MBS and the Risky Saudi Transition


MBS bloombergThe launch of Saudi’s vision 2030, by Mohamed Bin Salman (aka MBS), is a major milestone in the looming Saudi monarchy’s generational transition. Since its founding, Saudi has been ruled by the sons of the founding King Abdul Aziz. It is likely that King Salman will be the last of the brothers to rule the Kingdom; however, the transition to the next generation is highly contested and dangerous.

During his first day, King Salman consolidated power in the hands of his favorite son, MBS; from the military to the economy, to Saudi’s crown jewel: Aramco. MBS did not waste time to show his power and vision. He launched a war in Yemen to project military power, and started acting as a visionary leader who is laying forward the vision and plan for the future of Saudi. However, his path to the monarchy is lined-up with a number of major challenges, as he is shaking the foundations of the Saudi monarchy:

  1. Since its establishment, the alliance between Al-Saud and the Wahabis has been the corner stone of the monarchy. Wahabi thinking and institutions control the legal, educational, and public spheres, and provide legitimacy to the royal family. Last week, Saudi reduced the power of the Committee for the Promotion of Virtue and the Prevention of Vice, aka the motaw3a; the quasi-governmental religious organization tasked with policing morals and behaviors of citizens in public. The motaw3a are no longer entitled to stop, question or arrest people in public, which means losing their power in the streets. This organization is one of the tools the monarchy has historically used to assert its power and control. Some of the Wahabi leaders have already started complaining and one of them got arrested for a tweet! This move signals a fracture in this historical alliance. Would the Monarchy lose the support of the Wahabi leaders? Could it survive without their support?
  2. Last month, MBS attracted international attention when he first mentioned the possibility of a partial privatization of Aramco. Saudi oil revenues (2015) are estimated at $340 Billion, 45% of the Kingdom’s $750 Billion GDP and 80% of its government budget. Aramco controls Saudi oil reserves (18% of global reserves) and its production and revenues. The company’s financials are considered a state secret that is highly guarded by the monarchy. Today, Aramco is under the direct control of MBS, and its revenues do not flow directly through the Ministry of Finance. As a traditional monarchy, Saudi does not have a clear separation between the King’s/royal family’s finances and the state finances. Members of the royal family receive substantial “entitlements,” that are typically financed from oil revenues. Privatizing (up to 5%) of Aramco, as the young prince has mentioned, will create transparency into the company’s financials, and will expose and threaten the royal family’s interests. It is not clear if he will be allowed to proceed with this plan.
  3. Internally, Saudi is undergoing rapid demographic change. With one of the highest birth rates in the world, and a strong welfare system financed by oil revenues, the country is experiencing a rapid increase in population and a youth bulge. Many of the young Saudis are foreign-educated in the US and Europe and have aspirations for a more open and liberal society; however, they remain a minority. The majority of the youth are locally educated in a religious educational system (50-60% of the curricula in public schools are religious subjects) that is highly conservative and based on Wahabi values. Most of them enjoy well-paying government or public sector jobs and remain unemployable in competitive private sector jobs. Moreover, the Saudi society remains highly tribal in nature, with tribal loyalties controlling political alliances. It is not clear how the growing young generation and the tribal dimension will play out during the transition phase.
  4. The Saudi political model is based on a “rentier state” – a state that derives the majority of its revenues from natural resources (as opposed to taxation of economic activities), and hence the political class is not dependent on “tax payers”, but rather derives its power from controlling and distributing some of this wealth to its citizens in exchange for their political acquiescence. In his vision 2030, MBS emphasized the need to transition from dependency on oil revenues to new sources of revenues based on investments and taxation. If he manages to successfully create the new Saudi sovereign wealth fund and to generate sizable income that would substitute for the oil revenues, then Saudi may be able to maintain the rentier state model, at least partially over the short/medium term. However, introducing new taxes and fees, lowering public services and reducing public sector jobs is likely to challenge this model and to create to a large base of disgruntled youth, who will see their standards of living decline sharply with limited skills to find good jobs. It is not clear that the Saudi regime can survive beyond the current rentier state model; and it is not clear either how long their finances can allow them to maintain this model given the shrinking oil revenues.
  5. Since the 1950’s, the US-Saudi alliance has been the corner stone of Saudi security. Saudis ensured the flow of oil to the West, and the US provided security and protection to the Monarchy. This alliance survived the 1973 oil embargo, the 9/11 attacks and several other crises. However, recently, this alliance has been challenged by both Saudi and the Obama administration. The US dependence on oil is declining and hence the need for a strategic relationship with Saudi. Also the US pivot to restore relationships with Iran has created fear in Riyadh. Under MBS guidance, Saudi foreign policies changed from slow, passive and discrete to being more regionally assertive. Saudis launched a war in Yemen to stop the country from falling into the hands of Shia; fueled ad armed the insurgency against Bashar in Syria; and supported the new regime in Egypt, especially on the military armament side. Downgrading the US-Saudi relations is likely to create more dependence on regional allies, like Egypt and Pakistan, for security. Over the next 5 years, the US is likely to broker a “cold peace” arrangement between Iran and Saudi (as Obama mentioned last week) with new security arrangement and redrawing the map of the Levant. It is not clear who the winners and losers are in this new regime; however, it is likely that the historical strategic relationship between the two countries will no longer remain the same.

