It appears one of the most controversial episodes in Saudi Arabia’s recent reform drive has drawn to a close. Most of the pending cases in the Kingdom’s anti-corruption crackdown have been closed, and the Saudi attorney general announced nearly $107 billion (£75.6 billion) in settlements with many of the Kingdom’s richest and most powerful men. The Riyadh Ritz-Carlton is finally set to transform back from gilded cage to five-star hotel.
The jailed princes may be going free, but outside observers are still struggling to make sense of what this all means for their business interests in Saudi Arabia. Was the crackdown motivated by a genuine desire to change how Saudi Arabia does business? Or was it Crown Prince Mohammad bin Salman’s means to consolidate his grip on power?
The answers to these questions are of the utmost importance to businesses and investors doing business in the Gulf. Saudi Arabia may be the region’s largest economy, but it lags well behind one of its main neighbours and partners – the United Arab Emirates (UAE) – in terms of corruption perceptions and fostering a transparent business climate.
The Emirati Example
The Emiratis have succeeded in creating a straightforward business climate, largely free of corruption, in a way that the Saudis have failed to emulate. The Emirates are collectively considered the least corrupt country in the Arab world by Transparency International and the most diversified economy in the Gulf by the International Monetary Fund.
That distinction is becoming increasingly important as overseas firms looking to invest in the Middle East focus ever more closely on compliance and transparency issues. Global norms of corporate responsibility and accountability leave little room for the opaque backroom dealing that usually governs business relationships in the region. This is especially true in industries like banking and finance. Banks like HSBC and BNP Paribas have had to pay multibillion-dollar fines for violating sanctions and money-laundering rules.
Companies operating in the region want and need their local counterparts to uphold the same transparency and ease of business standards that apply in the West. The Emirates have implemented regulatory and economic reforms which keep their market attractive for Westerners. In a region fraught with risk, this has made the UAE the region’s financial hub and helped Dubai consistently rank among the top 20 global financial centres. Abu Dhabi, ranked 25th last year, is not far behind.
Many of the country’s key business relations depend on the Emirates’ strong compliance with international regulatory norms. Local regulators regularly call on Western expertise in keeping those frameworks up-to-date. SICPA, a Swiss company expert in anti-fraud, has developed a track and trace system for water and halal food products in Dubai. The company plays a pivotal role in increasing transparency and integrity of supply chains and casting a light on areas that offer opportunities for fraud.
Major British companies that rely on the Dubai international financial centre (DFIC) as a base for their regional operations such as Clifford Chance and Glaxo Smith Kline are also subject to strict compliance laws. Veolia, a French water company, is another example of a company putting a premium on promoting high corporate responsibility standards.
That has also helped the UAE to become Britain’s largest Mideast civil export market and 12th largest globally.
Bilateral trade in goods and services between the two countries reached £12.4 billion in 2013, and the UAE-UK Business Council aims to double that by 2020.
Getting the Dust to Settle
Few Saudis would argue against the need to eradicate graft. The wider public welcomed the move to detain hundreds of Saudi Arabia’s wealthiest elites, including several royals and a number of prominent businesspeople. The economy has also taken the developments in stride, thanks to rising oil prices. Saudi credit default swaps (CDS) are back under 0.80 percent, their lowest level since before the arrests. The Tadawul all-share index is also up nearly 10%, and the Saudi economy brought in nearly $5.5 billion in capital last month.
Those numbers, of course, don’t capture the whole story. Poor transparency surrounding the arrests and subsequent settlements has fed suspicions bin Salman is flexing his political muscles. Saudi Arabia’s business climate may be opaque and informal, but it has always at least been stable and predictable. As one Allianz portfolio manager put it to the Wall Street Journal, the backlash from the crackdown might ultimately “turn the apple cart”.
To regain the confidence of foreign investors, bin Salman is now planning an extended trip to Paris, London, Washington, New York and California. There, he will meet with representatives in key sectors like tech and aerospace and pitch his economic reforms to wean Saudi Arabia off oil. He will also sit down with Theresa May to discuss the long-awaited listing of Saudi Aramco, but the prince also has business with Richard Branson as well as Apple and Amazon.
Before he sets off, bin Salman’s advisors should remind him that realising his plans requires putting foreign companies at ease – behaving more like the UAE and less like a Middle Eastern autocrat.
To reach and sustain its foreign direct investment goals, Saudi Arabia needs to be similarly proactive.
The overdue crackdown on corrupt elites and high-level graft represents just one part of the challenge standing between Riyadh and the economy it wants to build. Bin Salman also needs to reform the business environment in a way that facilitates profitable relationships with Western institutional investors and private companies.
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