed each other’s course.

In eighteenth century Arabia a historic pact was made between tribal leader Muhammad ibn Saud (an ancestor of the later Ibn Saud) and religious leader Muhammad ibn Abd al-Wahhab. Al-Wahhab espoused a literalist interpretation of Islam, casting out idols and re-establishing a fundamentalist understanding of Islamic law, in the same theological lines as today’s Islamic State. By the turn of the 19th century the alliance between tribal leader and cleric presented a violent threat to the Ottomans and other religious sects as they raged across the peninsula. In 1801, they massacred thousands of Shi‘a Muslims at Karbala in Iraq.

Though this alliance was defeated early in the nineteenth century, it was a descendant of al-Wahhab that gave the later Ibn Saud his religious legitimacy in the creation of the third Saudi state. During the early twentieth century the Ikhwan – a Wahhabi group that demanded a return to an idealised Muhammadan community – was an important military force for the Arab leader. The Ikhwan ultimately rebelled against Ibn Saud, but were defeated by 1930 with the help of British air forces in Iraq.

But the Wahhabi clerics of the establishment remained an important part of his new kingdom, using their leverage over the monarchy to demand at various points the prohibition of alcohol and the reinstitution of stricter Qu’ranic doctrines.  With the arrival of oil wealth, the challenge has increasingly been to balance the personal morality and extravagance of the state’s royal family, with a religious-legal system that encompasses all: just this month, a Saudi prince was executed for murder.

Not that the application of the law has always been consistent. Back in 1951, one of Ibn Saud’s sons was spared the death penalty after murdering a British official, Cyril Ousman, in what was reported to be an episode of drunken rage. Such episodes empower the religious elite to reassert the state’s Wahhabi identity.

The Sauds v the world

Saudi Arabia’s foreign policy since the days of Ibn Saud has been to pursue hegemony within the peninsula while balancing the regional interests of global powers. Before the First World War, it was the rival empires of the British and the Ottomans that Ibn Saud played against each other, later it was the British against the Americans, and today the power balance is again shifting with growing Russian influence via Iran and Syria.

Whether it was the rise of Nasser in Egypt, Ayatollah Khomeini in Iran or Saddam Hussein in Iraq, the state has faced repeated threats from Arab nationalism and from external and  internal Islamist groups that have criticised the excesses of the royal family and its relationship with colonial and post-colonial states. Its reliance on the British Empire was a point of weakness for its enemies to exploit in previous decades – a relationship that abides with the Al Yamamah arms deal – but that has long been replaced by its dependence on the US.

Such military partnerships with states seen as foreign invaders, and often as Crusaders, has undermined its authority. In 1979, the Grand Mosque in Mecca was briefly seized by a militant group decrying a corrupt royal family and its relationship with ‘infidel’ powers. The presence of American soldiers in the kingdom during the 1990s Gulf War also provoked a backlash from lower ranks of the clergy and ordinary Saudis.

The Sauds v the Shi‘a

Another point of tension is the House of Saud’s relationship with the Shi‘a minority in the country’s eastern province, where many worked for Aramco. The official state narrative looks to gloss over this group, whose beliefs it regards as heresy. A combination of unequal treatment of Shi‘a by authorities and the 1979 Iranian Revolution created the conditions for an uprising beginning the same year, where some protesters were killed by security forces. The Shi‘a community continued to advocate for its rights into the twenty-first century, despite official clerics issuing repeated rulings against its beliefs and practices.

These domestic and regional factors are now playing out in the war in Yemen. The US has intercepted five shipments of weapons in the past 18 months, heading from Iran to supply the Houthi rebels, a Shi‘a-led group in the country. A vulnerable Saudi regime cannot allow a Shi‘a state backed by Iran to be established to its south while Iran’s influence on Syria, Iraq and Lebanon deepens, and while it retains an awkward relationship with its own Shi‘a minority. The result: relentless bombing of Yemeni hospitals, weddings and schools, carried out by an authoritarian Islamist state armed by western allies.

The liberalisation of economies such as Saudi Arabia is often seen as an agent for progressive social and political change. But as its monarchy forges further links with the world, it may face further internal challenges to its religious and dynastic authority, especially given the revival of Shi‘a influence. Do not expect a linear progression.

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Why we as taxpayers shouldn’t own banks reason 2,704 – thoughts on #RBSfiles

The investigation into RBS’s infamous Global Restructuring Group by Buzzfeed/Newsnight is excellent: take some time to read it.

It has given a comprehensive and human treatment to the GRG story that had been covered in the Tomlinson Report from 2013, and picked up a year later in journalist Ian Fraser’s exhaustive Shredded: Inside RBS, The Bank That Broke Britain. But it goes further, revealing documents and sources that demonstrate the treatment of small business customers, the bank’s own criteria for what constituted a breach of covenant, and inter-company narrative reflecting the banking culture set by management.

