What’s Going on in Saudi Arabia?

Jacob L. Shapiro: Greetings everyone, welcome to another Geopolitical Futures podcast. I am Jacob Shapiro. Xander is with me again, hello Xander.

Xander Snyder: Hey Jacob, how’s it going?

JLS: I hope that you’re not in your car this time. I hope you’re in a more comfortable place.

XS: I am at my desk in my office this time.

JLS: That’s nice. Today, we’re going to head back to the Middle East. We haven’t talked about the Middle East in a podcast in a while and some crazy things have been happening in the Middle East lately. A lot of them are revolving, pretty much all of them actually are revolving around Saudi Arabia and what it’s been doing.

The big news of course is that there was basically a massive purge in Saudi Arabia. The Crown Prince has removed potential rivals and confiscated property and he has them locked up in a hotel or something like this. Besides that we’ve had Saudi Arabia, I guess they didn’t declare war on Lebanon but they claimed that Lebanon declared war on them and had the Lebanese Prime Minister come to Riyadh and announce his resignation in Riyadh and they claim that he is not a prisoner but he’s still there, at least until he goes to visit France which has invited him to Paris, which is very nice.

This of course all comes on the heels of Saudi Arabia basically organizing a diplomatic offensive against Qatar. That happened a few months ago now. It comes as the Islamic State has been defeated. It comes as Saudi Arabia has in an unprecedented way, opened up friendlier relations with Russia. We saw last month the King of Saudi Arabia go to Russia. That’s the first time a sitting monarch in history has ever gone to Russia. The word unprecedented is given too often but that was really unprecedented.

So a lot of things are happening in the Middle East, a lot of them revolving around Saudi Arabia. Xander, I know you have done a lot of work looking at the Saudi economy. What’s your perspective on some of the things that are going on right now and some of the things that the Crown Prince is doing from an economic perspective?

XS: Saudi Arabia is facing one main challenge when it comes to its economy, which is it has developed something that looks kind of like a client system. I mean a lot of people are ultimately very dependent including oligarchs and people in the royal family in Saudi Arabia, they’re all dependent on or want to continue receiving handouts and subsidies from the government. And a lot of these subsidies and handouts are funded by oil revenues.

And while Saudi Arabia has a much lower break-even rate per barrel of oil in terms of profitability goes, it’s something like between $10 and $15 per barrel it can start generating profit on it, so much of its budget depends on oil that there’s this thing called a fiscal break-even which is the point at which prices per barrel would need to be for Saudi Arabia to break even on its budget to support all of its expenditures. And that’s closer to like $80 or it was last time I checked. I think the World Bank puts out or I think it’s the I.M.F. puts these figures out, the fiscal break-evens.

So that’s kind of the context for all of the economic challenges and financial challenges that the Saudi royal family and government is facing right now. It’s why they have prepared the process to I.P.O. Saudi Aramco, which is the state oil company, in order to generate some more funds there. But ultimately, they are just pressed for cash right now.

JLS: Yes but I think one of the things that has gone overlooked in the purge is just how much money it looks like the Saudi government perhaps stands to recoup from some of the Princes and various people that it has thrown into jail in a fancy hotel. I think it was something like $800 billion or something like that, that’s probably too high of an estimate but we’re talking about hundreds of millions of dollars being added to Saudi state coffers as a result of the purge, right?

XS: Yeah and I’m still in the process of researching just how reliable that figure is because it is a number that has been floated by a lot of what are generally considered somewhat reputable news sources, the Wall Street Journal, or at least mainstream news sources like the Wall Street Journal, has mentioned this $800 billion figure. And it is kind of a big number to wrap your head around especially when you consider that, the purges are not you know tens of thousands of people. It’s just been really a handful, something like I think like maybe ten, twenty people have actually been arrested, purged from their prior position.

So that’s a very big number that the Saudi government is looking to collect from a handful of individuals. One of the questions outstanding there is you know aside from one, does this amount of money actually exist and is it possessed by such few, such a low number of individuals, is how much of that if it’s available is actually overseas right now which would be obviously harder for Saudi Arabia to get its hands on, then if we were are all domestic. So I’m still in the process of following up on some of those figures but it seems like Mohammed bin Salman and his father, the King, stand to gain some degree of financial benefit from these purges.

