Crown Prince Mohammed bin Salman (MbS) was the main architect of the disastrous Saudi war on Yemen. His military hard-man display was meant to consolidate his rise to power as heir to the Saudi throne. It was a calculation based on the blood of the Yemeni people. But now the war has gone from a callous game to a far-more dangerous threat to the House of Saud’s seat of power. If the Saudi oil economy is put at severe risk, then the lifeline for the monarchy is liable to be cut.

After last weekend’s spectacular air strike on the main oil processing plant in Saudi Arabia – northeast of the capital Riyadh, some 1,000 kms from Yemen – the Houthi military leadership is warning that more deeply-penetrating aerial attacks are on the way. The Yemeni rebels have demonstrated that nowhere in Saudi Arabia is safe.

Saudi air defenses and their multi-billion-dollar US Patriot anti-missile systems have been rendered useless against an-ever increasing arsenal of more sophisticated unmanned aerial vehicles (UAVs) operated out of Yemen. UN experts reckon that the Houthis’ UAV-X drone has a range of up to 1,500 kms, which means that all of the Saudi oil infrastructure located in the Eastern Province near the Persian Gulf is a viable target.

Last weekend’s air strikes carried out with 10 drones, according to the Houthis, caused Saudi oil output to shut down by nearly half. The main target – the Abqaiq refinery – processes some 70 per cent of all Saudi crude destined for export. It is not clear when the processing plant can be restored to normal function. It may take weeks or even months. But if the Yemeni rebels can inflict that extent of damage in one air raid, it is not hard to foresee how the Saudi oil-dependent economy could conceivably be brought to a crippling standstill.

“The only option for the Saudi government is to stop attacking us,” said a Houthi military spokesman following the drone strikes. The rebels also warned foreign workers in Saudi Arabia associated with the country’s oil industry to vacate.

The Yemenis have a gun to the House of Saud’s head. It must give the rebels great satisfaction to finally have the Saudi monarchy in their cross-hairs after four years of Yemen suffering relentless aerial bombardment and siege by the US-backed Saudi military. The Saudi-led war on its southern neighbor – the poorest country in the Arab region – was always an outrageous aggression under the guise of supporting the return of a corrupt crony who had been ousted by the Yemenis in early 2015. Up to 100,000 people have been killed – most of them from the indiscriminate bombing campaign by Saudi (and Emirati) warplanes supplied and armed by the US, Britain and France. Millions face starvation in what the UN calls the worst humanitarian crisis for many years.

The Saudi rulers, Western governments and media have tried to obscure the genocidal war on Yemen as a “proxy war” involving Iran, as if Tehran is the instigator of subverting Saudi Arabia from the south. Iran backs the Houthis politically, and perhaps also militarily more recently, but any involvement by Tehran is a reaction to the initial Western-backed Saudi aggression against Yemen.

Claims by US and Saudi officials that Iran is responsible for the latest air strikes on Saudi Arabia’s vital oil industry are more of the same obfuscation. Such muddying of the waters is an attempt to distract from the central point that the Houthis are retaliating with the legitimate right of self-defense after years of merciless slaughter inflicted on their people by the Western-backed Saudi coalition.

There’s another urgent reason for why the Saudi rulers and the US are trying to blame Iran for the latest drone attacks on the Saudi oil industry. If admitted that the air raids were carried out primarily by the Houthis – perhaps even with Iranian drone technology – then that admission points to the complete vulnerability of the Saudi oil economy and the very power structure of the monarchial rulers.

A hint of the trepidation being felt in Riyadh are reports that the latest air strikes have rattled stock markets for Saudi petrochemical companies. Worse, it is also reported that the attacks may delay the planned stock market listing of Saudi Aramco, the state-owned oil company. Worse still, the valuation of the company may be slashed due to the perceived risk from further Yemeni air strikes.

The planned Initial Public Offering (IPO) of Aramco – whereby the Saudi state is selling a portion of the company to private investors – has been one of the most talked about events in recent years among international business. The IPO which is due to be launched next year has been called the “biggest-ever” stock market sell-off.

