The future of the Saudi-US bilateral relationship and economic cooperation – AEI – American Enterprise Institute: Freedom, Opportunity, Enterprise

2nd November 2018 Off By binary
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On November 1, 2018, AEI’s Karen Young participated in a Center for American Progress-AEI joint panel on US-Saudi relations. The panel was moderated by Brian Katulis of CAP and included Steven Cook, of the Council on Foreign Relations, and Melissa Dalton, of the Center for Strategic and International Studies. A video recording of the event is available here. A summary of Karen’s remarks and commentary are presented below.

Now is not the moment to sever ties or to make drastic changes to our relationship with Saudi Arabia. It may be appropriate to place sanctions on Saudi Arabia after the murder of Jamal Khashoggi, but these should be in proportion to other sanctions on states that commit similar crimes against their own citizens in US or NATO member territory. The most recent comparative case is the poisoning of Russian citizens (and British citizens) in the UK. In that case, the US sanctions were a reaction to the targeted assassination and use of chemical weapons, using legal force under the Chemical and Biological Weapons Control and Warfare Elimination Act (CBW Act).

In the Khashoggi murder, the Magnitsky Act is the more likely basis of US law that could be applied to those responsible for the murder. It is unclear, however, how the US is cooperating with the parallel Saudi and Turkish investigations, and how the US might assign blame to individuals within the Saudi government for this human rights violation against its own citizen. In the context of both of these legal frameworks, there has not been penalization of heads of state.

But let’s have a bit of self-reflection. Why has Khashoggi’s murder become a tipping point in what has been a long and already difficult relationship between Saudi Arabia and the United States? We do not share many political values or forms of governance. We have a difficult history understanding each other, often using each other when convenient, as in the Cold War and our efforts to defeat the Soviets in Afghanistan. After September 11, 2001, the relationship was strained, but was largely preserved via intelligence cooperation. After 2011, the relationship tensed again, as the US policy towards the Arab uprisings, especially in Egypt, signaled that the US was not a reliable partner to autocrats like Hosni Mubarak. Now, in the midst of the Trump era, we are two nations in a period of profound self-examination. We are both asking: “Who are we? What is our role in international and regional stability and prosperity?”

We may like to think that we have a values-based foreign policy, but we do not. That is not to say it is a fool’s errand; it is a noble aspiration. However, the current US foreign policy towards the Middle East is both transactional (and focused on the wrong kinds of transactions, like arms sales) and also hollow in its chest-beating machismo. We have oriented our policies towards both Iran and Syria as regime change, but we are unlikely to do much to achieve that objective. To advocate for regime change or even a leadership re-organization in Saudi Arabia is equally disingenuous. We have no intention of picking up the pieces should the system collapse.

The United States is making an inward turn, away from international agreements, allies, and leadership in international organizations. Our conception of economic growth is now confused with a zero-sum logic that is ignorant of how global markets function. Saudi Arabia, on the other hand, has been trying to reach out; to attract foreign direct investment; to invite visitors and tourists; to be proactive in its regional security provision; and to be seen as an equal in the international system. Certainly, under the direction of the crown prince, Saudi Arabia has also made foreign policy choices in Yemen and inside the Gulf Cooperation Council that are rash and destructive.

How we decide to treat each other right now will have important consequences for the Middle East, and, more generally, how the US continues to exercise its foreign policy and leadership in the world. Do we see the Middle East only through the lens of terrorism, or do we see regional opportunity? Do we have a vision for governance and economic growth that is attractive to the region? Do we stand for openness, tolerance, and opportunity? Or do we stand as “nationalists”?

The truth is, we don’t have the kind of global economy that works well for nationalists. And it is in the national security interests of the United States to see a prosperous and inclusive Middle East. And, by the way, when they grow, we also benefit.

Let me address three core misconceptions about the utility of economic cooperation with Saudi Arabia.

(1)     No, Saudi Arabia is not a defense free-rider. In fact, they are invested in regional security. Their methods of deploying their resources for regional security may be different than, and sometimes less optimal for, the United States. We are seeing the emergence of the Gulf states (particularly Saudi Arabia, the United Arab Emirates, Kuwait and Qatar) as an alternative finance facility for the MENA region and beyond, to the Horn of Africa and West Asia. They rival the World Bank and International Monetary Fund, and often surpass them in the amount of financing they can provide (in cash deposits to central banks, commitments to infrastructure investment, and in-kind oil and gas transfers), frequently without restrictions on fiscal or monetary policymaking. This is more than buying loyalty or checkbook diplomacy. This is economic statecraft.

This mode of intervention entails the ability to provide models of governance and to impact decision-making and the trajectory of domestic politics across the region. The United States cannot and will not compete in that way. Compared with the resources of China in partnered investments in the Belt Road Initiative, or with joint sovereign funds between Russia and China, our OPIC or USAID dollars are peanuts.

Saudi Arabia and its Gulf partners are now global development actors. We can be a part of that plan and seek to benefit from regional growth, or we can walk away from the table. If we walk away from political and economic reconstruction in Yemen, Syria, Iraq, and Libya, we will walk away from global leadership and the promotion of American ideals, including economic competition.

