U.S. Markets closed

For Saudi Arabia, Deep and Lasting Ramifications for Khashoggi Debacle

Vivienne Walt

It seems hard to believe in the wake of Saudi journalist Jamal Khashoggi’s probable horrific murder, but only a year ago, the mood in Riyadh was virtually electric.

At that time, a 26-year-old woman receptionist at a Western hotel told me she was thrilled that the Crown Prince Mohammad Bin Salman, or MBS, had allowed women to accept jobs involving interacting with male clients. “I thought of leaving the country, but now there is no need,” she said. Some of the hundreds of hip youth packing the opening of the Saudi Design Week rushed to tell me how excited they were about their changing prospects under MBS, and could barely stop talking about the spontaneous street party that had erupted weeks before. “Things are totally changing,” gushed Nelly Attar, a 27-year-old fitness instructor with long, curly hair that flowed free without the required Islamic head covering. She had just opened a women’s gym in the capital after the government finally granted women gym licenses.

Now things are about to change again—and perhaps in a very bad way.

As the gory details emerge of how Saudi operatives allegedly seized Khashoggi inside the consulate in Istanbul, then dismembered his body before flying out of the country, the implications for Saudi Arabia’s closest ally, the United States, are profound. After weeks in which President Trump balked from criticizing MBS, he told the New York Times on Thursday that the consequences for Saudi Arabia “have to be very severe.”

In reality, the implications of a severe response could spread wide, and last long—not least for the Crown Prince, who at just 33 years old has effectively run Saudi Arabia for the past year and is poised to succeed his father, the ailing King Salman, on the throne as soon as next year.

All of that now looks in doubt, potentially upturning U.S. policy. As part of President Trump’s plan to abandon the 2015 Iran nuclear deal, he is imposing another, tougher round of sanctions on November 4—two weeks away—banning the Islamic Republic, OPEC’s fourth biggest producer, from exporting oil on world markets. Baked into the new sanctions has been the assurance that Saudi Arabia will supply additional oil to cover the loss of Iranian crude, in order to avoid soaring prices on world markets.

Yet despite that, Crown Prince has appeared totally unconcerned with any opprobrium from the White House.

One cold calculation he has made since Khashoggi vanished on October 2 was that he could bend the facts without consequences. Just three days after Khashoggi was reportedly butchered in the Turkish consulate in Istanbul, he told Bloomberg in Riyadh that Khashoggi had “entered and he got out after a few minutes or one hour”—a statement he surely knew was not true.

But getting away with murder might be harder than getting away with lies. For one thing, U.S. politicians have staked their credibility on trumpeting MBS as a ground-breaking young reformist, ushering in liberalism in a country that adheres to a severe form of Wahhabi Islam.

Now, those politicians look like they might have been suckered into buying a bill of goods—or at least, that they chose to champion the Crown Prince’s reform plan, called Vision 2030, while ignoring more ruthless aspects of his rule. Among them: prosecuting a brutal bombing campaign against Houthi rebels in Yemen—fought with weapons and planes purchased from the U.S., and with U.S. assistance—which the U.N. estimates has killed about 16,000 civilians and caused widespread famine and cholera. The Crown Prince also instituted a blockade last year against next-door rival Qatar, where the U.S. has a large military base, and has jailed activists and critics at home.

All those alarming actions were eloquently outlined in Khashoggi’s columns in the Washington Post, even while U.S. officials embraced the Crown Prince as the key to overhauling the entire Middle East.

But nothing appears more gullible that than believing that MBS had no knowledge of Khashoggi’s impending doom—even if, as the Kingdom originally claimed (in its defense!) his death was a botched abduction or interrogation, rather than premeditated murder. “I will not have my intelligence insulted or my support disrespected,” Republican U.S. Senator Lindsey Graham raged on Fox & Friends on Tuesday, calling MBS “a wrecking ball.” “I was the leading advocate for Saudi Arabia because they are a strategic ally,” Graham said. Now, he added, “I feel used and abused.”

