Index trend
Previous quarterly editions
Expropriation Risk: 52 52 51 51 ►Political Violence Risk:50 48 48 48 ►Terrorism Risk:30 30 30 30 ►Exchange Transfer and Trade Sanction Risk: 45 54 45 45 ►Sovereign Default Risk:37 27 37 37 ►
Overall Risk Temperature: 45 (Medium) TREND ►
Special topic: Gray zone aggression
Degree to which the country relies on outbound gray zone action to achieve its strategic objectives1 = Not at all5 = Gray zone action is a core tactic
3
Impact of inbound gray zone attacks on the country1 = Negligible impact5 = Significant impact on economic growth and/or political stability
4
Saudi Arabia’s pivotal position in the global economy, combined with its active role in regional politics, renders it a prime target for gray zone aggression. The country also makes extensive use of gray zone actions in its own interest, but to a lesser degree than some other powerful regional players, notably Iran.
The Saudi leadership has taken steps to moderate the risk of exposure to gray zone aggression, wishing to avoid a resurgence of attacks such as the 2019 missile and drone strikes on the Abqaiq oil processing complex and regular missile launches from Houthi forces in Yemen. These steps have included Saudi Arabia’s positive response to China’s efforts to reduce tensions between Saudi Arabia and Iran, which culminated in September 2023 in the exchange of ambassadors between Riyadh and Tehran after a seven-year break. Saudi Arabia has also restored diplomatic relations with Syria and placed its relations with Iraq on a more stable footing while working to achieve a political settlement in Yemen.
The U.S. had envisaged that the process of regional de-escalation could lead to the establishment of formal relations with Israel, although Saudi Arabia had not shown great enthusiasm for this. This process was knocked off course by the conflict unleashed by the Hamas attack on Israel in October 2023. Saudi Arabia’s response has been low-key. Crown Prince Mohammed bin Salman has shown little interest in the Palestinian cause and wider Arab political affairs, but he is presumably well aware of the strong sympathies for the Palestinians among the general Saudi population.
Saudi Arabia has not participated in the Western-led efforts to confront the Houthi campaign against shipping in the Red Sea, even though these actions have disrupted Saudi oil and petrochemical exports and have affected the operations of Jeddah port. If Saudi Arabia were to join the anti-Houthi coalition, it would be condemned in pro-Palestinian circles as lending support to Israel, opening the way to various forms of gray zone aggression. These could include Houthi missile strikes, drone attacks from Iraq and cyberattacks from Iran.
Saudi Arabia’s gray zone activity has been focused mainly on targeting its own citizens overseas. The most notorious case was the murder of Jamal Khashoggi in the Saudi consulate in Istanbul in 2018. This was part of a campaign against dissent. Other dissidents have also been pursued abroad. Among them is Saad al-Jabri, a former intelligence chief who fled to Canada in 2018. Saudi Arabia’s pursuit of Jabri and other Saudi dissidents in Canada led to a rupture in relations that included effective Saudi sanctions against Canadian firms. There has recently been a thaw, with both sides announcing in 2023 that they would restore diplomatic relations.
TREND ►
For foreign companies operating in Saudi Arabia, the risk of expropriation is low. The 2000 foreign investment law included provisions to protect investors against expropriation. These protections have been enhanced in the updated investment law that was issued in August 2024 and that will come into force in early 2025.
The new law covers investment by both foreign and domestic investors and states that an investment may not be wholly or partially expropriated or confiscated except after a final judicial ruling. Any expropriation also has to be shown to be in the public interest and in return for fair compensation. The updated law also provides a wider range of options for dispute resolution.
Most foreign investors in Saudi Arabia have the additional security of bilateral investment treaties. Nevertheless, investors do need to take into account the risk of arbitrary action by a powerful sovereign. This was demonstrated in the 2017 Ritz Carlton affair, when dozens of leading Saudi businesspeople were rounded up and forced to hand over assets. No foreign investors were directly involved, but the incident was a shock to the business community, including foreign companies.
The main risks in this category come from the war in Gaza and the potential for the conflict to spread to Lebanon and possibly Iran. The war could also cause long-term damage to the United States’ and wider West’s influence in the Middle East. Saudi Arabia has kept a low profile in the hope that it can salvage as much as possible of its pre-Gaza strategy of recognizing Israel in exchange for Israeli acceptance of a Palestinian state (and written U.S. security guarantees, assurances about future weapons supply and support for its nuclear energy ambitions). Saudi Arabia seeks regional stability in pursuit of its internal economic goals and has kept lines open to Tehran following their reconciliation in 2022, even though Iran continues to smuggle weapons to the Houthis in neighboring Yemen.
Riyadh has not been directly affected by the Houthi attacks on shipping using the Red Sea, but it has not publicly supported or condemned the U.S.-led attempts — so far unsuccessful — to deter the Houthis. Before the Gaza war began in October 2023, the Houthis and Saudis were on the point of finalizing a deal that would enable Saudi Arabia to exit Yemen. That is now on hold and could be undermined if Houthi leaders seek greater concessions influenced by the popularity of their anti-Israeli actions in the Red Sea among Arab (including Saudi) public opinion. However, a deal remains in the interests of both parties (and would prevent any recurrence of damaging Houthi missile and drone strikes on Saudi targets) even if it will not make Yemen any more stable. Yemen will remain a security concern for Riyadh not least because of Iran’s influence.
Al-Qaida in the Arabian Peninsula (AQAP) remains active in Yemen, where it has a new leader, but it is no longer able to mount a terrorist campaign in Saudi Arabia. Both sides in the Yemen civil war oppose AQAP. The campaign led by Mohammed bin Salman to marginalize more extreme interpretations of Sunni Islam — backed by most young Saudis — reduces the already low risk of terrorism. There is still some restiveness among the Saudi Shia minority but no organized opposition. Saudi Shias are a different strand from the Houthi Shiism, and there is no evidence of any cooperation.
The risk here is low, although falling oil revenue has pushed the Saudi budget into deficit. Foreign exchange reserves were $445 billion in mid-2024, slightly above the five-year average. However, the net foreign assets of commercial banks slipped into a deficit of about $4 billion in July 2024. Typically these net assets show a significant surplus. Government debt remains manageable, at about 27% of GDP.
Efforts to persuade multinational companies to move their regional headquarters to the kingdom appear to be working — as the number and scale of investment opportunities grow and the government continues to reform legal and regulatory frameworks. This includes enhanced provisions for foreign investors to repatriate dividends and capital in the updated investment law that was issued in August 2024. The gross foreign direct investment inflow slipped to $12.3 billion in 2023 from $28 billion in 2022, but this was still well above the 2018 – 2020 annual average.
The risk of a sovereign default remains low, although Saudi Arabia is increasing its borrowing to cover its fiscal deficit and to sustain its domestic investment drive. Some of the major investments are now being cut back, and the government is supplementing its borrowing through privatization deals, notably the mid-2024 secondary sale of shares in Saudi Aramco, which raised $12.35 billion.
Total debt issuance by the Saudi government and government-related entities in the first three quarters of 2024 exceeded $30 billion. This included about $20 billion raised by the Public Investment Fund (PIF), a $6 billion bond issue by Aramco and $5 billion in sukuk (Islamic securities) issued by the government. The PIF stated that it had $120 billion in debt on its books at the end of 2024.
According to the National Debt Management Center, the government’s direct external debt stood at $125 billion in mid-2024. Saudi Arabia’s debt issuance tends to be heavily oversubscribed, reflecting confidence among foreign investors that the default risk remains low. This will continue to be the case as long as the public debt ratio remains below 40% to 50% of GDP.