JLS: And I think one of the things to point out here is that, you did a very good job of sort of laying out Saudi’s domestic troubles and how that relates to the economy, but one of the reasons Saudi Arabia has been burning through so much money so fast is because it has basically been spending money all around the region to try and realize its strategic objectives.

So even though the Saudis have been buying advanced military equipment from the United States for a long time, there’s a big difference between having advanced military equipment and being able to use that in a particular way. And Saudi Arabia has not shown that it is willing or wants to really use that military equipment and to commit soldiers to conflicts. The conflict that it’s probably most involved in is Yemen and there it actually is doing stuff but in terms of what Saudi Arabia did in Syria to try and bring down the fall of Assad, it was mostly supporting various proxy groups. The millions of dollars that it gives to Egypt to keep Egypt financially solvent, again another thing that helps buy Egyptian loyalty, allows Saudi Arabia to project more influence in the region than maybe it actually has.

I think one thing that has really driven this home for me is a couple months ago, we remember that Saudi Arabia was able to marshal together this impressive Arab coalition against Qatar. And you know Saudi Arabia and Qatar have sort of not seen eye to eye for quite some time and Qatar has played a lot of different sides in the Middle East that Saudi Arabia doesn’t necessarily like. We know that Qatar has been a supporter of political Islam and groups like the Muslim Brotherhood throughout the Middle East. We know that Qatar has forged if not a close relationship, a more cooperative or open relationship with Iran which is an anathema to Saudi Arabia. We also know that Turkey and Qatar have a closer relationship and Saudi Arabia and Turkey don’t always see eye to eye.

So Saudi Arabia marshaled this huge you know diplomatic initiative of GCC states and Egypt and basically tried to completely diplomatically isolate Qatar. Flights that were in the air from Qatar Airways that were supposed to land in some of these countries literally couldn’t land in some of these countries anymore. They had to find new places to go.

But we’re a couple months later and what we see is that even though like Qatar has definitely faced some problems since then, it had to dip into their reserves and spend about $38 billion in order to weather it. But Qatar has not bent, Qatar has not signed onto any of Saudi Arabia’s demands, it has not really gone forward and has not really made a major priority of making itself right with Saudi Arabia and the rest of the Arab world.

When they were running out of food in that first 48-hour shock period, Iran and Turkey helped Qatar bring food to the country and ever since then, they’ve been basically ok. And they are finding ways to get around all of this other stuff. The reason I bring this up is because it seems to me that even though Saudi Arabia has been spending all of this money, its initiatives are basically meeting with failure. It really didn’t get what it wanted out of the civil war in Syria, the outcome that it wanted didn’t come to pass. It is not nearly as influential in Iraq as Iran is. And now I think we can say that its diplomatic offense against Qatar really didn’t work. It has not been able to make Qatar feel enough pain in order to change its behavior.

And all of this I think portends very bad things for how Saudi Arabia is going to deal with Lebanon. It looks like Saudi Arabia now is going to try and isolate Lebanon. And here I think that Saudi Arabia it has more that it can do to Lebanon then perhaps it could’ve done to Qatar. Something like 16 percent of Lebanon’s GDP comes from remittances and a lot of those remittances are coming from Saudi Arabia and from the Gulf States. At the same time though, when you think about Saudi Arabia’s other moves, it just has not been able to move the needle the way that it wants to.

So what do you think of that hypothesis, Xander? Do you think that it’s too early to say that the Saudis diplomatic blockade of Qatar failed? Do you think there’s still more time to sort of see if it’s going to pan out or do you think this is really a sign of Saudi weakness and that we should take from that example of Qatar that whatever Saudi Arabia wants to do in Lebanon it’s probably not going to be able to happen?

XS: I think one way or another it’s a sign of Saudi weakness. I mean the first question that comes to my mind is and I know you’ve been digging into the financial numbers for Qatar a little bit more than I have recently and you mentioned the $38 billion that they had to spend from their fund, has that spend continued or has it abated since the first two months or so?

