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Can Saudi prince change its biz model?

By Michael Jansen, Dec 29 2017, 0:22 IST

Since early November, Saudi Arabia's crackdown on corruption has solidified the grip of Crown Prince Muhammad bin Salman while eroding the country's decades-old business model. Some of the 11 princes who were dragged from their homes in the middle of the night and forcibly checked into the capital's luxurious Ritz Carlton Hotel could have formed a powerful family group opposing the hegemony of the crown prince. Chief among them were Miteb bin Abdullah, son of the former king and head of the national guard, and Alwalid bin Talal, a multi-billionaire businessman.

Four ministers, scores of ex-ministers, officials and businessmen were among the nearly 200 other detainees who were presented with files detailing their involvement in corrupt practices. At least 1,900 bank accounts, holding assets worth $800 billion, were frozen with the aim of retrieving $100 billion in illegally got gains.

While some detainees have been set free without payment, officials dealing with the rest claimed that most of them would give away large sums in excha ­nge for freedom. The first batch of 23, including the head of Saudi
telecom, was released this week; more releases are expected.

The exercise amounts to no ­thing less than kidnapping and extortion on a grand scale. Since there is no transparency, no rule of law and no court of appeal, potential investors will hesitate to put their money in projects in the crown prince's plan to diversify the economy and reduce its dependence on oil.

The crown prince devised this method of dealing with men made wealthy by the country's longstanding business model, which was built on commissions, nepotism, and graft. Corruption is the main obstacle to doing business in Saudi Arabia. Seizing funds from the wealthiest sector of society is not the remedy because corruption infects every level of the administration.

A main cause of this infection has been the requirement that foreign businessmen needed Saudi partners to operate in the kingdom. While this requirement has been limited to certain types of businesses, this practice made many active and "sleeping" Saudi partners millionaires and billionaires and encouraged non-Saudis to obtain Saudi citizenship.

The crown prince has also sought to use the corruption campaign to secure his political aims. Lebanon's Prime Minister Saad Hariri, whose construction company filed for bankruptcy last summer, was summoned to Riyadh and ordered to resign from his post. All Lebanese communities protested and united in calling for his release. After intervention by French President Emmanuel Macron, Hariri, who holds Saudi, Lebanese and French nationalities, was allowed to travel via Paris to Beirut where he, eventually, resumed his job without meeting the political demands of the Saudis. The prince's ploy backfired.

The second case involved Palestinian billionaire Sabih al-Masri, chairman of Jordan's largest bank and a major investor in hotels and telecommunications in the kingdom and the Palestinian territories.

During the 1991 US-led war on Iraq, Masri, who was already wealthy, made a fortune selling food to US forces in partnership with the Saudis. Masri, who has Jordanian, Saudi and Irish citizenship, was released after reportedly reaching a financial settlement. An Israeli source put a political spin on Masri's detention, claiming he had been held to put pressure on Jordan's King Abdullah and Palestinian President Mahmoud Abbas to tone down condemnation of Donald Trump's recognition of Jerusalem as Israel's capital.

If this is true, holding Masri also backfired. Abbas has not only castigated Trump but also cut all ties to his administration and refused to accept the US as a mediator in peace talks with Israel. Jordan voted for the UN General Assembly's resolution calling on Trump to rescind his Jerusalem declaration.

The practice of pairing foreign entrepreneurship and expertise with Saudi partners goes back to the founding of the kingdom in 1932 by Abdel Aziz ibn Saud, a canny tribal leader whose followers were largely illiterate tribesmen fired by their puritanical faith to seize and hold most of the Arabian Peninsula.

The business model was evolved after oil was discovered in 1938 when a US consortium, Aramco, took over exploitation and export. In 1950, the Saudi government was granted 50% of the profits from oil sales and in 1980 obtained 100% ownership, although foreign partners have continued to operate the company.

Since the tribesmen did not have the background needed to run a state, foreigners were hired to fill the void. Syrians, Egyptians, Lebanese and Westerners flocked to the kingdom, but over the past half century, thousands of Saudis have attended school and university and received training in the professions, reducing dependence on foreigners in skilled fields.

Most Saudis are employed in the public sector, while private sector and menial jobs are filled by expatriates from the West, West Asia, the Indian sub-continent and the Philippines. In the kingdom, there are 23 million Saudis and 8.4 million foreigners. As part of his effort to reform the business model, Crown Prince Salman is pressing young Saudis to fill jobs in the private sector while retaining expatriate technical and manual labour.

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