In an extensive interview with Bloomberg in October last year, the Saudi Crown Prince, MbS, boasted that it was the “biggest IPO in human history”. He claimed then that Aramco’s total valuation was worth $2 trillion. If the Saudis sell off a 5 per cent share in the company, they are expecting to raise $100 billion in cash. The Aramco IPO is central to MbS’ ambitious diversification master plan for the entire Saudi economy, known as Vision 2030. The capital raised from the Aramco sell-off is intended to catalyze private sector employment and technological innovation in the oil-dependent kingdom whose budget is unsustainably propping up government-sector jobs and welfare largesse to prevent the young population of Saudis rebelling against the sclerotic House of Saud.

After the Houthis’ devastating air attacks on the Saudi oil heartland – the crown jewels of the kingdom – potential investors are now reportedly looking warily at the future risk of Aramco. Valuation of the company in the aftermath of the Yemeni drone strikes has been slashed by some estimates to $300 billion – that’s down by 85 per cent from the previous aspired-for $2,000 billion. If that downgrade holds or worsens with future Houthi attacks on Saudi oil infrastructure, then the capital raised from an IPO could shrink from the $100 billion projected by the Crown Prince to $15 billion. In short, his Vision 2030 plan is down the pan.

It must be alarming to the young Saudi potentate that US President Donald Trump has begun to play down any retaliation against Iran, saying that he doesn’t want to be drawn into a war.

That means the Saudi monarchs are on their own and at the mercy of the Houthis and what they do next. The downfall of the scheming Crown Prince evokes a Shakespearian drama of treachery.

In the slideshow that is Middle Eastern politics, the series of still images seldom add up to make an enduring narrative. And the probability is high that when an indelible image appears, it might go unnoticed – such as Russia and Saudi Arabia wrapping up huge energy deals on Wednesday underscoring a new narrative in regional and international security.

The ebb and flow of events in Syria – Turkey’s campaign in Afrin and its threat to administer an “Ottoman slap” to the United States, and the shooting down of an Israeli F-16 jet – hogged the attention. But something of far greater importance was unfolding in Riyadh, as Saudi and Russian officials met to seal major deals marking a historic challenge to the US dominance in the Persian Gulf region.

The big news is the Russian offer to the Saudi authorities to invest directly in the upcoming Aramco initial public offering – and the Saudis acknowledging the offer. Even bigger news, surely, is that Moscow is putting together a Russian-Chinese consortium of joint investment funds plus several major Russian banks to be part of the Aramco IPO.

Yet the Aramco IPO was a prime motive for US President Donald Trump to choose Saudi Arabia for his first foreign trip. The Saudi hosts extended the ultimate honor to Trump – a ceremonial sword dance outside the Murabba Palace in Riyadh. Hardly 10 months later, they are open to a Russian-Chinese consortium investing in the Aramco IPO.

Riyadh plans to sell 5% of Saudi Aramco in what is billed as the largest IPO in world history. In the Saudi estimation, Aramco is worth US$2 trillion; a 5% stake sale could fetch as much as $100 billion. The IPO is a crucial segment of Vision 2030, Saudi Crown Prince Mohammad bin Salman’s ambitious plan to diversify the kingdom’s economy.

Aramco signs MoU with Novatek

Also on Wednesday, Saudi Aramco signed a memorandum of understanding with Novatek, Russia’s largest non-state natural-gas producer, regarding Saudi investment in the latter’s LNG (liquefied natural gas) projects – specifically, in the $20 billion Arctic LNG-2, which is expected to be on stream in 2023 and has a capacity of 18 million metric tons annually.

Saudi Minister of Energy, Industry and Mineral Resources Khalid Al-Falih told the media in Riyadh, “This is a big project. It will become part of Aramco’s gas strategy.” The agreement will be showcased as the centerpiece of the St Petersburg International Economic Forum in May. (Novatek is also interested in building a regasification terminal in Saudi Arabia.)

Other Saudi-Russian energy deals in the making include investment by Aramco and the Saudi sovereign wealth fund (Public Investment Fund, or PIF) in the Russian company Eurasia Driller, a major independent driller, which has been seeking entry to onshore and offshore projects in Saudi Arabia. The Saudi and Russian officials also disclosed that Russia had made a formal proposal to build two nuclear reactors in Saudi Arabia and that the contract was expected to be awarded by next year.