JLS: It’s not clear. We know that they sort of announced that you know in one bit that is what has been spent. We can say that there’s still $35 billion in national reserves, we can say that there’s a sovereign wealth fund that is worth about $300 billion and about $180 billion of that is liquid. We know that Qatar also brought back about $20 billion from the Sovereign Wealth Fund’s investments back in mid-October, so it maybe appears like they’re facing spending more money.

But at the same time, they are signing business deals with Iran, they are signing business deals with… actually I should take that back excuse me they are signing business deals with Turkey, I am sure that they are looking into deals with Iran and they are also trying to establish direct shipping routes through places like India and Oman or Pakistan or places like North Africa.

So you know, Qatar has LNG exports, it has something that people are going to want to buy and I think that the shock of what Saudi Arabia did maybe cut off some of their sort of tried and true ways of working but at the end of the day like Qatar does have a product, it has to figure out how to get it all over the place. And unless Saudi Arabia is literally gonna blockade Qatar, I am not sure how they can stop them.

XS: Yeah so I really do think this is a sign of Saudi weakness. And the reason I asked that question about Sovereign Wealth Fund burn is because even if they do need to keep spending that money, the fact that they’ve been able to stay afloat so you know this long in face of, in opposition to Saudi initiatives and that they have two other regional powers as patrons helping them through this time, means that even if they need to spend more cash, it’s a sign that Saudi Arabia is not able to even by marshalling all of the allies and diplomatic levers that it has available to it, it can push you know Qatar to bend to its will.

So that doesn’t particularly bode well for Saudi power in the region if it can’t even push Qatar to you know accede to its demands. Let alone Yemen, who as you mentioned if there’s one country that Saudi Arabia is more involved in militarily its Yemen. Primarily, as I understand it, they have a greater presence in the air than you know on the ground. And even with the level of intervention that Saudi Arabia has in Yemen, it’s still kind of bleeding them dry money wise. I mean back in I think it was April or May, a letter was, an email was leaked, well maybe the email was leaked later but it was from April or May where the Crown Prince was saying something along the lines of “you know really look for a way to get out of Yemen, this is just costing us too much money.”

So even when it does apply the military resources it has available to them that it receives through funding from the United States or its allies, it’s still really hard from them to even keep a relatively small-scale conflict waged very close to its own borders. Let alone project power somewhere far more distant in the region.

JLS: Right. And the other thing that Saudi Arabia has really failed to do, is it has failed to get outside powers to sort of see the world the way Saudi Arabia sees it. The United States for example has affirmed its support for Lebanon, so has the European Union. The United States still has a fairly cooperative relationship with Qatar in spite of everything that Saudi Arabia has done to Qatar. I think this may be one of the reasons that Saudi Arabia is reaching out to Russia.

You know Saudi Arabia has known for a couple years now, really ever since the United States signed the Iran nuclear deal, that the United States and Saudi interests were diverging a little bit. And even though there has been a little bit of a summer romance between the Trump Administration and Saudi Arabia, I think you’re still seeing some of those interests diverge. And so that creates this interesting situation where you have Saudi Arabia reaching out to Russia and Russia in turn reaching out to Saudi Arabia, coming to agreements on supplying them with air defense missiles and other things like that.

So you have Saudi Arabia and Russia working together in some ways, which Russia has been working with Iran, which is Saudi Arabia’s enemy. And Saudi Arabia has always been in the U.S. camp but now Saudi Arabia is talking to Russia at this complicated time. I think you were looking at some stuff related to Russia that might dovetail some of this, particularly in the relationship with the United States.

XS: What are you referring to specifically? I’ve done a lot of looking at Russia lately.

JLS: Of course you are. (laughs) I didn’t set you up with a big enough softball there. I was talking about the things that you’ve been looking at in South Ossetia.

XS: Oh right yeah. The first thing that people always ask when I mention South Ossetia is what is South Ossetia? It’s such a small region in a part of the world that people are already generally so unfamiliar with. I think you know, South Ossetia only has a couple hundred thousand people in its population, that it just doesn’t seem like it could possibly be important, but it is.