 

Navigating these changes ushers a fundamental change in the foundations of the Saudi monarchy: from the domestic alliance with the Wahabis to the global alliance with the US; with challenges to the rentier state model, a hard-to-employ youth bulge and fractures within the royal family.

During the next few months, MBS will have to create a path to the monarchy, which implies either becoming the crown prince, replacing Muhammad Bin Nayef, or even managing a direct transition to the throne during the life of his father. This is a risky transition given all the above factors. Over the past decades, the region had a number of similar father-son transitions that we can learn from, specifically relevant are the transitions of King Abdullah of Jordan and Gamal Mubarak in Egypt. In the case of Jordan, another monarchy, the late King Hussein replaced his brother with his son during his own reign. King Hussein’s strong legacy and control of the country’s institutions allowed for a smooth and unchallenged transition. It is not clear if this will be the case in Saudi with the more complex tribal and royal family politics. However, the safer option would be to time the transition during the King’s life, i.e. as soon as possible.

In the case of Egypt, the Gamal Mubarak transition introduced highly-unpopular neo-liberal economic policies and challenged the power of traditional military and bureaucratic institutions. He tried to do this under the reign of his father for more than 8 years; however, he failed in creating enough popular and institutional support for his project, which eventually led to his demise. The failure of the Gamal Mubarak transition came from popular opposition, mostly to the economic policies and closing of the political space, but more importantly from the opposition of the military institution to the change of the 1952 political regime. Many of the elements of the Gamal project are present in the MBS vision 2030 program, and he is likely to face similar challenges.

Listening to MBS on his televised interview on Al-Arabiya (25 April 2016), it is obvious that he is well advised on the economic transition program by top management consultants; however, it is not clear if he has access to similarly wise advice on the political side. He needs to consider the creation of institutional and tribal alliances that would help him during the transition stage. So far, this is not clear in his narrative – a sign of high risk.

The coming months are going to be critical to the Saudi future, as well as the region’s. MBS is undertaking a very risky transition. His transformation program is upsetting all the foundations of the Saudi monarchy. The region would benefit from an orderly transition of power in Saudi, along with a transition to a more modern state (eventually evolving into a constitutional monarchy), moving beyond the traditional fundamentalist Wahabi values and the conservative regional politics and security arrangements; however, analysis of the current situation reveals a risky transition project, whose failure may lead into a more conservative and oppressive regime.

Amin Elmasry.
27 April 2016.

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