The same might be said for the many U.S. CEOs and Western financial officials who were set to fly to Riyadh for the Future Investment Initiative, which begins on Tuesday. The so-called “Davos in the Desert” organized by the Saudi sovereign wealth fund, is ironically being held in the Ritz Carlton Riyadh, which MBS last year transformed into a luxury prison for Saudi business leaders. Those execs were held mostly without charge, some for months, many of them released only after turning over some of their fortune to the Saudi leadership. The website for next week’s conference promises business leaders a “blueprint for the 22nd century”—never mind the messy century we’re living through—in “conversations with global leaders, private meetings, curated roundtables, world-class entertainment, unparalleled CEO networking, and deep engagement with global media.”

That now looks hugely overblown, as does MBS’s promises to create a dramatically new country.

On Thursday U.S. Treasury Secretary Steven Mnuchin finally dropped plans to attend the Riyadh conference, sending the Dow down 327 points. He was one of the final hold-outs after cancellations by French and Dutch finance ministers, IMF chief Christine Lagarde, and numerous business leaders, including CEOs Jamie Dimon of J.P. Morgan and Stephen Schwarzman of Blackstone, and the chief execs of Standard Chartered and Credit Suisse. Even Uber CEO Dara Khosrowshahi pulled out despite Saudi Arabia’s $3.5 billion investment in his company.

Tragically, one Saudi journalist has paid a deadly price for challenging MBS—a murder whose alleged macabre details have nauseated the world. But there might be highly damaging fallout from Khashoggi’s death, too.

For the Crown Prince to rule over a stable country, he badly needs Vision 2030 to work. Despite Saudi’s mammoth oil wealth, its economy has faltered in recent years, as global oil prices have slid ever lower. The IMF recently estimated that the country needs oil prices of about $85 a barrel in order to balance its budget (although the figure does not take into account the Kingdom’s cash reserves). Until recently, oil prices were nowhere near that.

Worse than deficits, perhaps, is the prospect of millions of frustrated youth hitting the labor market, and finding few jobs—one factor that sparked the Arab Spring revolutions in 2011. Among Saudi Arabia’s 33 million people, about half are under 25, and about one-quarter of them are unemployed, according to the World Bank. Job creation is urgent.

In order to diversify the economy from being almost entirely run on petrodollars, MBS unveiled Vision 2030 in 2016, promising to privatize airports, railroads, and public services, regulate businesses, and throw open the labor market to women (hence his decision this year to allow women to drive); some U.S. corporate giants have leaped at the opportunities, with Bechtel building the Riyadh Metro and Goldman Sachs overseeing the partial privatization of Riyadh Airport.

How many more U.S. companies will jump on large deals, if Saudi’s putative leader is seen as erratic? “His whole reform program required direct foreign investment—and money has been flowing out of Saudi Arabia for months, not in,” New York Times columnist Thomas Friedman, a long Saudi watcher (and formerly MBS fan) wrote on Thursday. “Now it will get worse.”

In addition, Vision 2030 has depended heavily on a flotation of about 10% of Saudi Aramco, the world’s biggest oil company by far, originally scheduled for this year. Economists estimated the IPO would bring about $100 million into Saudi coffers. “The economic diversification program hinges on the success of the IPO,” Kate Dourian, a Saudi expert at the International Energy Agency in Paris, told me after I returned from Riyadh last October. Without the IPO, Vision 2030 would badly falter, she said.

Now, the IPO has been put off until some unknown date, in part because it would have demanded that the opaque oil company finally open its books to public scrutiny. Some energy analysts even question Saudi Arabia’s stated oil reserves, which have remained level for many years, at about 260 billion barrels.

“You always need to be transparent with your shareholders, and we have one shareholder,” Aramco CEO Amin Nasser told me, referring to Saudi King Salman, when I interviewed him for Fortune at Aramco HQ in Dhahran last October. “When we go public, we will be more than happy to share all the data, as soon as we are listed.” As the world has learned since Khashoggi’s disappearance and death on October 2, prying information from Saudi Arabia can be difficult.