South Ossetia is a breakaway region in the country of Georgia. South Ossetia claims it is an independent state, almost no one else does except for Russia. Russia supports South Ossetia because in the early 90s when the Soviet Union fell, there was sort of an emergent Georgia nationalism that wanted to fold some of these regions of Georgia with different ethnicities that had historically been closer to Russia into a single, new unified Georgia. And what remained of Russia after the fall of the Soviet Union, wanted to retain to as much power as it possibly could and saw a nationalist Georgia as a threat to it.

So it supported South Ossetia and another breakaway region called Abkhazia also within Georgia in a number of different wars throughout the 90s and again in 2008 when Russia intervened more directly and invaded Georgia. Why does Russia care so much about this little tiny region in Georgia with a couple hundred thousand people in it? Well a lot of it comes down to geography.

The Caucasus is an area defined by two mountain ranges, the Greater Caucasus and the Lesser Caucasus and the Greater Caucasus is a very rugged mountain range that spans from the Black Sea to the Caspian. And when you go just north of the Greater Caucasus, it very quickly becomes a flat plain right into the center of Russia. There’s a lot of agriculture but importantly once you get past this line that runs from, I am forgetting the names of the cities now damn, Astrakhan, Rostov-on-don, it’s about a 400-mile stretch. Once you get past that, it’s just like a clear way to the middle of Russia.

So the Greater Caucasus is sort of like a protective barrier for Russia and Georgia sits just south of that. And South Ossetia sits very close to a strategic highway that runs through the Greater Caucasus which is one of the few ways to get through it. So it seems so inconsequential but it’s actually one of the main ways that Russia could be threatened by another potential power if they are coming south from like more in the Middle East area as opposed to from Western Europe.

JLS: Yeah and I think people don’t realize this enough and if you have the capability of looking at a map while you are listening to us, it might be good to open one because you were talking about Georgia, Georgia shares a border with Turkey. Iran does not share a border with Georgia but Iran shares borders with Azerbaijan and Armenia, both of those countries share a border with Georgia.

So when we think about Russia’s engagement in the Middle East, this is not the same as when the U.S. engages in the Middle East and it goes all the way across the ocean and is dealing there to hit radical Islam and to help shape the balance of power in such a way that it’s beneficial to U.S. interests. Russia likes to do that too and part of what Russia is doing in the Middle East is to cause problems for the United States and to try and create leverage in separate negotiations with the United States.

But Russia also has very real interests in the Middle East. Russia really borders, I can’t say that Russia borders the Middle East maybe per se. But the Caucasus is sort of that, if you get through the Caucasus, you are right smack dab in the Middle East. And Russia has historic relationships going back a long way with Turkey, a long way with Iran.

In some ways, Russia and Saudi Arabia are perhaps more, their interests line up more now than they ever had before. Because while Russia does cooperate with Iran right now, that relationship is very fraught, and they have competition in Central Asia, in Afghanistan, in the Caucasus. Russia’s competition with Turkey is even more pronounced. They compete in the Caucasus, they’re gonna compete because Turkey can shut off the Bosporus if it wants the Russian ships. Turkey also when it is strong throughout history projects power into the Balkans and this is a place that is a Russian sphere of influence.

So on the one hand the things that Russia is doing in places like Syria is about its relationship with the United States. But if you look at it from another point of view what Russia is doing in the Middle East is intimately connected to Russia’s overall national strategy. So a place like South Ossetia you might not think of the Middle East when you think about it, but really all of these things are connected aren’t they?

XS: Yeah and I think you asked me about what was going on in the Caucasus and I started talking about geography. So I’ll answer your question, it’s just, it’s important context to understand why any of this is actually important at all.

Last bit of context I’ll mention is that in ’08 like I said Russia invaded Georgia and it was just kind of assumed that Georgia has been turning increasingly pro-West and most of the world thought that the U.S. was gonna, and Georgia thought as well that if it got into a war with Russia, the U.S. would support it. And it kind of didn’t and it was very much a wake-up call to the rest of the world, that one: that Russia was back and more powerful than people thought it was and two: that U.S. interests and Georgia’s just really aren’t akin to Russian interests in the Caucasus. So there’s a mismatch and Russia, its power trumps in that area because it is there and the U.S. isn’t.

