Previous Quarterly Editions
Expropriation Risk: 45 52 52 52 ►Political Violence Risk:51 51 51 51 ►Terrorism Risk:40 40 38 36 ▼Exchange Transfer and Trade Sanction Risk: 35 35 35 35 ►Sovereign Default Risk:37 27 37 26 ▼
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Geopolitical alignmentEast 1 2 3 4 5 West
Alignment five years agoEast 1 2 3 4 5 West
Degree of contestationSettled 1 1.5 2 3 Contested
Western influence in Saudi Arabia, mainly Washington, will remain pre-eminent but is weakening in the face of competition from Russia currently, and China in the longer term. The U.S. relationship was based on a tacit understanding that Washington would defend the Saudi state from external aggression in exchange for Saudi oil supplies to the U.S. and its allies at affordable prices. The Saudi armed forces use mostly U.S. weapons and there are close contacts between the military leaderships.
However, in recent years, domestic shale oil has made the U.S. an energy exporter and no longer as dependent on Saudi production. The two countries share interests but not values, and relations have cooled over the 2018 killing of journalist Jamal Khashoggi, and wider concerns over human rights. Saudi Arabia is concerned by Western policies of weaning the world off fossil fuels. Given the nature of the Saudi regime, and that it is likely to endure for many years with Mohammed bin Salman (MBS) the crown prince being only aged 36 the relationship will need to be carefully managed by both sides to ensure that the inevitable problems are contained.
Saudi Arabia understands only the U.S. and its allies have the interest, will, and capacity to protect Saudi Arabia from Iran and other potential aggressors. Washington will want to ensure world oil supplies are adequate and affordable, even if does not need Saudi oil.
As major oil exporters, Saudi Arabia and Russia collaborate to keep oil prices high but also compete for market share. They and China are autocracies that share similar values on human rights and democracy. Moscow and Riyadh were key to the 2016 agreement (OPEC+2) to regulate oil production to maintain higher prices. Saudi Arabia has resisted Western pressure in 2022 to increase output substantially and
thereby undermine Russian attempts to use energy as a weapon in its confrontation with the West. Saudi Arabia has also imported more Russian heavy oil and has made significant investments in Russian energy giants Gazprom, Rosneft, and Lukoil. This has enabled MBS to show he could defy the West and make money.
Meanwhile, the U.S./Saudi defence relationship is so deep it would take years for Riyadh to switch to another supplier. Furthermore, the unsteady Russian military performance in Ukraine has undermined the credibility of its training and weaponry. Russia will not displace the U.S.
Saudi Arabia is China’s largest trading partner in Middle East-North Africa region. China buys 27% of Saudi crude oil exports and is a major destination for petrochemicals. China has offered opportunistic investments in the oil sector and the two countries have looked at how their major initiatives – China’s Belt and Road and Saudi Arabia’s Vision 2030 – can be integrated to mutual benefit. Saudi Arabia is interested in China’s developing defence industries and has acquired some drones and missiles, but its armed forces are so tied to the West that a major change in direction is not feasible over the next five years, as previously noted.
Saudi Arabia is concerned about China’s close relations with Iran, which is the main threat to Saudi Arabia. The relationship over the next five years will grow but remain confined mainly to trade and investment. In the longer term, China will develop a capacity to project its power into the Middle East-North Africa, but for the next five years Saudi Arabia will remain aligned to the U.S. on defence and will opportunistically seek to improve relations and commercial benefits from Russia and China.
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The risk of expropriation is low. Saudi Arabia had a budget surplus of over USD35 billion in the first half of 2022, with a rise in revenue of 49% and spending of 16%. This is driven by higher oil prices (well above the USD70-75 per barrel figure used for the budget) and output (20% higher than 2021 up to August 31), which are likely to remain high for the rest of the year and beyond, as the Russia/Ukraine crisis continues.
Saudi Arabia has resisted pressure to increase oil exports except marginally, but its capacity to do so is limited. Growth in the non-oil sector, particularly industry and construction, is well up from 2021 as the impact of COVID-19 recedes. This is a sign the diversification of the economy, a key aim of Vision 2030, is having some success. Consumer spending remains high, and inflation is low at 3%.
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The truce in Yemen remains fragile, even though it has now been extended. The Huthis cannot be defeated while Saudi Arabia has been struggling to make the Political Leadership Council (PLC) into an effective governing body because its constituent parts, each commanding forces, have different long-term ambitions.
The Southern Transition Council (STC) controls Aden, where the PLC is based, and wants an independent south, not the restoration of a united Yemen, the avowed aim of the PLC. The truce has led to a cessation of Huthi missile and drone attacks on Saudi Arabia and to a renewed effort, led by the STC and allied militias, to eliminate the remnants of Al-Qaeda in the Arabian Peninsula (AQAP).
Despite the truce, the combatants are not prepared to make the concessions needed to find a permanent peace and the Huthis have been rebuilding their forces with more overt Iranian assistance. Thus, the potential threat from Huthis missiles remains.
Saudi Arabia remains concerned over the possible renewal of a version of the Joint Comprehensive Plan of Action (JPCOA), otherwise known as the 2015 Iran nuclear deal. Riyadh is also deeply worried about the role of Iran in Lebanon, Syria, and Iraq. The Saudi government clearly prefers the closer relations and now allows Israeli aircraft overflying rights between Israel and some Arab states over the threat from Iran, but is careful to avoid any public commitment given the degree of popular backing for the Palestinians in the kingdom. Saudi and Iranian intelligence officials have continued meeting in Iraq.
A recent UN report estimated that AQAP has several thousand fighters in Yemen. The group operates in the more inaccessible parts of southern Yemen and has survived two major offensives in 2014 and 2017 intended to eliminate it. However, AQAP has lost many of its leaders to U.S. drones, with the hard core now comparatively small. The group can draw on support from other jihadi groups and criminal gangs to mount occasional attacks.
The current STC-led operation appears to be making good progress. Though still important in Yemen, AQAP and Islamic State no longer poses a serious threat within Saudi Arabia, where AQAP and Islamic State may be able to launch an occasional isolated attack. Saudi security services seem able to prevent attacks through intelligence-led operations.
The economy is in good shape and the risks associated with exchange transfer and trade sanctions are low. The International Monetary Fund estimates that Saudi GDP will grow by 7.6% in 2022, though recent Saudi statistics suggest that growth could be at least 8%.
There will therefore be ample funds for the government’s proposed expenditure, managing contingencies, for instance, the renewal of war in Yemen, and being able to build up foreign exchange reserves, which were USD461 billion in June 2022. Public debt is likely to decline further than the forecast 25.9% of GDP in 2022 and 25.4% in 2024.
Saudi Arabia is making steady progress in measures to stimulate the private sector and encourage foreign direct investment. The country is using the Public Investment Fund, which acts as its sovereign wealth fund, to drive investment in the economy, particularly into renewable energy. Unlike the past, Saudi Arabia is reforming its economy during a boom with the aim of sustaining a good level of growth for the long term. The risk of sovereign default is therefore low.
