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The Saudi System And Why Its Change May Fail

Courtesy of ZeroHedge. View original post here.

Via Moon Of Alabama blog,

The Saudi clown prince Mohammad Bin Salman is an impulsive tyrant. But what accounts for his urge to purge the country of any potential competing power center? Why does he run a such an activist foreign policy? The answer might be Iran. Not Iran the country, but Iran the system.

Since the U.S. war on Iraq the sclerotic Saudi Arabia continuously lost standing in its region. The Iranian model gained ground. A decade later the authoritarian Arab systems were challenged by the so called "Arab spring". While the movements in the various countries -as far as they were genuine- have failed, they were a warning sign for things to come.

Saudi Arabia reacted to the challenges by moving away from a sedate, consensual run family business towards a centrally controlled, supercharged tyranny. The move allows for more flexible and faster reactions to any future challenge. But it also increases the chance of making mistakes. To understand why this endeavor is likely to fail one needs look at the traditional economic and social system that is the fabric of the country. The fate of the Hariri dynasty is an example for it.

Since Salman climbed the throne he has moved to eliminate all competition to his rule. The religious establishment was purged of any opposition. Its police arm was reigned in. First crown prince Murqrin was removed and then crown prince Nayef. They were replaced with Salman's inexperienced son. Economic and military powers were concentrated in his hands. During the recent night of the long knives powerful family members and business people were detained. The Wall Street Journal reports of a second arrest wave. More higher ups have been incarcerated. This round includes senior military commanders and very wealthy business people.

As the prison for the arrested VIPs, the Ritz-Carlton hotel, is fully booked, the next door Mariott is now put to use. Qualified staff was hired to handle the prisoners:

As many as 17 people detained in the anti-corruption campaign have required medical treatment for abuse by their captors, according to a doctor from the nearest hospital and an American official tracking the situation.

The former Egyptian security chief, Habib el-Adli, said by one of his advisers and a former Egyptian interior minister to be advising Prince Mohammed, earned a reputation for brutality and torture under President Hosni Mubarak.

After the torture reports spread due to employees of local hospitals, a medical unit was established in the Ritz itself.

My assertion in earlier pieces, that one motive of the arrest wave was to fleece the prisoners, has been confirmed. The arrested rich people are pressed into "plea deals" in which they give up their assets in exchange for better treatment and some restricted kind of freedom. The aim is to "recover" up to $800 billion in so called "corruption" money. Thousands of domestic and international accounts have been blocked by the central bank of Saudi Arabia. They will eventually be confiscated. But Saudi billionaires have long been looking for ways to park their money outside of the country. The accounts which were blocked are likely small change compared to their total holdings in this or that tax haven. Historically the recoveries of such assets is problematic:

Asset recovery programs never really go quite to plan. They are beset by obstacles — most often in the form of wealth squirreled away offshore and political infighting over wealth seized onshore.

Most likely, Saudi Arabia will obtain a sliver of these assets — say in the tens of billions of dollars — a useful, but temporary, gain. What happens after that depends on how Crown Prince Mohammed bin Salman re-sets relations with business.

The financial success of the MbS raids will be small. The financial damage he causes with his jihad against his own family members will be significant. It ruins his plans for attracting foreign investment:

“Half my Rolodex is in the Ritz right now. And they want me to invest there now? No way,” said one senior investor.

“The wall of money that was going to deploy into the kingdom is falling apart.”

One can not steal money from some people and then expect other people to trust assurances that such could never happen to them. MbS's big plans for Neom, a $500 billion artificial city financed by foreign investors, will fall apart.

To accuse princes and high officials of "corruption" is a fancy excuse. "Corruption" is how business is done in Saudi Arabia. It is tightly connected to the traditional ruling system. The king and his son are trying to change both:

Foreign investors tend to enter the Saudi market via partnerships with established business franchises or princes as they seek to exploit their domestic clout to navigate a complicated bureaucratic landscape.

The same goes for any state tender. To contract for building a road or public housing a company will have to find a prince or high official with the necessary clout. To get a tender signed it will have to promise, or pay upfront, a share of the expected profits. When the job is finishes it will need to come back to its protector to get its bill paid. No money will flow for the delivered work unless another bribe is handed over. Contracts are calculated with 40% on top to compensate for these necessary lubricants.

