14 February 2015

The Future Is Bleak For The House of Saud - Part I

Recently, the New York Times ran a front page story about how the Saudis expand their regional power while others falter.

To my contrarian eyes, this was a fairly inaccurate assessment of the current situation. I have been claiming that the House of Saud was built on a very precarious system and their cynical and pernicious symbiosis with the House of Wahhab would put them on a path of destruction in the near future.

Contrary to the New Times' rosy evaluation, with an economy solely based on oil revenues and therefore very sensitive to the vagaries of the oil markets, the aging kings and crown princes are ill-equipped to deal with the Kingdom's internal problems, like the very different aspirations of the youth, (51 percent under the age of 25), the frustration of women and the deep-seated resentment of the Shia minorities both in the Kingdom and in neighboring Bahrain.

If you add to this domestic tableau a region in serious turmoil, the overall crisis reaches a level that surpasses the crisis-management capabilities of the autocratic House of Saud and the reactionary and misogynistic House of Wahhab.

I believe that it is a brittle structure that is likely to break if it is confronted with a multifaceted challenge.

Moreover, I think that day of reckoning is approaching fast. And it will have far-reaching consequences for the Middle East.

In my opinion, the House of Saud is facing four sets of interrelated issues. This post deals with the first two.

The Succession Woes

The House of Saud has no institutionalized system of selecting monarchs. They use an arbitrary form of agnatic seniority as its method of succession, which means brothers have priority over male offspring. This has been the case since the death of the founder of the Kingdom Ibn Saud. And this is why most Saudi monarchs are frail old men.

The late King Abdullah created a body called the Allegiance Council in 2007 to somewhat institutionalize the succession process. It is composed of sons and grand sons of Ibn Saud. However, he never formally consulted it to select Crown Princes.

A few weeks ago, he passed away (incidentally, he died of lung cancer as a life-long smoker and not pneumonia) and he was succeeded by the Crown Prince Salman bin Abdulaziz.

Salman is one of the last remaining sons of Ibn Saud (and one of the Sudairi Seven).

Salman is old (79) and not in good shape, And he is said to be suffering from early stages of dementia. Since his health has been an issue for some time, Adbullah named a Deputy Crown Prince in 2014 and promoted, Prince Muqrin, the youngest son of ibn Saud, to that position.

After Muqrin, it is assumed that the new King will be selected from the next generation, that is, the grand sons of Ibn Saud.

This is one of the first issues: there are other several half brothers of Prince Muqrin, like Prince Ahmed. Ahmed is also one of the Sudairi Seven and when he was appointed Minister of Interior in June 2012 (following the death of Crown Prince Nayef) he was assumed to be next in line. But he was forced out within six months and the job went Nayef's son Prince Muhammad. Using the agnatic seniority principle, Ahmed could still make a case before the Allegiance Council to stop Muqrin's rise to power. It is not very likely but it is possible.

Assuming Muqrin moves up unchallenged, the transition to the next generation is not going to be smooth.

There are three leading candidates.

One is Abdullah's son Mutaib, who is the Minister of the National Guard, a very powerful portfolio created for him by his father Abdullah. Then, there is the Minister of Interior Muhammad bin Nayef. And finally there is Salman's son Muhammad who was appointed Minister of Defense as soon as his father became King, even though he is only 34.

My guess is that Salman will not rule for more than a couple of years. In fact, if dementia rumors are true, he might not even survive that long. After his departure, I expect quite a bit of turmoil, especially if the Allegiance Council decides to take its job seriously.

Between the Minister of the Interior, the Minister of National Guard and the Minister of Defense you have the making of a major power struggle.

There is one more actor who could influence the process from within the system: Prince Al-Waleed bin Talal. The fabulously wealthy grand son of Ibn Saud was recently voted "the most influential Arab" in the world.  His father Prince Talal bin Abdulaziz was a member of the Allegiance Council until he resigned in protest in 2011 and one of his sons has the right to claim his seat.

Until recently, no one thought that Al-Waleed would be interested in meddling in the political affairs of the royal family but lately he seems to be on a collision course with the Saudi Establishment.

Economic Problems

As you know, when the crude prices went below $60, life became very difficult of oil producers. And Saudi Arabia is no exception.

However, even before the falling oil prices Saudi Arabia did not have a healthy economy. The Kingdom gets roughly 93 percent of its revenues from oil products. These revenues are especially important because they allow the royal family to maintain social peace by generously subsidizing every aspect of Saudi life. There is no income tax and most state services are free. About 40 percent of working age Saudis do not bother to work. The public sector is the biggest employer for Saudi citizens and the salaries are significantly higher than private sector wages.

In an ordinary society, such subsidies would be questioned and perhaps removed if the revenues did not cover spending. But the ailing King Abdulah was so afraid of social unrest that he decided to increase spending despite falling oil prices.
[S]ince the start of the Arab Spring in 2011, the Saudi royal family has dramatically increased spending on the kingdom's welfare state to support the unemployed, the middle class and provide affordable housing. Salaries for the 2 million employees of the government, directly or indirectly, have increased. Funding for education and health care has gone up. The king has sought to buy off any dissent. Even in the Shiite Eastern Province spending on public programs has gone up.
Not surprisingly, this largesse led to the largest budget deficit of the Kingdom's history.
Last week, the world's biggest crude exporter announced an expansionary 2015 budget with the largest-ever deficit of $38.6 billion. 
It projected spending at $229.3 billion, a slight rise from last year's estimates, and revenues at $190.7 billion, sharply down from $228 billion projected in 2014.
Now, the Kingdom is not Venezuela. They have reserves of roughly $750 billion. But the reserve fund is handled by Saudi Arabia Monetary Agency, which invests in state bonds with an annual yield of 2.4 percent on average. This return is not enough to cover the kinds of budget deficits Saudi Arabia will have to run if it continues on the current path.

