The unavoidable fall of Riyadh
Hockey great Wayne Gretzky once said 'skate to where the puck is going to be, not where it has been'.
The puck is going to be in Riyadh, and the fall of Riyadh will have enormous consequences that are insufficiently debated. Instead a lot of media and political attention is focused on current tragedies like Aleppo or the occasional diabolical terrorist acts. As horrific as these situations are, they are merely tremors, that foreshadow the big earthquake that is likely to follow the fall Riyadh. Saudi Arabia, a young nation, little over 80 years old is, precarious, unstable and in spite of its oil wealth the most vulnerable nation in the Middle East.
On the Religious front, rhetoric aside, at its core in the Middle East, this is not a conflict between the West and Arab Muslims, but an existential conflict between Arab Muslims. This is not dissimilar to the conflict amongst Christians at the start of the reformation many centuries ago, when Christians burned each other at the stake over a difference in beliefs. Over the past 10 years, hundreds of thousands of Arab Muslims have killed each other in Iraq, Syria, Libya, and Yemen. The horrific terrorist attacks in the west (Paris, Brussels etc) are merely to build their 'brand' and help them in recruiting for their death struggle against each other. However it helps all the participants in the East and West to cast the conflict as a 'struggle between civilizations'. The Arab Muslim groups prefer to say that they are fighting against 'imperialist Zionist ' interests, thereby obfuscating the fact that most of the people they kill are fellow Muslims. In turn the Western governments find it useful to say that they are protecting modern civilization to mobilize popular support, gain support for restrictive laws, and military funding.
On the Economic front it's immense oil wealth has enabled Saudis to engage in a Faustian bargain, where 80% of its workforce is non-nationals Saudi nationals do not need to work to maintain their lifestyle. There are 10 million non-nationals in a country of 30 million people. In a unique work structure even when a Saudi is nominally employed it is the non-national that really does the work and held accountable. So most jobs are ‘doubled up’. Most of the non-nationals are transients, without family, have no roots or loyalty to the country. They are paid extra for their expatriate status, and leave the country after about 5 years. In a crisis this workforce would vanish and the Saudi economy would disintegrate.
80% of Saudi budget revenue is oil exports. Saudi need oil to be $100/barrel to balance their budget. The price of Brent crude (a worldwide benchmark for price of oil) was down 44% from a year ago. While historically oil prices have been cyclical several disruptive trends suggest that oil prices may go down further rather than go up. The US innovation of fracking has increased energy supply, weak global growth has reduced oil demand and conservation driven by global warming concerns will lower the need for fossil fuels. General industry expert consensus is that oil will remain significantly below $ 100/ barrel over the next decade. Another big uncertainty is the value of the Saudi Riyal, which has been pegged to the US dollar for 30 years. This peg is not sustainable, given the swoon in oil prices, likely stronger US dollar as a result of Fed interest rate increase, and growing Saudi deficit due to its aggressive military actions in Yemen and elsewhere. Recently the cost of forward contracts on Riyal grow 40x so speculators are beginning to bet against the currency. Last month Bank of America analyst said that "de peg of the Saudi Riyal is the no 1 black swan event " . Faced with similar circumstances but without the vast financial reserves to lean on Russia had to devalue the ruble by over 50%. But unlike Russia, Saudi has no local economy and imports everything from grain to weapons. A local saying is that they export hydrocarbons and import carbohydrates. Devaluation would result in hyperinflation and total dislocation of the economy. While Saudi's have strong reserves, they have burnt through 25% of them during the last year will not be able to withstand a sustained speculator run on their currency. A major Saudi devaluation could drop the price of oil to $25/barrel (ready for $1/gallon gas at the pump?) but be devastating economically for every country in the world that relies on oil exports. While the exact combination of events is unknown, in the near term Saudi will be severely pinch financially and will no longer be able to support the three legs of their stool, overpaid non national expatriate workforce, support lifestyle of nationals who do not work, and fund Wahhabi/military adventures overseas.
On the spiritual front the House of Saad will find it difficult to disengage from the pact it made with Wahhabi preachers. In return for political obedience to the crown, it granted protection and propagation of Wahhabism. The kingdoms oil wealth was the fuel for many Wahhabi initiatives including the defeat of Soviet forces in Afghanistan, rise of Taliban, Al Qaeda, Sunni awakening in Anbar and more recently the rise of ISIL. Even more destabilizing to the middle east is a fundamental tenet of Wahhabism that Shia are apostates, and apostates should be killed ( the converse is not true amongst Shia). Of the 2 billion Muslims worldwide, about 200 million are Shia, so the implications are horrifying. Perhaps surprisingly unbelievers(Christians and Jews) or infidels do not need to be killed, they can live as long as they pay a tax (Jizya) around 10%. About 15% of the citizens of Saudi are Shia, so you can imagine how unsettling this preaching is for them. Saudi Arabia is surrounded by nations with significant Shia populations and several Persian gulf states have Shia majority population (with Sunni monarchs) so conflict between and within countries is inevitable. Iran as the largest Shia nation in the region now closely aligned with Iraq will do everything it can to aid and protect Shia. The restive Shia populations in Saudi, Yemen and Persian Gulf nations will continue to engage Saudi forces, and will further drain the Saudi treasury. In this interciene war the west is again likely to be a bystander because no amount of drones or bombing are likely to affect the ultimate outcome.
After much bloodshed and the fall of Riyadh, as boundaries are redrawn, there will be an arc of Shia countries south of Saudi Arabia, around the Persian Gulf aligned with Iran and Iraq.
But perhaps without Saudi funding, ISIL will no longer be around, but that is where the puck was, let's focus on where it is going.
