Saudi plan to end oil ‘addiction’: How will it change the kingdom?

Saudi Arabia has announced a grand strategy to wean the kingdom off oil and create an investment-driven economy.

Yet between the lines of its vision to kick what royals are calling an “oil addiction” are clear steps for Saudi to kick its other habit – reliance on US economic and military support.

Such a shift has the potential to profoundly reshape Saudi Arabia. But it is unclear whether a newly “unbound” kingdom would play a productive role in the region or expand its proxy wars against Iran and inflame the Middle East. And while some observers predict that the 2030 plan will carry with it a wave of social changes, the closed, conservative kingdom may find a way to circumvent such influences.

In unveiling the so-called Saudi Vision 2030 plan, Saudi Deputy Crown Prince Mohammed bin Salman laid out a bold strategy: reducing dependence on oil sales, increasing investments abroad to over $2 trillion, cutting unemployment to 7 percent, privatizing state-owned industries such as telecom and airports, and increasing the private sector’s share of GDP to 65 percent.

A driving factor behind the reforms, approved by the Saudi government on April 25, is the falling of crude prices from $100 per barrel in 2014 to around $40 this month. That pushed the Saudi budget deficit to $98 billion in 2015 and $87 billion this year.

Under the plan, Saudi will sell off 5 percent of Aramco, the largest company in the world at a value of $2 to 10 trillion, diverting the profits to a sovereign wealth fund worth over $2 trillion to invest across the world. It would be the largest of its kind and more than double Norway’s $870 billion oil fund.

“Saudi is basically diversifying away from the dependency on one revenue source, one country source, and one market to many markets,” says John Sfakianakis, former economic adviser to the Saudi government and Riyadh-based director of economics research at the Gulf Research Center.

Saudi officials privately praise not only the economic independence gained by the scheme, but the political freedom it would bring from the US, which at around 1.4 million barrels per day is the second largest importer of Saudi oil.

According to the theory, freeing Saudi Arabia of the oil market would liberate Riyadh from its political obligations to its oil importers – particularly the United States, whose overtures to Iran have upset the Saudis and where Saudis perceive growing “anti-Saudi” sentiment.

“Saudis today feel they have the resources, the confidence, the military, and the willpower to be a major player, and they are ready to go independent,” says Abdulkhaleq Abdulla, Gulf observer and Emirati professor of political science.

Saudi fears reached their peak with Congress’s introduction of the so-called 9/11 bill, which would strip Saudi Arabia’s sovereign immunity and allow victims of the 9/11 attacks to sue the Saudi government. In response, Riyadh has threatened to sell off $750 billion in US assets and treasury securities, out of fear that they could be frozen by US courts.

“This bill was a kind of a warning to Saudi that there are risks to their investments in the US as long as the atmosphere is anti-Saudi,” says David Ottaway, longtime Saudi observer and scholar at Woodrow Wilson International Center for Scholars. 

Call to Arms

Perhaps the most ambitious goal of the 2030 plan is for the creation of a homegrown military industry that would account for half of all Saudi military purchases – up from 2 percent today.

In 2015, Saudi Arabia ranked third globally with military spending of $87.2 billion on arms and military equipment. More than one-fifth of that was purchased from the US.

Saudi Arabia has already begun manufacturing spare parts and basic ammunition, the 2030 document states, but under the new plan a Saudi government-owned company will expand the initiative to munitions and “higher value and more complex equipment such as military aircraft.”

The calls for a military industry are tied with Saudi Arabia’s growing military assertiveness under King Salman.

Pressed by the advance of perceived Iranian proxies, Saudi launched a year-long war in Yemen in March 2015. Late last year, Riyadh announced a military coalition of 34 Muslim states to “fight terrorism,” with the prospect of sending military expeditions in Libya and elsewhere in the region.

Although the Obama administration has signed off on a record $60 billion in arms sales to Saudi Arabia since 2010, with tens of billions more in the pipeline, Saudi officials express frustration that US arms sales often face “delays” and are considered “politically sensitive.” Securing a domestic supply line will be “critical” for a more active Saudi, particularly if Washington may not approve of Riyadh’s future military ventures.       

“Saudi had a shortage of munitions in its war in Yemen, and the US was slow to supply them – they don’t want to go through that again,” Mr. Ottaway says. “To become more independent in the military area, Saudi has recognized that it needs to get into the nitty-gritty – providing their own small arms, munitions, and armed personnel carriers.”

An Opening?

But these changes, however dramatic, may do little to shift internal social and political dynamics.

The plan calls for opening to foreign direct investment, granting “green-card” residences to foreign nationals, boosting women’s participation in the workforce from 22 percent to 30 percent, and even investing $46 billion in the tourism sector over the next five years.

Foreign companies have long had a presence in Saudi Arabia. Social media use is rampant and largely free; Saudi Arabia has the largest Twitter usage in the world.

Yet these have not lessened human rights abuses or led to political representation in the kingdom. Saudi executed 47 people on a single day in January, cinemas are banned, and women are still unable to legally drive or open their own bank account.

Even Prince Mohammed bin Salman seemed to backtrack from his initial support for women’s empowerment while promoting the vision, warning a few days after unveiling the plan that the “society is not convinced about women driving… it is up to Saudi society” to decide.

Rather than Europe or even modern Arab states such as Tunisia, in its vision, Saudi Arabia may be copying a model farther to the east: China.

“I think this is a model of a directed, authoritarian capitalism – which the Chinese are pulling off, other places are pulling off, and Saudi Arabia is looking to follow suit,” says F. Gregory Gause, Saudi expert and professor of international affairs at Texas A&M University.

“There are theories that the stronger the private sector gets, the more it will demand political rights – but we will not see that in Saudi.”