Muhammad ibn Salman Al Saud and Vladimir Putin. Source: gazeta.ru
War and Vision 2030
As you know, in March of this year, a conflict occurred between the two largest oil producing countries, Russia and Saudi Arabia. Russia refused to reduce oil production in order to keep the price in the region of $ 50 per barrel, to which the Saudis responded with a full-fledged economic war. Initially, Saudi Aramco dropped selling prices for its own oil for Europe, the main consumer of Russian hydrocarbons. At the same time, the conditions for buyers among the Saudis were simply unprecedented: it was possible to pay for oil three months after the conclusion of the contract, while receiving up to $ 11 discount per barrel. This led in March and April to the fact that oil supplies from the Middle East to some ports in Europe increased two to three times due to a reduction in Russian supplies. Immediately, many analysts began shouting about the defeat of Vladimir Putin’s strategy, about the perspicacious Arabs and the imminent end of Russia's financial system.
Processing facilities of Saudi Aramco. Source: sharespro.ru
However, already in early May, the Minister of Finance of Saudi Arabia Mohammed al-Jadaan officially announced tough economic measures, to which the well-fed population of the state was not at all accustomed to. The crisis into which the kingdom’s economy is slipping, according to al-Jadaan, is unprecedented in scale. On this basis, VAT from July 1 rises to 15% (which is relatively small), and the individual monthly allowance of 1000 reais is also canceled. This amount at one time was supposed to just compensate for the previous five percent VAT, that is, the real financial burden on citizens increases immediately by 15 percent. points.
Vision 2030, a Saudi strategy that is unlikely to succeed in the new realities. Source: ajgalvez.com
Obviously, such unpopular measures undermine the ratings of Crown Prince Muhammad ibn Salman Al Saud, as well as jeopardize the Vision 2030 strategy. This innovative product is the brainchild of the Crown Prince and is aimed at diversifying the state’s economy, that is, avoiding total hydrocarbon dependence. This idea came to the monarch, either under the influence of world fashion, or from constantly jumping oil prices, but in the end he decided that by 2030 Saudi Arabia would not be associated with oil and gas. And with what? Saudis can do little on their own, they have to buy almost everything abroad, and no one really wants to work. For many decades, the state has brought up a consumer attitude to life among citizens, severely restricting them to the norms of Wahhabism. From the very beginning of the program, the ruling Al Saud family has placed severe restrictions on inviting workers from abroad. As a result, since 2017, at least 1 million migrant workers have left the country. In particular, if a company operating in the kingdom has more foreign workers than local workers in its state, it must pay a monthly tax of $ 107 each. The calculation was on attracting internal labor reserves, but there wasn’t much excitement. It was much easier for the average Saudi to not work at all, getting guaranteed payment from the state, than to go to low-paying and dirty work.
Muhammad ibn Salman Al Saud. Source: vesti.ua
And now, by 2030, the crown prince decided to remove the country from the "oil needle". Certain hopes are placed on tourism. But the first tourist visas to the kingdom began to be issued only last year, and there was no particular stream of people wishing to get acquainted with the specifics of the country. Firstly, law enforcement agencies seriously restrict the freedom of visitors, including the arrest for unauthorized filming. Secondly, with the cultural and entertainment program in Saudi Arabia, to put it mildly, not really. At least, in the usual sense for a European and an American: there are no night clubs, alcohol is strictly prohibited. In this sense, the neighboring United Arab Emirates is much more democratic. Therefore, the Vision 2030 initiative from the very beginning seemed a kind of adventure on which low oil prices seemed to put an end to. The Saudis simply will not have extra money for fundamental structural transformations in the near future.
The game is not according to plan
The budget of the kingdom is calculated from the average annual oil price in the region of 70-80 dollars per barrel, which in the current conditions seems fantastic. One of the provisions of Vision 2030 now seems anecdotal, according to which Crown Prince Mohammed bin Salman promised the country in 2020 a stable economy with oil at $ 30 per barrel. Moreover, the royal family is to blame for the modern dizzying peak in oil prices. First, she pumped up Europeans and Americans with cheap oil (they gladly filled all possible storages), and then a coronavirus struck, paralyzing the entire world structure of hydrocarbon consumption. And they have been spending much more in Saudi Arabia for a long time than the budget allows: for several years the country's treasury has been in short supply. If we compare the kingdom with Russia, then our state has one undeniable advantage in the form of a floating ruble exchange rate. In many respects, up to a certain point, our exporters benefit from a cheap ruble - it is easier to compete with foreign colleagues. In Saudi Arabia, the rial rate is strictly fixed, which makes the local central bank throw huge resources to maintain it during the period of cheap oil. This, by the way, may be one of the reasons why the accumulated reserves may not be enough for a long time, unless, of course, the Saudis let the national currency go free float. And again, an involuntary comparison with Russia as the main opponent in the oil war begs. The fact is that we are now far from a worldwide gas station, the share of hydrocarbon money in the budget does not exceed half. Initially, it was easier for our country to enter into a confrontation with the Saudis with their 90% dependence on oil (although 75% are said in the country itself).
Now the reserves of Saudi Arabia are at the level of 2011 and amount to 464 billion dollars. Budget costs must be covered by external borrowings, which, of course, are not unlimited. The kingdom also has tense relations with Donald Trump over the oil war with Russia. A sharp drop in oil prices to the Americans, of course, is beneficial, but only to a certain limit and a certain time. When all the storages were full, and their own oil production began to decline due to unprofitability, the Americans had questions for the kingdom. Trump does not need dozens, and sometimes hundreds of thousands of unemployed oil workers, inside the country.
When the ruling family became aware of the consequences of their reckless steps, throwing began. Obviously, hoping for the power of his word, Saudi Aramco announced that it would reduce oil production not to 8,5 million barrels per day, as required by the OPEC + collusion, but to 7,5. Oil, of course, won back something, but now the Saudis have cheap oil too, and they will sell it in smaller volumes. True, in this case a simple game on the nerves is not ruled out: no one in reality will reduce production. Additional risk factors for the kingdom, of course, are the raging epidemic in the country and the unpopular war in Yemen.
The Saudis pin certain hopes on the speedy exit of most countries from the pandemic and the rapid recovery of the economy. However, none of the analysts dares to make truly serious forecasts on the timing, which means that an atmosphere of uncertainty will prevail over the kingdom. Then unpopular measures will be taken in the form of further cancellation of part of social guarantees - clear signs of a final loss in the oil war with Russia.
Do not think that such consequences await exclusively the Middle East kingdom. Similar problems now have all oil-producing countries. Indicative in this sense is Norway. First time in stories They started selling the sovereign fund of this country in order to overcome the consequences of the pandemic and the collapse of oil prices. Norwegians did not resort to this either in 2008 or in 2014. The situation in this Scandinavian country is still relatively optimistic, but the very fact of opening the egg-caps is alarming. If Norway, which does not fight with anyone on the oil market and even does not enter OPEC, had to be tight in this situation, then what can we say about Saudi Arabia!