It was a busy Saturday in Riyadh that started with a phone call between President Trump and King Salman and ended with the detaining of 11 princes and 38 current or former officials in a corruption probe. Along the way, the Saudi’s intercepted and shot down a missile fired from the Iran-sponsored Houthi rebels in Yemen that targeted Riyadh’s international airport.
We’ve had a chance to consult with friends in the region as well as those closely monitoring events in Washington. Here is our analysis of Saturday’s developments.
Trump Tweet Pushing US Listing for Aramco IPO
If the Saudis are to do the Aramco IPO in 2018, they will need to make a decision on its listing by the end of the year. As a result, we believe they are in the final stages of several key decisions on Aramco.
The President’s senior advisor Jared Kushner made an announced trip to Riyadh on October 26 and 27 accompanied by two senior NSC officials. While we doubt this was the main focus of his trip, the Aramco IPO almost certainly would have been on a list of 3-4 topics that were discussed. We believe that the Saudis informed Kushner on the trip that a US listing was not likely.
We have had many discussions with friends in Saudi Arabia since the IPO was first raised, and we believe the Saudis prefer a NYSE listing. But the Saudis want a listing on their own terms for reasons of transparency and litigation risk – both problems unlikely to be resolved by the US in order for a NYSE listing to go forward. London has made changes to listing requirements to try to land the Aramco IPO but these are changes the US is unable or unwilling to make.
On his Saturday flight to Asia, the President had a scheduled telephone call with King Salman. According to an official US readout of the conversation released Sunday, the discussion focused on the crisis in Yemen and the attempted Houthi missile attack on Riyadh, cooperation on terrorism, further US arms sales, Saudi support for the US in the wake of the terrorist attack in New York and the Aramco IPO. Interestingly, the Saudi government readout did not mention the Aramco IPO conversation.
We believe Trump raised the Aramco IPO issue on his own. Certainly, there is nothing wrong with a head of state advocating for a US commercial entity as Prime Minister May has made similar efforts to land the IPO for the London exchange. But Trump’s tweet on the IPO got everyone’s attention, especially given its timing with the missile attack, cabinet reshuffle and arrests of various princes and government officials in the described corruption crackdown.
Trump’s tweet stated: “Would very much appreciate Saudi Arabia doing their IPO of Aramco with the New York Stock Exchange. Important to the US.” Trump further explained his effort to reporters aboard Air Force One: “I want them to strongly consider the New York Stock Exchange or Nasdaq. I just spoke to the King a little while ago, and they will consider it.”
In our view, we think Trump made this clever move on the Aramco IPO Saturday because 1) he knows the final listing decision in imminent and the US is unlikely to get it; 2) he believes he has maximum leverage with US support to Saudi on the missile attack and future action to isolate Iran; and 3) most importantly, Trump is testing the Crown Prince’s reform policies purporting to promote transparency and anti-corruption by ratcheting up the pressure for a US listing despite its drawbacks to Saudi sensitivities.
The last point deserves to be underscored. The highly unusual arrests of other princes, ministers and other top current and former officials in Saudi Arabia will provoke a critical response in the international community. The Saudis will be under a spotlight in the days ahead and keeping the Trump Administration response muted will be a high priority.
We suspect the other significant topics Kushner likely discussed with the Saudis on his trip (Iran, Hezbollah, Qatar) provide additional US leverage in Trump’s view and so he has decided to up the pressure on the Saudis.
With his tweet, Trump has breathed new life into a potential US listing for the Armaco IPO. But we still give a US listing very low odds.
Rising Geopolitical Risk in Middle East – Saudi Arabia, Iran, Lebanon, Qatar, Iraq
It’s hard to read the cabinet reshuffle and corruption arrests in Saudi Arabia as anything but a consolidation of power. There are certainly internal political benefits to be realized from combatting the establishment and corruption in the Kingdom with the younger generation of Saudis.
Of those sidelined Saturday, the most notable was Prince Miteb bin Abdullah as a Cabinet Minister and Head of the National Guard, who was viewed as an alternate power center to the Crown Prince.
In our view, the power consolidation is a sign that King Salman may soon abdicate to the 32-year-old Crown Prince in the coming months – perhaps after King Salman’s expected trip to the US early next year. However, the provocative recent moves in the Kingdom are making it look like the least smooth Saudi leadership transition in recent memory. Until the transition of power is complete, there will continue to be heightened political risk concerns anew about the Kingdom.
We do not think recent events will derail the Aramco IPO or investor interest in it as all sides recognize the importance of the oil revenue in the Kingdom. In addition, we also see no impact on Saudi oil policy. The Saudis are now price hawks, and we fully expect a Saudi-led extension of the OPEC production cut deal at least through the first half of 2018.
However, we do think other arrests of prominent business executives were especially surprising and will cause some pause in the international business community about investment in Saudi Arabia.
The attempted missile attack on the Riyadh airport by the Iran-backed Houthi rebels in Yemen is a reminder that Iran looms as the biggest geopolitical risk to the region and oil markets. Trump discussed the missile attack with reporters aboard Air Force One on Saturday: “A shot was just taken by Iran, in my opinion, at Saudi Arabia. And our system knocked it down.”
In addition to any expected Saudi response to the missile attack, Trump is also considering withdrawing from the Iran nuclear deal and reimposing sanctions on Iran that will target oil revenues.
The resignation of Lebanese Prime Minister Saad Hariri on Saturday in Riyadh also has foreboding implications for conflict with Iran. We have been hearing for some time about the potential for a military confrontation in the coming months between Israel and Iran-ally Hezbollah, and the Hariri resignation only increases the odds of such an event.
In addition, Iran’s recent activity in Northern Iraq is also raising concern among US national security officials and as well as in Congress and the Gulf. Iraq is walking a fine line with Iran, and there is a great deal of uncertainty about the path forward.
Lastly, the GCC conflict with Qatar has now gone longer than anyone had expected and with no end in sight. It is widely viewed to also be the personal initiative of the Crown Prince. The aggressive actions in Saudi Arabia to consolidate power are now causing concern about how the Qatar situation may or may not be resolved.
Oil markets were already facing major geopolitical risks with Iraq's response to the Kurdistan independence bid, potential new US sanctions on Iran and an economic and political collapse in Venezuela. Now we can add an unsettled Saudi political environment and attempted Houthi-Iran missile attack on Riyadh to the mix. Geopolitical risks have just spiked.