It’s our problem

While we await the Financial Conduct Authority’s review of these practices, the investigation will undoubtedly add to the blowback on RBS. But let’s not forget that this a bank still majority owned by the taxpayer, after a (too-big-not-to) bailout during the financial crisis.

As such, it provides an object example of why the government should not retain ownership of parts of the banking sector. That UK Financial Investments, the body established by the government to manage and sell these stakes, is a core shareholder consulted on the restructure of RBS’s non-core business shows just how muddy the water can become.

This is the current board of UKFI. It includes a senior government official nominated by the Treasury and is accountable to the chancellor, and ultimately to Parliament. As covered in the story, the House of Commons’ Treasury Committee did a good job forcing the bank to admit the nature of the GRG business.

But there is a clear problem when the government itself is for the best part of a decade the principal shareholder in a bank that is attempting to reduce the risk and size of its balance sheet, and thereafter to reform its working practices. The shareholder’s interest and the national interest do not necessarily align.

Dust is gathering on last year’s report from investment bankers at Rothschild arguing that increasing the free float (selling the public stake and so increasing the number of shares in circulation) might provide some upward momentum to the share price. The government should have ignored criticism of selling the stake at a loss, and argued that it was more important that one of our major commercial banks be returned to the private sector, where it could keep a clearer eye on it.

Don’t know about you, but I’m looking forward to Newsnight…

Brexit: choosing which hearts to break

At 2:05 in the below video, at the corner of the shot, you can see Newsnight’s Evan Davis holding his head in his hand. The interchange with Leave campaigner Daniel Hannan on BBC Newsnight, following the UK’s vote to leave the European Union, was one example of how the frustrations resulting from a binary in/out choice will affect both sides.

Vote Leave’s slogan ‘Let’s take back control’ was a simple appeal to people concerned with a loss of sovereignty on a range of issues, principal among them immigration. Taking back control of our borders, with a points-based immigration system among the proposals, was a major feature of the debate. That one of Vote Leave’s most prominent politicians would be arguing for a Norway-like settlement where the UK can accept free movement of labour in exchange for access to the single market clearly presented a rowing back, if not a complete reversal.”The public have been led to believe that what they have voted for is an end to free movement,” responds Mr Davis.

But such clashes are inevitable. Voters on both sides of the argument made their decision for a wide, wide range of reasons, from wanting to protect our economy to not liking Jeremy Hunt very much. It is now up to our politicians to choose which hearts to break, while, overall, respecting the people’s democratic will.

Row back on immigration

It is also worth reflecting on Boris Johnson’s much-derided Telegraph article following the vote, in which he made a series of promises which seemed optimistic, to put it mildly.

“British people will still be able to go and work in the EU; to live; to travel; to study; to buy homes and to settle down. As the German equivalent of the CBI – the BDI – has very sensibly reminded us, there will continue to be free trade, and access to the single market…

“The only change – and it will not come in any great rush – is that the UK will extricate itself from the EU’s extraordinary and opaque system of legislation…”

Dreamland stuff. But clearly the government is hopeful that access to the single market can be retained despite the UK leaving the union and limiting migration from it. That is despite clear opposition from European leaders to the UK being able to retain the benefits of membership without any of its costs and obligations.

So one option is to accept, as Mr Hannan suggested, some element of free movement in exchange for a similar trading relationship. The Labour Party under Jeremy Corbyn is already in this camp, preferring an impact fund for those areas where jobs are affected, as he explained on the Marr Show last weekend. Mr Corbyn is keen to avert a ‘hard’ Brexit where the country’s manufacturing jobs are harmed, and the UK is forced to become (even more of) a corporate tax haven on the edge of the union.

But any concession here would mean disappointing those voters who believed a vote to leave was a vote to keep our fellow Europeans out. This could be very damaging to the already pitiful political engagement among the electorate, intensifying anti-establishment feeling. But it might also prove the right thing economically, and in the medium term politically.

Hard means hard 

The other option would be to dash the hopes of those voters who believed Mr Johnson’s promises that the UK would not lose out economically in the short term, that it would retain ‘access’ to the single market. The free trade optimists such as Liam Fox, the man charged with negotiating the deals, present ‘hard Brexit’ as an opportunity for UK business, rather than a restraint.

Much was made of the economic forecasts before the referendum that tried to calculate how bad an impact this would have on the UK’s economic growth over the medium term. As we know, this negative message did not cut through, but that doesn’t mean the forecasts should be jettisoned. It would be inadvisable to ignore the weight of academic opinion on a matter of such national importance simply because of how this message was used in a flawed political campaign, or worse as part of a general rejection of ‘experts’.