The systems works. The Saudi State has enough money to compensate for such distribution. The system is only problematic when a contractor delivers shoddy work, but can still bribe his patron into accepting it. Drainage man-hole covers in Saudi streets without the necessary drainage tunnels below them are a well known and despised phenomenon.

Rafic Hariri, the father of the Lebanese premier minister Saad Hariri, built a construction empire in Saudi Arabia by paying the right people. He knew how to work within the  system. He was also a capable manager who ran his business, Saudi Oger, well. He was also the Saudis man in Lebanon and did his best to fulfill that role.

His son Saad never got a grip on the business site. By 2012, seven years after Rafic Hariri had been assassinated, the family business in Saudi Arabia ran into trouble:

Almost a year ago, the Saudis began keeping an eye on Hariri’s company, which reeked of corruption. Several high-ranking officials – some close to Saad Hariri – were accused of theft and extortion. But Hariri could not find a solution to the crisis, nor was he able to restore the confidence that the company lost in the market.

So he began a major pruning operation, laying off lower-level employees without any indication of objections to their job performance. The dismissals did not even spare Saudi nationals, leading to widespread dissent.

The Saudis once treated the company with care, providing it with contracts in the region’s biggest oil economy. Now, the company is suffering from internal disputes and theft. It became closer to a scrapyard for the Kingdom.

Saad Hariri had the wrong contacts, bribed the wrong people and delivered shoddy work which made his company an easy target. He also failed to be a reliable Saudi asset in Lebanon. There the Shia Hizbullah gained in standing while the Sunnis, led by Hariri, lost political ground.

The Hariri company took up large loans to finance its giant construction projects for the Saudi government. But by 2014 oil prices had fallen and the Kingdom simply stopped paying its bills. It is said to own $9 billion to the Hariri enterprises. Other Saudi constructions companies, like the Bin Laden group, also had troublesome times. But they were bailed out by the Saudi government with fresh loans and new contracts.

No new contracts were issued to Hariri. No new bank loans were available to him and his bills were not paid. The Saudis demanded control over Lebanon but Hariri could not deliver. In July, after 39 mostly successful years, Saudi Oger went out of business. The Hariri family is practically bankrupt.

Hariri's two youngest children, 16 and 12 years old, are kept hostage in Saudi Arabia. After the recent trip to Paris his wife also returned to Riyadh. The French President Macron had intervened and Hariri was allowed to leave Saudi Arabia. But Macron failed (intentionally?) to free him from Saudi influence. Hariri's financial means and his family are under control of the Saudi tyrant. He is not free in any of his political, business and personal decisions.

Hariri is pressed to now drive a political hardline against Hizbullah in Lebanon. He knows that this can not be successful but his mischievous Saudi minder, the Minister for Gulf Affairs Thamer, does not understand this. His boss, MbS, believes that the whole world can and should be run the same way he wants to run his country.

Bloomberg's Erik Schatzker has long observed how business is done in Saudi Arabia. His recent observations at a nightly desert picnic explains how the wider al Saud family used to run the country:

It was almost midnight when the prince held a Majlis, a traditional Bedouin ceremony in which tribesmen come to pay their respects and ask for charity. A line of men in white robes and red-and-white Arab headdresses stretched into the darkness. One by one they approached, removing their sandals, bowing and handing him pieces of paper. Some recited poetry. The prince scribbled on each cover sheet and put the papers on a stack.

Saudi Arabia used to run on such patronage:

Saudi society is divided by tribe, region, sect, degree (or nature of religiosity), and class. Although these various groups are only rarely organized in formal structures outside of the state, many developed special connections with specific state bodies, turning the sprawling state apparatus into constituencies of sorts.

Middle East expert Steffen Hertog has aptly described how the Saudi state emerged in the oil era: leading princes carved out structures they could dominate; state institutions worked in silos and coordinated poorly; and networks of beneficiaries, contractors, and influence brokers populated various bureaucracies. The Saudi state expanded rapidly into an uncoordinated group of what Hertog goes so far as to call “fiefdoms.”

High up princes take care of lower ranking ones. Each has common folks, clans or whole tribes he is supposed to take care of. Obedience is bought by controlling the "social" spending that trickles down through this pyramid. The princes make their money by having their fingers in, or "taxing", all kind of state businesses. It is this money that sponsors their luxurious life as well as the benefits they distribute to lower folks. This was never seen as corruption as it is understood in the west. For decades these tribute payments were simply owned to the princes. They had a birth-right to them.