Indeed, these deals must be seen in the backdrop of the Saudi-Russian alliance to sustain the oil price through production cuts until the end of 2018. In 2015, the Russian Direct Investment Fund and Saudi Arabia’s PIF joined hands to make investments in projects in Russia. Last year, RDIF and PIF announced the creation of a Russia-Saudi Investment Fund with total committed capital of $6 billion to pursue investment opportunities, primarily in Russia, and in joint ventures that can help Saudi Arabia’s economic diversification.

Tectonic shift

Historically, Saudi Arabia has been seen as a pivotal country in the United States’ Middle East energy strategies, which formed a core template of Cold War-era politics to keep the former Soviet Union out of the region. The past week’s developments signify that the tectonic plates are shifting.

And history might repeat. Reminiscent of the so-called Quincy Agreement of February 1945 between US president Franklin Roosevelt and King Abdul-Rahman bin Abdulaziz, founder of Saudi Arabia, the emerging Saudi-Russian energy alliance will most certainly trigger an overall expansion of relations between Russia and Saudi Arabia, including in defense and security fields.

Russian President Vladimir Putin telephoned King Salman bin Abdulaziz Al Saud on Wednesday, when they discussed “a wide range of bilateral cooperation, primarily in trade and defense technology” and “expressed readiness to boost meaningful coordination in global hydrocarbon markets,” according to Moscow. The Kremlin readout highlighted that Putin and King Salman discussed Syria and Saudi Arabia’s standoff with Qatar – and, possibly, Iran too.

Interestingly, the Kremlin statement cited Putin as regretting that “the current crisis by no means contributed to the consolidation of joint efforts in the struggle against a terrorist threat or the stabilization of the Middle East in general.” Indeed, it cannot be lost on the Saudis that what distinguishes Russian diplomacy is that unlike the traditional US tactic of exploiting regional tensions and divisions, Moscow focuses on beneficial cooperation. Quite obviously, the Russian military bases in Syria or Russia’s axis with Iran do not impede a full-bodied Saudi-Russian strategic relationship.

Suffice to say, Russia is positioning itself, in geopolitical terms, to shape outcomes in the Middle East and to enhance its standing as a great power, while also advancing its economic, political and security interests. The contrast with the US couldn’t be sharper.

Radio Free Europe/Radio Liberty reported last week that while addressing a closed-door meeting of the Russian Union of Industrialists and Entrepreneurs, a prominent group of industrialists and business tycoons, in Moscow on February 9, Putin predicted that “those who are doing this [imposing sanctions] will themselves tire of it soon.” The news from Riyadh signals that Putin’s prediction is well grounded.

When Russia teams up with China and Saudi Arabia in making such massive investments in the energy field, the US sanctions aimed at denying Western capital and technology to stymie Russia’s oil industry have been rendered meaningless.

atimes.com

Saudi Aramco’s management set off a real bomb in early 2016 when they announced their plans to privatize part of the company through a stock market IPO. The proposal was to sell shares in Saudi Aramco equal to about 5% of the company. But an estimate of the company’s potential market price is needed in order to understand how much this would be in absolute terms. Almost the next day after the announcement of the potential sale of part of the company (in January 2016), the global media published a stunning evaluation by the independent oil analyst Mohammad Al Sabban, a former senior adviser to the Saudi Arabian oil ministry. He estimated the company’s worth at $10,000,000,000,000 (ten trillion USD). For comparison I should add that in 2016 the largest US oil company, ExxonMobil, barely exceeded $350 billion in share capital. And yes, It’s true that later on some of the hype in the assessments died down and more rational numbers were cited, most often $2 trillion. This meant that Saudi Arabia would be able to rake in approximately $100 billion from the sale of 5% of the company. But the company’s biggest trump card isn’t even the current record levels of oil production, but rather the reserves of hydrocarbon raw materials at Saudi Aramco’s disposal. And that’s a number that none of the companies named in the rankings of the global oil industry can even begin to approach.

At present, Riyadh adjusts and verifies the data on the hydrocarbon reserves in the fields owned by Saudi Aramco. Financial reports are painstakingly drafted in the needed formats for a public offering of shares. The company is being restructured to optimize the way it is organized and managed. And finally, a crucial step was taken to lower the taxes on the company’s profits. The traditional tax rate has been 90%, but this year it was set at 50%, which roughly corresponds to the level at which the leading Western oil companies are taxed. Lowering the tax rate raises dividends and makes the company a more attractive target for investment.

