How much power does Saudi Arabia wield over the global economy?

Up until Saudi journalist Jamal Khashoggi‘s killing on October 2, the Saudis were on a charm offensive – building brand new megacities, investing in tech start-ups and letting women drive.

The world’s biggest oil exporter did everything it could to convince the world it was serious about change, and investor confidence was growing. This plan for the future was the brainchild of Crown Prince Mohammed bin Salman who was feted as a reformer.

But then Khashoggi was killed and now Saudi Arabia and its crown prince are facing international scrutiny. At an investment conference this week the crown prince rejected any idea his economic ambitions would be curtailed. But as things stand Saudi Arabia’s greatest strength, oil, is also its greatest weakness.

So, how seriously should the world take Saudi threats to curtail oil output and how much influence does it really have over the global economy?

Saudi oil is “actually quite important, particularly in the short-run,” according to Chris Garcia, CEO of Vicar Financial and former deputy director of the US Department of Commerce under US President Donald Trump. “This is why when we look at some of the potential retaliation tactics that the Saudis have threatened, we have to take them seriously.” 

When we look at some of the potential retaliation tactics that the Saudis have threatened, we have to take them seriously.

by Chris Garcia, Vicar Financial

“It’s the short-run repercussions of the Saudis cutting [oil] output that would send shockwaves throughout the global economy, but I would say that’s leverage that would diminish in the long run unless they diversify as the world continues to diversify itself from its energy resources,” explains Garcia. 

Saudi and Silicon Valley

From Riyadh to San Francisco, oil money from Saudi Arabia is being channelled into US-based tech start-ups. This kind of financing is known as venture capital.

From Saudi’s point of view, these kinds of investments can hedge against a potential decline in the demand for oil in the future. That’s because the start-ups are tipped as having long-term growth potential.

Saudi’s sovereign wealth fund is called the Public Investment Fund, which traditionally had a strategy of low-risk investments. But everything changed in 2016 when the kingdom’s sovereign wealth fund invested $3.5bn in Uber, making it the largest single investment ever made in a privately-held company at the time.

Since then, the kingdom became the largest investor in the $93bn SoftBank Vision Fund, which is the biggest fund ever raised in Silicon Valley.

Led by Masayoshi Son, Japan-based Softbank has changed the landscape of venture capital according to some reports. Rival venture capital firms worry SoftBank could be pushing up valuations and pushing them out of the market

But since Khashoggi’s killing, questions about morals and ethics are being raised.

As such, Saudi money could be viewed as a liability by start-ups and their customers. 

So, how much damage has the Khashoggi affair done to the attractiveness of Saudi money in the tech world?

“It’s difficult to say at the moment but the likelihood is it’s going to have some notable impact on companies that will accept the Vision Fund money and other seeders and whether they’ll continue to stay in the Vision Fund,” explains Amir Anvarzadeh, from Asymmetric Advisors.

As far as Saudi’s contribution to the Vision Fund, “It’s a big contributor, it’s not so easy to find alternatives if they pull out – but I don’t think Saudis will pull out. It’s in their benefit to stay in it … the Saudi government wants the Vision Fund to succeed.”

Deals or no deals?

The Future Investment Initiative conference, which took place in Riyadh this week, was intended to show off Saudi Arabia’s investment plans. A number of business and government figures pulled out of the conference amid global outrage over Khashoggi’s death.

But there were plenty of others who did attend. There were government delegations from China, Russia and African and Middle Eastern countries.

The conference is bin Salman’s brainchild, created to draw investment and diversification into an oil-dependent economy that needs to find new ways to provide millions of jobs and it’s those opportunities that attendees couldn’t ignore. 

Naeem Aslam, chief markets analyst with Think Markets, offered his views on how integrated Saudi Arabia’s markets are into the global financial system.