Saudi Arabia: The “Blessed” Coup

Published on June 21, 2017

Perhaps the most remarkable aspect of Mohammed bin Salman’s bloodless ascension last night as Crown Prince in the ouster by royal decree of his chief rival, the former Crown Prince and Interior Minister Mohammed bin Naif, was the careful steps taken to ensure a smooth succession: loyalties pledged by the other members of the Royal Family and the Ulema, timed on one of the holiest nights in Islam, within hours of Saudi Arabia’s stock market being included in the Morgan Stanley MSCI Index, and set against the geopolitical backdrop of the assumed support of US President Donald Trump.

*** As the newly installed Crown Prince, Mohammed bin Salman will also retain his position as defense minister and chairman of the Council for Economic and Development Affairs, as well as chairman of the council overseeing Saudi Aramco. MbS now directly controls the Saudi military save the somewhat emasculated National Guard, the internal security and intelligence services, as well as every agency and arm of economic and oil policy in Saudi Arabia. Only 32 years old, MbS will be ruling over the Kingdom for a long time when his father passes away.  ***

*** MbS’s unprecedented consolidation of power will translate into a doubling down on the Kingdom’s “whatever it takes” oil policy to stabilize oil prices around the $50 mark. The Saudi efforts are strongly supported by Russia and equally, though less explicitly, by China. MbS’s power play, coupled to his fierce anti-Iran policy and aggressive stance against Qatar, is likely to prod both Doha and Tehran into a more conciliatory stance on oil quotas or even output cuts. We would not rule out efforts as soon as September to engineer another round of OPEC/non-OPEC output cuts, if needed. ***

*** The unprecedented power move almost certainly would not have happened without an assumption in Riyadh of US support under President Donald Trump, who aligned the US behind MbS’s aggressive stance against Qatar and a strongly anti-Iran regional policy as shared counter-terrorism efforts. Barely within days of Trump’s visit to Riyadh, MbS was also quick to fly to Moscow where he met with Russian President Vladimir Putin to solidify the Saudi-Russian alliance on oil policy. ***

Saudi Oil Policy, and Regional Tensions with Iran

Oil prices, under heavy downside pressure, barely rose on the initial news of MbS’s consolidation of power, and have fallen even further since. But while the bearish overhang of US shale production remains a constant source of offsetting crude supplies, we believe on balance the bolstering of MbS power in the Kingdom and the high near term political stakes in stabilizing oil prices should put some support under oil prices, perhaps at or near current lows.

At the same time, the Kingdom’s highly aggressive regional policy against Qatar and Iran should over time put a geopolitical risk premium in oil pricing in tail risk threats to the flow of oil moving through Hormuz. The risks of a confrontation, intended or otherwise, leaves the oil-soaked region vulnerable to political or military miscalculation.

Just two days ago, the Saudis asserted Iranian revolutionary guards tried to attack a Saudi oil platform that no one other than the Saudi media believes to be true. But it does point to the escalation of tensions and the willingness of Riyadh to ratchet up its political rhetoric and threats, especially as the Saudis feel they have the support of the United States. This will also deepen the pressure on Qatar to make significant concessions, unless the US State Department can successfully intervene in the still evolving Trump Mideast policy.

But in the near term, Saudi Arabia will all but certainly be doubling down on its “whatever it takes” oil policy through the end of the year and into the first quarter next year period of the current nine month extension of the Vienna OPEC/non-OPEC output agreement. The consolidation of power and how much MbS’s political fate is tied to oil policy success means the Saudis will be willing to cut output more “if needed,” albeit coupled to a more assertive negotiating stance demanding the other oil producers must also join in with further cuts, especially Iran.

As though right on cue, perhaps in part to deflect some of the Saudi pressure, Iran has already called for further output cuts to ensure the vaunted “rebalancing” of the global crude oil market. The OPEC-non OPEC Technical Committee just met, noting high compliance to the output quotas, but warning any slippage will further delay the rebalancing. The next crucial meeting of the OPEC Monitoring Committee will be in July, in Russia, and then in September, before the full annual OPEC meeting on November 30, in Vienna.

And we understand China has been quietly lending its support to the Saudi and Russian efforts to stabilize oil prices around the $50 mark by increasing its crude oil imports by 13% in the first five months of this year. Most of the higher imports were to meet higher domestic demand, but the Chinese also diverted crude imports into SPR storage while also ordering domestic producers to cut output.

