Can Saudi's smoke and mirrors anti-corruption drive convince investors?

In late 2017, Saudi Arabia announced the detention of hundreds of business tycoons, including members of the royal family, in an anti-corruption purge. Saudi authorities said it was a long-awaited clampdown on a system of privilege that has made a select few super-rich in the kingdom. 

Then came reports that the campaign might be a ruse for Crown Prince Mohammad bin Salman (also known as MBS) to solidify his hold over the country by sidelining competitors and taking control of companies such as MBC, a popular Arabic broadcaster and the Saudi Binladin Group, the construction conglomerate. 

This week, Riyadh announced the end of the anti-corruption drive, but questions linger over what has been achieved. 

“For many years there has been a concern about corruption in Saudi Arabia. I have had businessmen tell me that minor princes from time to time grab pieces of their deals,” Robert Jordan, a former US ambassador to Saudi Arabia, tells TRT World.

“I think this young crown prince has used the excuse of fighting corruption as a means of settling scores and consolidating his power.”

The Saudi authorities say they have recovered more than $100 billion in assets — cash, real estate and companies — after settlements with 87 individuals. Another 56 cases have not been settled while eight people who refused to confess face charges.

No details were shared about how the wealth acquired by these individuals was illegal in the first place. It also remains unclear what legal means have been used for the settlements. 

The secrecy with which the deals have been struck without any public disclosure has raised more questions than it has provided answers. 

“There was no investigation by an independent authority. No process followed in the sense that no case was taken to court, no sentence made,” Marwa Fatafta, a MENA region coordinator for Transparency International, the corruption watchdog, tells TRT World. “The people were just handpicked and thrown in the hotel.” 

Journalist Jamal Khashoggi’s killing at the Saudi consulate in Istanbul in October last year is a “clear indication this anti-corruption campaign was politically motivated,” she says. 

The absence of an independent judiciary or any oversight mechanism gives Saudi rulers, including MBS, a lot of power over how they will use the seized assets.

“The royal family and the government are one, there isn’t any state structure as such,” says Fatafta. 

“They have monopoly over certain sectors. Through patronage they win contracts. It’s like having a big cake and then giving different cuts to members of the royal family.”

The arrests and detentions coincided with Saudi Arabia’s attempt to push through major economic reforms as part of its Vision 2030 programme, which will help reduce reliance on oil as its main source of income. 

Saudi Arabia, the world’s biggest oil exporter, earns about 70 percent of its export revenue, or $167 billion (according to 2017 figures), from the sale of oil and petroleum products. The increased dependence on hydrocarbons has blotted the size of government and stifled the private sector. 

Around two-thirds of all Saudis work for state institutions while 90 percent of private sector jobs are filled by expatriates, according to the Financial Times. 

Unemployment among Saudi nationals has gone up despite increasing opportunities for foreign workers. That’s partly because 45 percent of private sector jobs are in the construction sector, which mostly hires poorly-paid workers from Pakistan, India and Bangladesh.

Recently, the Saudi government banned certain businesses from hiring expatriates as a way to increase the share of Saudi nationals in the workforce. 

Under this so-called Saudisation model, retail outlets that deal in products such as watches, cars, medical equipment, mobile phones, and home furniture can only hire locals.

While Riyadh tries to attract foreign investment, a series of events attributed to MBS will make it difficult for investors to commit money to the country, says Jordan. 

“Foreign investment is partly discouraged by the actions of the crown prince in the Ritz Carlton episode, the Khashoggi episode, the Qatar blockade, the Lebanon fiasco, and of course the problem in Yemen,” he says. 

Internal issues, including the quality of education, also hamper Saudi attempts at diversifying the economic base. 

In the last few decades, the kingdom has done well on socio-economic indicators. Its child mortality rate has come down, and Saudi women have less than three children on average, down from seven in 1960, according to UN stats. 

But a consequence of that has been more women applying for a limited number of jobs. 

Female participation in the workforce increased between 2000 and 2017 from 10.1 percent to 19.4 percent but it remains below the Gulf Cooperation Council average and behind other countries on same income level, according to the International Monetary Fund. 

And much-needed jobs require investment in new industries, which requires foreign investment. 

A centrepiece of MBS’s Vision 2030 programme was an initial public offering of Saudi Aramco, the country’s national oil company, which after the initial hype never went through. 

“I have always felt the Saudis would not be willing to undertake the kind of disclosures that are necessary for public listing of the stock of Aramco. They don't want to disclose their reserve estimate, their sources and uses of funds,” says Jordan. 

The absence of transparency about how the Saudi government spends its oil revenue will continue to be a matter of concern for foreign investors, he says. 

“I think that’s a serious problem if you are an outside investor and you don't know if your business partner is going to be jailed the next day, you don’t know if someone is going to try to grab a piece of your deal and if you don’t know whether there is going to be a legal system that protects you.”