MbS "corruption" drive is destroying that system without him having a replacement. Saudi Arabia has been run as a family business. Decisions in recent decades were taken by consensus. Every part of the family was allowed to have its cash generating fiefdom and patronage network. The rule of King Salman and his activist son are trying to change that. They want to concentrate all business and all decisions in one hand. But what will replace the old system?

Mohammad bin Salman's view of the world is that of Louis XIV – "L'etat, c'est moi" – I am the state. In his own view MbS is not just a crown prince or the future king of the state of Saudi Arabia. He, and he alone, is Saudi Arabia. He is the state. He let this view known in an interview with the Economist in January 2016:

[W]e have clear programmes over the next five years. We announced some of them, and the rest we will announce in the near future. In addition to this, my debt-to-GDP is only 5%. So I have all points of strength, and I have the opportunities to increase our non-oil revenues in many sectors, and I have a global economic network.

As I remarked at that time:

The young dude not only thinks he owns the country, he actually thinks he is the country. He has debt-to-GDP, he has ten million jobs in reserve, he has all women of Saudi Arabia as productive factor and he has scary population growth.

Does the guy understand that such an attitude guarantees that he personally will be held responsible for everything that will inevitably go wrong with his country?

Saudi Arabia and its state apparatus have for decades been built on an informal but elaborate system of personal relations and patronage. MbS expects that he can take out one part of the system, the princes and businessmen, and the rest will follow from that. That he will be the one to control it all.

That is a doubtful endeavor. The ministries and local administrations are used to do their business under tutelage. Eliminating the leadership caste that controlled them will not turn them into corruption free technocracies. Seeing the exemplary punishments MbS hands out at the Ritz the bureaucracies will stop working. They will delay any decisions out of fear until they have the okay from the very top.

Tens of thousands of tribal and clan leaders are bound to and depend on the patronage system. The hundreds of people who sought audience with Alwaleed bin Talal at the desert picnic will turn whereto? Who will take up their issues with higher authorities? Who will provide them with hand outs and the "trickle down" money they depend on?

Another target of Mohammed bin Salman's activities have been the religious authorities. Some critical sheiks have been incarcerated, others are held incommunicado. The Salman "revolution from the top" extends into their judiciary role:

Historically, Saudi leaders have propounded the view that the sharia is the country’s highest law and the overall legal system operates within its bounds.

the domination of the religious establishment in law is ending. The king and crown prince are clearly favoring (and fostering) religious figures who repudiate some long-standing official views.

Bin Salman is purging the religious establishment, the military, the competing members of the families, the business people and the bureaucracy. He wants to run the state on his own. He demands the right to review any decision in the legal, business and foreign policy realm. He has authority to punish people responsible for decisions he dislikes. Under his system any personal initiatives will become extinct.

The country is too big for one person to control. MbS can not take all decisions by himself. No large system can work like that. The people will soon become unhappy with his centralized and unresponsive control.

That centralization does not work well is already visible in his failing foreign policy. MbS wants to be seen as the indisputable "leader of the Islamic world". His hate for everything Iran originates there. The Iranian system of a participatory and democratic Islamic state is a living alternative to the autocratic model he wants to implement in Saudi Arabia. The western model of a "liberal democracy" does not adapt well to the historic social models that are prevalent in the Middle East. But the Iranian system is genuine and fits the local culture. It is the sole competition he fears. It must be destroyed by any means.

But all his attempts to counter Iran (even where it was not involved) have been unsuccessful. Saudi interventions in Yemen, Qatar, Iraq, Syria and Lebanon have been disastrous. Over the weekend the Arab League delivered the usual criticism of Iran but decided on nothing else. Half of the Arab League states, including the powerful Egypt, are not willing to follow the aggressive Saudi course. Mohammed bin Salman's grand scheme of using Israel and the U.S. to fight Iran in Lebanon, Syria, Yemen and Iran itself is unraveling.

The Saudi response to the competition of the Iranian system is a move towards more authoritarian rule. This is hoped to allow for more agile policies and responses. But the move breaks the traditional ruling system. It removes the sensible impediments to impulsive foreign policies. It creates the conditions for its very failure.


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Sign up today for an exclusive discount along with our 30-day GUARANTEE — Love us or leave, with your money back! Click here to become a part of our growing community and learn how to stop gambling with your investments. We will teach you to BE THE HOUSE — Not the Gambler!

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