So what we’ve seen in the course of the last week or so are a couple of things related to Georgia and the South Ossetia which is why you brought this up, one of which is a U.S pledge to give about $100 million and I think 40 or 50 military advisors to Georgia to help support its military training and its defense. And that you know it’s not groundbreaking, it doesn’t change the world. But it certainly makes you raise an eyebrow because between you know again 2003 or so when a pro-Western President was elected in Georgia until 2008 when Russia invaded, it was getting closer and closer to the U.S. and that kind of worried Russia and that’s part of the impetus for the invasion.

So it’s like ok well you know the U.S. obviously doesn’t have the same degree of interest in Georgia as Russia does so but it’s gradually beginning to get involved again. And then a couple of days after that, even though best as I can understand right now it was a planned meeting between the President of the semi-autonomous state of South Ossetia and Vladimir Putin, it was announced that you know they were gonna enhance economic and security ties between Russia and South Ossetia. And South Ossetia was calling for a more fortified border so basically to wall off its borders from Georgia. And to just kind of secure its own territory a little bit better, you know implying of course with Russia support. So even though this meeting was planned, it very much, reading between the lines here, seems kind of like a tit for tat response from Russia to the U.S. saying ok if you’re going to involved you know we have this lever that we can pull, don’t forget this.

JLS: Yeah and ultimately this all goes back to, in some ways it all goes back to Georgia, as you sort of said. Russia really sort of returned to history, when it invaded Georgia. And when the United States didn’t come to Georgia’s aid the way that Georgia thought it was going to, it opened up this idea that Russia was going to ascend again and I think one of the ways in which this ended up expressing itself goes back to Syria.

The United States said that, you know it was the Obama administration, that said that there was a red line in Syria and that if chemical weapons were used, the United States was going to strike the Assad regime. Well chemical weapons were used and the Obama administration backed down from that. It didn’t end up doing that. I don’t think it’s a coincidence that a couple months later, when things that basically Russia annexed Crimea and things started going haywire in Ukraine.

Now what happened in Ukraine obviously was a revolution and it was a failure on Russia’s part. They did not have the resources perhaps that they thought they had and instead of being able to engineer some kind of pro-Russia situation in the Ukraine, what ended up happening was that a pro-Western government came in control of Kiev. And you know just a small sort of eastern part of separatists were broken off and that’s the frozen conflict that we have here.

But I say that just to say that when you think about sort of the massive circle that’s going on here, you know things happen between Russia and the United States and then things are also happening in the Middle East and eventually the things that are happening in the Middle East and the competition that is happening between the United States and Russia starts to converge.

I think one of the interesting things that people aren’t thinking about right now though is that if you look over the long term, just in terms of what’s happening in the Middle East, the United States and Russia actually may have more in common than they do in other parts of the world. Certainly, this is not your old Cold War situation where it’s a zero-sum game, where the U.S. has its allies and Russia has its allies and they are trying to fight against each other.

I think one of the things that the Saudi-Russia emerging friendship tells us is that both Russia and the United States are hoping the Middle East settles into a kind of uneasy competition where there isn’t one country that can really ascend or become more powerful than all the others. Because that presents serious problems both for the United States and for Russia. I think some of those problems are actually in the Caucasus like you talked about.

XS: Yeah I think that’s entirely right. I mean in a way I think the U.S. would really love to go back to 2002 version of the Middle East where there is a powerful Iraq to you know balance off against the other states and now that ISIS has been defeated and the competition is really beginning to emerge in Syria against or between rather Turkey and Iran and then to a lesser degree Russia and Saudi Arabia. It really kind of benefits both the U.S. and Russia, to just have them all fight each other and not have to worry about another major uprising from a transnational Jihadist group that risks completely overthrowing the balance of power in the region.