Some examples:

  • Yemen central bank deposits ($2.2 billion in 2018) and humanitarian aid ($11.5bn); yes, Saudi Arabia is responsible for the humanitarian crisis in Yemen (along with the Houthi rebels), but they are also most likely to pay for the reconstruction;
  • Jordan support ($2.5 billion);
  • Lebanon support (new commitments with France of more than $1.6 billion in previous years, and as much as $4 billion in military aid);
  • Egypt support ($12 billion from Gulf States since 2013, and Saudi Arabia central to the IMF restructuring package disbursed this year);
  • Pakistan support ($6 billion in commitments);
  • Ethiopia ($3 billion), with the UAE joining in with in-kind oil and gas support;
  • Bahrain ($10 billion in 2018, along with Kuwait and UAE; preceded by $10 billion in infrastructure investment support after 2011 to Bahrain and Oman);
  • and Qatar’s recent investment commitment of $15 billion to Turkey.

Therefore, the Saudi economy is in some ways a bellwether of the broader MENA economy and important in the lines of fiscal support and investment flows between oil importers and exporters in the developing world. Remittance flows are another important connector to Egypt, Jordan, Pakistan, Lebanon, Bangladesh, Sudan, and India. Workers in the Gulf account for 70 percent of remittance flows to Jordan (13 percent of GDP), Egypt (10 percent of GDP) and Pakistan (6.4 percent of GDP).

Our foreign policy towards the Middle East should see Saudi Arabia as central, but we need to engage a wider and more sustained way. We are forfeiting our entry points to the region and that is not in the long-term interest of the US or our global economy.

(2)     No, the United States does not need Saudi oil. With current US production at 11 million barrels per day, we rival Saudi production. But we do need Saudi oil to flow and to go eastward. The flow and supply of energy to China, South Korea, India, and Japan is in everyone’s interest to sustain global growth, especially in emerging markets. And, oil should be reasonably priced. A ten percent increase in the global price of oil impacts the Chinese economy with a 0.2 percent fall in GDP, 0.3 percent decline in India, a 0.5 percent decline in South Korea, and a 0.6 percent decline in Thailand, according to Global Data Watch research by J.P. Morgan.

This is not to say that Saudi Arabia is holding the global economy hostage. It is not, but it does have leverage. With the US current Iran policy, oil market cooperation is vital. While the Saudi energy minister Khalid Falih has been adamant that oil will not be weaponized (as during the 1973 embargo on the US and the Netherlands), we are in a situation in which there is not tremendous spare capacity. The Trump administration’s Iran policy is difficult and nearly impossible without Saudi cooperation in oil markets.

(3)     The US’s choices are not black-and-white. There is a false dichotomy between supporting the Crown Prince Mohamed bin Salman and therefore creating a 40-year reign of terror, and following a more values-driven foreign policy to undermine and shun him with the expectation of a change in leadership. First, the US should not be in the business of telling other countries whom to put in power. This reinforces a sense of unreliability after 2011 and makes the US look fickle in its relationships.

Second, it is not a sustainable policy that can be routinely and fairly applied. We don’t do it to China, which is certainly guilty of detaining its own citizens in rehabilitation camps and forcefully “rendering” its citizens back home for discipline. The sanctions on Russia for the poisoning of its own citizens in the UK are a more likely and appropriate standard.

Saudis are perfectly capable of determining how they want to be governed. Mohamed bin Salman has had a lot of domestic support. There are now some serious shifts underway, and not for the reasons that most Americans would expect. It is not because of the disastrous war in Yemen, the Qatar crisis, or the debacle of detaining Prime Minister Hariri. It is because of national pride. Mohamed bin Salman has embarrassed them and insulted the honor of the country, if he ordered the brutal murder of Jamal Khashoggi. He won’t last if people feel he has dishonored them.

And there is no reason to think that MbS will be a dictator for 40 years. Saudi Arabia right now is in the midst of tremendous upheaval. Anyone who has the task of governing will be met with some serious economic challenges, which no amount of repression can erase. The 44.5 percent youth unemployment among citizens is one key reason. The pressure is on the Crown Prince to deliver and continue social reform, to create jobs, and to deal with the problem of economic and social exclusion.

We are connected by our markets. The massive amount of sovereign debt issued Saudi Arabia and the Gulf states since 2015, now more than $144 billion, will be a metric to weigh the success of reforms and domestic governance. That debt is traded globally, and will soon be included in global index funds (JP Morgan EM Bond Index) with much of it coming to maturity in 2023. Americans will hold this debt in their pension funds and IRAs. And it is not just debt securities, it is investment in Saudi corporates as well, as new inclusion in equity indices (FTSE, MSCI) will encourage American and global investment funds to invest in Saudi Arabia.

And Saudi Arabia is equally, if not more substantially, invested in the United States. Saudi Arabia holds roughly $150 billion in US securities, both equities and debt, as government investments. Kuwait actually holds considerably more, at nearly $220 billion, and the Norwegians hold nearly $350 billion. We are connected– by oil markets, by shared investment, and in a global economy that has little concern for national boundaries.

It is possible to have good bilateral relations with Saudi Arabia that focus on our shared interests in global growth; in a stable and prosperous Middle East that sees opportunity for its youth population; for governments that can have the resources and access to finance to make choices about policy that are based not on fear, but on optimism. It is also possible to be optimistic about the Middle East without kowtowing to brutality. We just have to figure out what we stand for.

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