Dwindling demand of oil, Saudis could rein in arms spending

US President Donald Trump shakes hands with Mohammed bin Salman at 2019 G20 Summit in Osaka, Japan (AFP photo/Saudi Royal Palace/Bandar al-Jaloud).

Saudi Arabia may be forced to forego new weapons contracts and delay already-agreed weapons purchases as a financial crisis grips the kingdom, experts predict.

The expected delay of new weapons deals could have long-term political repercussions for the country under the rule of Mohammed bin Salman, the crown prince and de facto ruler who has waged a bloody war with neighbouring Yemen.

Saudi Arabia is facing an unprecedented budget crunch because of the collapse of the oil markets and the global economic turmoil caused by the Covid-19 pandemic, which has reduced oil demand for the foreseeable future.

“I have no doubt, this is the end of an era. The era of the Persian Gulf having all this money is over,” said Bruce Riedel, a senior fellow at Brookings in Washington and 30-year veteran of the Central Intelligence Agency, who has served as an adviser on Middle East issues to several US administrations.

Plunging Oil Price

Oil price collapse came as the coronavirus pandemic obliterates global demand, furthering a price shock seen in March as OPEC and its allies, chiefly Russia, engaged in drawn out negotiations over production cuts.

In terms of the overall economic picture for major producers, Iran is the most dependent on oil, which accounts for 65% of its GDP, followed by Kuwait (60%) and Saudi Arabia (50%).

Saudi Arabia plans to draw down 120 billion riyals ($32 billion) from its cash reserves to cushion the economic blow from tumbling oil prices and the broader impact of the pandemic, finance minister Mohammed Al-Jadaan said Wednesday. In its 2020 budget, the Kingdom assumed an oil price of $60 per barrel.

Saudi Aramco reported a 25% fall in net income for the first quarter on Tuesday as the state-owned oil giant battles with a dramatic slide in crude prices and cratering global demand. The company said net income slid to 62.5 billion riyals ($16.6 billion) in the first three months of the year, down from 83.3 billion riyals over the same period in 2019.

Together the Hajj and the Umrah add $12 billion to Saudi Arabia’s GDP per year, which accounts for 20 percent of the country’s non-oil GDP and seven percent of total GDP.

Oil prices need to be maintained at about $85 a barrel for Saudi Arabia to maintain its budget, Riedel said. Instead, the kingdom has been siphoning off its reserves, which have dwindled from $750bn to $500bn over the past five years.

Weapons Spending

Saudi Arabia spent about $62bn (£51bn) in military expenditures last year, making it the fifth largest spender globally. Although that figure was less than in 2018, it still represents about 8% of Saudi’s GDP, meaning that the country spent a larger portion of its wealth on military expenditure than the US (3.4%), China (1.9%), Russia (3.9%), or India (2.4%), according to research by the Stockholm International Peace Institute. US leads arms sales to Saudis, followed by UK, from 2014-2018.

“If Saudi Arabia wasn’t by far one of the largest buyer of weapons you probably couldn’t count on the uncritical support of powerful western powers. One of the outcomes of purchasing weapons is that you’re buying relationships,” said Andrew Feinstein, an expert on corruption and the global arms trade.

In the US, Donald Trump has in the past pointed to Saudi’s proposed weapons purchases – and inflated estimates about its impact on US jobs – to justify his administration’s soft response to the murder of Jamal Khashoggi, the Washington Post journalist.

Britain sells more arms to Saudi Arabia than to any other country – more than £4.7bn since the kingdom began a bombing campaign against Yemen in March 2015 – and Boris Johnson has faced criticism for allowing sales to continue despite concerns that the UK has risked being in breach of international humanitarian law by aiding the Saudi campaign.

Read More   So, Why did Russia send Su-57 fighter jet to Syria?

Another expert, Gerald Feierstein, a former US ambassador to Yemen, said it would be easy for the Saudis to delay or cancel new weapons contracts, but that the Saudi government would likely have to continue maintenance contracts to keep its current force operable. Feierstein said Saudi Arabia has in the past sought to renegotiate payment schedules for weapons, stretching out payments over long periods of time.

Yemenis searching for survivors under the rubble of houses in the capital Sanaa after a pre-dawn Saudi-led air strike. Photograph: Mohammed Huwais/AFP/Getty

“Remember when Mohammed bin Salman came to the White House and Trump held up that cardboard graphic with $100bn in sales, that was all aspirational anyway,” Feierstein said. “Most of that stuff has never happened and it’s never been signed, it was just kind of pulled out of the air.”

Prince Mohammed does not only have the financial crisis to worry about. In the US, he is facing the prospect of Joe Biden, the presumptive Democratic nominee for president, winning in November. Biden has already said he would curb US arm sales to Saudi Arabia and called the current leadership a “pariah”.

Instead of announcing cuts in spending, Fontenrose suggested, the Saudis could wait for the results of November’s election and – if Biden wins – for the Democrats to force the spending reductions, which they would “pretend to grudgingly accept”.

“That would be a way for them to escape the political repercussions and maintain some of their leverage with the private sector,” she said.

Meanwhile, Riedel said that among the companies likely to be hardest hit is Britain’s BAE Systems,, given the company’s exposure to Saudi Arabia.

“BAE will be hit enormously. There are thousands of BAE employees whose jobs revolve around supporting the Saudi air force in one way or another. Sooner or later they are going to be told ‘we can’t pay your salary anymore,’” he said.

In a statement, a BAE spokesperson declined to comment on whether Saudi would reduce arms sales, but said that the company, which generates 13% of group sales from the kingdom, would continue to provide “support and training” to Saudi Arabia through 2022.

Rein in arms spending

Publicly, Saudi Arabia appears to be on a spending spree, even as it recently introduced an unprecedented hike in taxes and budget cuts.

The Saudi sovereign wealth fund, which is controlled by Prince Mohammed, is set to acquire a majority stake in the Newcastle football club, and has bought hundreds of millions of dollars in shares of Carnival Cruise ships and in Live Nation, the world’s largest concert and events promoter.

But Riedel and others believe the Saudi government will have little choice but to delay military spending, in some cases permanently.

Andrew Smith, at the Campaign Against Arms Trade, said: “I expect that they may in the short term put off committing to some larger purchases, like a new set of fighter jets, for example, which Britain has been negotiating for quite some time.”

© 2020, GDC. © GDC and www.globaldefensecorp.com. Unauthorized use and/or duplication of this material without express and written permission from this site’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to www.globaldefensecorp.com with appropriate and specific direction to the original content.

Be the first to comment

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.