That is because, over and above its lavish domestic spending, the royal family has many foreign clients that depend on its continuous support.
The kingdom is keeping friendly fellow monarchs in Bahrain and Jordan in power with hefty subsidies. The military regime in Egypt is a very expensive ally. Pakistan is another major recipient of Saudi largesse. Yemen is the most immediate crisis. With the Houthi takeover of Sanaa, the kingdom faces a longstanding enemy now dominant on its southwest border. (...)   
One senior Saudi official told me privately that the kingdom spent $30 billion in 2014 propping up its friends — not counting the costs of the wars in Syria and Iraq where Riyadh funds friendly Sunni groups.
Enter Al-Waleed bin Talal, a.k.a. the guy who bought Apple, Citibank, Disney or News Corp stocks when they were dirt cheap to amass a $30 billion fortune.

After Abdullah announced his budget and the deficit that went with it in December, Al-Waleed wrote to the Minister of Finance a furious letter asking him to justify the high spending level and the use of the Saudi reserve funds to cover the budget deficit.

Think about it. This is the world's last absolute monarchy. You don't get to ask the King to justify his decisions. Yet, this is what he did. And used an unusually rude tone in the process.

Al-Waleed is noteworthy for another reason. His Rotana media group is the largest entertainment company in the Arab world. It owns record labels, radio stations and TV channels. Interestingly,
Rotana, largely owned by Saudi Prince Waleed bin Talal, does not follow strict moral codes in relation to the depiction of intimacy between female and male characters. Rotana and Rotana Clip, specialized music TV channels, regularly air music videos that focus on the sexuality of female singers and models. Woman singers are consistently shot in revealing clothes and flirt with the male characters in their videos. 
This is in a country where the mere launch of a TV station led to the assassination of its King:
King Faisal, in a rush to modernize his realm, created Saudi state television in the 1960s, and that bold step is widely believed to have led to his assassination in 1975. 
The Saudi ulema were so upset about Waleed's media activities that they tried to warn him through his brother Khaled bin Talal:
As part of conservative wing in Saudi royal family, Khaled said he had been forced to speak out after quiet efforts to advise his brother to mend his ways had fallen on deaf ears. Khaled, told an Arabic website that his brother's plan to introduce cinema into Saudi society was the straw that broke the camel's back. This was a reference to a Saudi film financed by Al-Waleed bin Talal, and shown in Saudi Arabia late last year despite fierce opposition from Islamist activists.
Al-Waleed does not simply offend the religious establishment of Saudi Arabia. He attacks the royal family as well.
“Fat Cats of the Desert,” a gaudy nighttime soap on a more daring channel on the Rotana network, is in its fourth season, and it portrays rich Saudis as decadent, hard-drinking, free-spending sybarites. The series opens with a disclaimer that says any resemblance to real people is a coincidence, which helps convince many viewers that the desert fat cats are stand-ins for certain members of the royal family.
To top it all, he launched an Al-Jazeera-type all news channel called Al-Arab with the promise of independent reporting and billed itself as "dedicated to free speech."

Yes, dedicated to "free speech" in Saudi Arabia. It was launched on 1 February 2015 and was shut down within hours after it broadcast an interview with a prominent Bahraini dissident.

You see what I mean when I say he is on a collision course with the Saudi Establishment.

As if all of this was not enough, in his letter to the Minister of Finance, he asked the King to turn the Saudi reserves into a Sovereign Wealth Fund (SWF) and allow him and people like him to run it in order to generate 7-8 percent annual revenues.

Given Al-Waleed's track record, it makes sense for the House of Saud to let him handle the Fund. The level of revenues he is projecting would allow them to run reasonable deficits without draining the reserves.

But that represents a major dilemma for the royal family: If they persist on the current system, they will eventually use up the country's reserves: they already withdrew $58 billion in two years. If they don't, they will no longer be fully in charge of the Kingdom's economy.

Clearly, if Al-Waleed were to invest the SWF, he would have a disproportionally larger say over fiscal matters. He could block certain expenditures like the transfer of huge sums to the House of Wahhab that enable them to export their brand of Islam. He could veto subsidies to some groups or payments to foreign countries.

More importantly, what if, after being put in charge of the SWF, Al-Waleed bin Talal were to claim his father's seat in the Allegiance Council?

Talk about a kingmaker.

For all these reasons, I believe that the Royal family will not put Waleed in charge of SWF and will try to keep him sidelined. The problem is that, with shale gas and fracking, oil prices are unlikely to rise to their previous levels for any sustained period of times.

Already "Standard and Poor's has lowered the outlook for the world's top oil exporter Saudi Arabia to negative" as they believe that the country cannot maintain its strong fiscal position (and credit rating) with sliding oil prices.

Sooner or later, this economic reality will catch up with the royal family.

Now let's turn to their ties to terrorism and their cynical role in the internecine fights within Islam.

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