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.

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…