What is fair to say is that the short-term expectations for what would happen immediately after a leave vote have been confounded by the UK’s economic performance, but this could be attributed to the immediate postponement of (even the) start of the negotiating process to some-time-next-year. Brexit campaigner John Redwood argues that there is no reason to expect a negative economic effect from the start of the exit negotiations, and that the market has already priced it in. This feels to easy: it is an incredibly difficult risk to discount, given we don’t yet know the UK’s starting position. The loss of purchasing power with sterling’s fall is a foretaste of what is to come.

But Theresa May’s administration may well decide a political obligation to exit the EU fully is worth some economic pain. It will prove hard thereafter for opponents to prove the how the counterfactual (that the UK had remained within the EU), would have played out, anyway.

You’re right from your side

It is very difficult to foresee an outcome where all sides can be pacified. Politicians can make statements about respecting the will of the people but ultimately they will have to take a position. Mr Corbyn’s stance will no doubt lose him votes in a general election but at least he knows who he will disappoint: those voters who object to immigration on nationalistic grounds, rather than because their jobs or communities are being affected. But his is a party that looks currently to pursue principle over power. Ms May, who has demonstrated her preference for the latter over the former, will soon have to choose which voters she can afford letting down.

Arguing the counterfactual: a bootless pursuit

The difficulty of arguing the counterfactual could be one reason why political commentators talk about the leader of the opposition as the hardest job in Westminster. An opposition force of even modest duration will have to explain quite how things would have been different had their policies been taken up. Perhaps that’s why some politicians choose not to lay out policy platforms, or instead to discuss aspirations rather than defined positions.

‘Too far, too fast’

An obvious example is the failure of the Labour Party under Ed Miliband to explain how its stance on public spending, softer than that of the Conservative-Liberal Democrat government, would have helped the economy.  Then shadow chancellor Ed Balls’ opposition to the government’s spending cuts as ‘too far, too fast’ signalled a desire to avoid the hard edges of its programme while retaining fiscal credibility for the opposition party.

But many of the party’s supporters and critics took up the corollary of that statement: same cuts, but slower. The leadership struggled to shake this ‘austerity-lite’ criticism from the left, or convince the right that it would not return to the perceived overspending of the later years of the Labour government. But what compounded this was the failure to demonstrate, even when anti-austerity voices were growing louder, how this third way would have delivered a better outcome than the path taken by George Osborne.

The impact of severe austerity on Greece’s economy grew clearer during the 2010-2015 parliament, and the IMF admitted the terms of the original rescue package hurt just as they helped. The UK’s economy performed its slowest recovery on record. And yet it was impossible to strike a lasting political blow on the very reasonable grounds that extra spending on growth accretive projects could have improved things without the country’s creditors running for the hills. So unforgiving and lonely was this furrow that as the election approached, Mr Balls decided fiscal discipline was the more important message and mimicked his opposite number’s budget surplus target.

Lower for longer and longer and longer and lo

There are lots of reasons why lower-for-ever interest rates are a bad idea, and it’s been covered by many expert commentators (and by me). This is bad for any actor in the economy which relies on returns from long-term debt: retail bankers concerned about their margin may receive but crocodile tears, but these banks are crucial to our economy, as well as providing a chunk of tax revenue; not to mention that we own a good chunk of them.

Closer to home, these are bad times for savers wanting to get an income from their retirement savings, and for similar reasons these conditions have pushed employers’ pension scheme funding to breaking point, and have suppressed insurance companies. It has also kept the party going in areas of lending such as the residential mortgage market, where concerns had already been building about asset prices and income ratios. But perhaps more importantly, lower-for-the-forseeable interest rates mean our monetary authorities have less firepower to deal with the next crisis when it comes along.

There are few arguing that the Bank of England should never have cut interest rates during the financial crisis. Rather the question is what would have happened if the BoE had moved earlier in the recovery to increase rates, perhaps if it had stuck to its unemployment link in 2014, or even earlier. That alternative path might have led to a position of greater strength today. Again this is an utterly unsatisfying argument to make.

Brexit: the counterfactual to end all conterfactuals

Those who voted remain in the UK’s referendum on membership of the European Union may feel they are currently living in a counterfactual, the equivalent of Stranger Things’ ‘upside down’. Those who voted leave are already crowing that the predictions for immediate economic deterioration have proved wide of the mark. But the real experience of Brexit will depend on the deal that is negotiated with our European neighbours.

If the UK dispenses, or is compelled to dispense, with its membership of the single market, we will get some sense of how accurate those alternative realities feared by remain-advocating politicians really were. But it won’t matter: Brexit will be the reality. If that brave new world seems unnecessarily harsh, it will be the task of pro-EU politicians to describe how things could have been if the vote had gone the other way. Unless they have already moved on to other battles.