The Chinese have pledged continue support to Moscow and Riyadh on oil policy and are expecting to discuss further efforts to stabilize oil prices at the upcoming G20 meeting in July.

Near Term Political Stability

Saudi political stability, at least in the short term, is nevertheless ensured. Saudi television ran last night repeated images of the deposed Mohammed bin Naif pledging his allegiance to the new Crown Prince. Just days ago, the King had already stripped MbN of his power as Interior Minister over the Saudi Bureau of Investigation which handles internal criminal investigations. There is highly unlikely to be any opposition from other factions within the Royal Family.

The King also named his nephew, Prince Abdul Aziz bin Saud al Naif, as MbS’s successor to the Interior Ministry. Prince Abdul Aziz is the son of Prince Saud bin Naif, MbN’s full brother and currently the powerful governor of the Kingdom’s strategic Eastern Province, home of the Kingdom’s oil sector and the country’s minority Shia population. In effect, his appointment keeps the al-Naif clan in the inner circle of Al Saud power, but no longer a threat as a rival to MbS, but rather, now, subordinate and reporting to him.

The ouster of Naif was also undertaken on the symbolically important laylat al-qadr, or night of the final revelation of the Quran by the Prophet Mohammed, the holiest day of the holy month of Ramadan. The symbolism of the decree and ascension of MbS on the same night will not be lost within the Kingdom and wider Islamic community. The Ulema also lent its full support and allegiance to MbS as Crown Prince.

The so called “Allegiance Council” — created by the late King Abdullah to provide an institutional stability to the Al Saud succession, and comprising 34 descendants across the various branches of bin Saud — met in the Al Safa royal palace in Mecca last night to vote on the new succession. Some 28 members voted to endorse MbS as Crown Prince, with four voting no and two abstaining.

That six members of the Council dared vote non-support was a bit unexpected, but the endorsement of the Allegiance Council was never in doubt. Over the previous months, MbS had placed his supporters among many younger members of the royal family in almost all of the deputy governor positions in the Kingdom’s thirteen provinces. These deputy governors have equal votes in the Allegiance Council to the older Governors, many of them appointed by King Abdullah or who were sympathetic to MbN.

But as a concession to the other main branches within the Royal Family, and perhaps crucial to winning their votes in the Allegiance Council, the Kingdom’s Basic Governance Law was also amended so that the future King and Crown Prince cannot be from the same branch of the Al Saud Family. So aside from the exception (this time) for the new Crown Prince Mohammed bin Salman, there will be no further successions from father to son. The next Deputy Crown Prince has yet to be named, but he will be drawn from a different branch of the descendants of bin Saud.

The Riyal, the Budget, and Foreign Reserves

The timing of the Royal Decree ousting MbN as Crown Prince also came in a happy coincidence of the announcement the Saudi stock market would be included in Morgan Stanley’s MSCI Index. Expectations are that the inclusion should offset any speculative pressure on the riyal peg by ensuring an inflow of foreign capital over time as global asset managers buy Saudi equity to gain a targeted weighting.

In any case, the Saudi riyal peg is as political as it is economic, and the Saudi monetary authorities will defend the riyal against any speculative pressures at all costs if necessary. How sustainable the peg might be well down the road is an open question, as the Saudis will almost certainly be digging deep into their foreign reserves to cover a likely increase in the budget deficit.

Most of the austerity started in this year’s budget to prepare the Saudi economy for MbS’s National Transformation Plan have since been reversed with bonuses paid out to the Kingdom’s sprawling civil service, and almost all the subsidies eliminated have since been restored. There will also be an unreported jump in spending to pay off other members of the Royal Family for their loyalty as well as the anticipated boost to military spending in the wake of President Trump’s visit to Riyadh.

Little noticed as well, MbS has also tightened his grip on the Finance Ministry and the Saudi central bank. The long serving finance minister Ibrahim al-Assaf was replaced by Mohammed al-Jadaan, handpicked by MbS, while the head of the the Saudi Arabian Monetary Agency was replaced with another MbS protege, Ahmed Abdul-Karim al-Kholifey.

SAMA was also discreetly renamed the Saudi Arabian Monetary Authority, reflecting what is expected to be a shift to more of a domestic banking regulatory agency. Crucially, the talk in Riyadh is of the management of the Kingdom’s foreign reserves being transferred from SAMA to the Public Investment Fund, chaired by another MbS protege, Yasir bin Othman Al-Rumayyan.

 

 

 

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