So I mean you just wrote a Reality Check on this, I think it was yesterday or two days ago, discussing how Russia’s approach right now, it’s emerging but what we’re seeing is a strategy where Russia attempts to be closer to all of the major Middle Eastern powers than they are with one another. So seen through this lens, the Saudi King’s trip to Moscow makes sense despite Russia’s continued cooperation with both Turkey and Iran right? Because none of these powers particularly, none of these Middle Eastern powers particularly like one another.

And an item that we caught this morning that we threw on our watch list was about Turkey coming out and saying you know the U.S. claims that if Turkey invades Afrin, it will fight Turkey in order to defend the Kurds and its allies there. And we dug into that a little bit and it looked like Turkey was really very much misrepresenting something that was actually said by an American Colonel who just said you know we’re going to support allies who have been fighting ISIS. And you know it was stretched quite a bit from what was actually said.

And again this is very much a reading between the lines thing but it really kind of seems like Turkey is frustrated that up until this point, there have been all these talks in Astana between Russia, Turkey and Iran. They’ve agreed on de-escalation zones, some of these have been very advantageous to Turkey, it’s been able to send military forces into Idlib, it had its eyes in the northwest of Syria in Afrin where a major Kurdish presence is.

And now the U.S. and Russia are working together and kind of to the exclusion of Turkey and Iran and it definitely seems like Turkey is concerned that whatever deconfliction agreement that is being talked about between the U.S. and Russia right now will not necessarily be in Turkey’s interests. We don’t exactly have an idea of what or where those deconfliction zones would be. But we can assume if Turkey’s or we can infer rather if Turkey’s visibly upset about this collaboration then it’s probably not going to be to its advantage.

JLS: Yeah and I think that’s one of the key takeaways from all of this which is that if you’re thinking about the Middle East and if you’re thinking about you know obviously at GPF, our long-term forecast says that Turkey is gonna rise as a more significant power, that you know Iran is right now doing well but ultimately this is sort of Turkey’s historical sphere of influence and they are going to return to it.

One of the bench marks that you might have for that kind of forecast coming true is whether or not Turkey can establish some kind of independence of action because even Turkey and even Iran right now are really forced to react sometimes to things that Russia or the United States or outside powers are doing in the region. They still have a very limited sense of what they can do. You know Turkey feels threatened by the Syrian Kurds. Afrin is a pretty small place and is not going to be very easy to defend for the Syrian Kurds, and yet Turkey hasn’t done anything about that and you know raises a large storm when it feels like the United States is pushing back against its ability to do that.

So the Middle East for really hundreds of years now has been sort of the playground or chess board of outside powers. And even though I think we are beginning to see Middle Eastern countries develop to the point that they have their own power, that they are able to resist a little bit, I think we are still fundamentally in that paradigm. And within that paradigm, Saudi Arabia is the country that is probably the least stable right now. We already saw sort of Syria fall apart, Lebanon is sort of a basket case of instability, I don’t even really think of Iraq as a country anymore.

But of the countries that have held together since all of this Arab Spring stuff started, Saudi Arabia is really the one that I think is the weakest. And I think one of the reasons you’re seeing it act out in so many different ways, is that it is looking for solutions to problems that aren’t necessarily there. And as we go forward, I think watching Saudi Arabia and whether it’s able to get a lid on some of this stuff or whether it’s going to continue to be battered and whether that’s going to continue to manifest an internal instability in the kingdom is really one of the major questions for the next year to three years.

XS: So for all you listeners out there, if these are subjects that are interesting to you, be sure to check out Jacob’s Reality Check from November 16^th, it’s called “Saudi Arabia, Russia: Delivering Missiles, Delivering Promises of Cooperation” and it lays out this strategy that we’ve talked about only briefly here in much greater detail.

If the strategic importance of the Caucasus is something that you want to read a little bit more about, we published a Deep Dive on this back on October 19^th, this one is only available to subscribers, it’s called “The South Caucasus’s Untamed Crossroad of Empires” and again in our Deep Dives, much more in-depth analysis, well not analysis but much more in-depth historical context provided than we can in the much shorter Reality Checks so check out both of those pieces.

JLS: Alright, well thanks Xander. It’s always a pleasure talking to you and to all our listeners, we’ll see you out there.

XS: See you next time.