But beginning in early 2017, the estimates of Saudi Aramco’s market value have unexpectedly begun to decline. Appraisals began to surface that claimed the company’s share capital was only worth $1.5 trillion, then $1 trillion. The consulting firm Wood Mackenzie estimated Saudi Aramco’s worth at $400 billion overall, bringing it closer to US-based ExxonMobil. And suddenly Western consultants began talking about the need to “discount” the value of the Saudi company, since it is state-owned, and in the securities markets all government issues are by convention sold “at a discount.” They point out that although Saudi Aramco currently pays 50% of its profits in taxes, since the government owns the company anyway it could restore the 90% tax rate tomorrow with a simple stroke of the pen. There is also the fear that oil prices could be low for the next few years, and Saudi Aramco might not be able to generate big profits. But none of that can remotely explain why the valuations of the Saudi company have dropped so precipitously in the past year.

Analysts blame this on the pressure Washington is putting on Riyadh, for reasons that have as much to do with the currency market as the oil market. And the pressure coming from Washington is, in turn, a response to the pressure also being exerted on Riyadh by China, which wants to buy oil from Saudi Aramco in renminbi instead of dollars. China is currently the world’s biggest oil importer, knocking the US out of its former first-place position. China is also the Saudi oil industry’s biggest customer, and Beijing does not want to pay extra for that black gold using American currency. A number of oil exporters that sell to China have already partially or entirely transitioned to settling their accounts in renminbi. Topping that list are Nigeria and Iran. Russia has also recently begun to sell some oil to China for renminbi (although only small percentage as yet).

Saudi Arabia, however, is heavily dependent on the US and has thus far refused to settle its accounts in renminbi. And that rebuff is costing the country dearly: Beijing is gradually finding other suppliers to take Riyadh’s place. The Saudis used to be China’s biggest foreign supplier of oil, but recently Russia has squeezed them out for that number-one spot. If this continues, Saudi Aramco might lose its Chinese market altogether.

Riyadh now finds itself caught between a rock and a hard place. It’s hard to imagine what Saudi Arabia could be hit with from across the Atlantic, should it sell even one barrel of oil for Chinese currency. After all, that would be a direct challenge to the petrodollar, which was born right there in Saudi Arabia in the 1970s, midwifed by the negotiations between Henry Kissinger and King Faisal.

Washington has sternly warned Riyadh to refrain from any ill-considered move to replace the dollar with the renminbi in its transactions with China, lest other players in the oil market follow suit (oil might then be traded for rubles, rupees, rials, etc.) And tomorrow that epidemic of transitioning to national currencies could infect other commodity markets. Incidentally, this year Beijing will begin to trade oil futures priced in renminbi on its commodity exchanges and claims that this is only the first step.

Voices have already been heard within the US president’s entourage that suggest blocking the listing of Saudi Aramco shares on the New York Stock Exchange. Signs have emerged of an organized campaign to short-sell the Saudi oil company. In light of that development, Riyadh has announced that it will put off its share listing until a later date. But its problem isn’t going to go away – Saudi Arabia will still have to make a choice between the dollar and the renminbi.

Although Beijing is upping its pressure on Riyadh, it is also simultaneously offering to directly buy out 5% of Saudi Aramco, while allowing the Saudis to forgo the usual ritual of listing shares on Western stock markets. And China is prepared to shell out a “fair” price (about $100 billion). The Chinese government has already announced that it is forming a consortium of energy and finance companies, plus China’s sovereign wealth fund, in order to purchase a “chunk” of the Saudi company. The Chinese media reports that that consortium is ready to become a cornerstone investor in Saudi Aramco.

Beijing’s winning move in its chess game against Washington has neutralized the US threat to disrupt the sale of Saudi Aramco, while simultaneously pushing Riyadh toward a decision to transition Saudi oil sales to the renminbi.

And so the plot thickens inside the Beijing-Riyadh-Washington triangle of intrigue.

The Kingdom has launched an ambitious Vision 2030 program to start a new chapter in its history, turning itself from a US dependent oil exporter to a regional powerhouse with diversified economy, gradually opening the doors to the whole world. Investment flows are to come from different directions with money put into different baskets. Saudi Arabia is intensifying its diplomatic efforts to change its perception to start a new era. Russia is viewed as a partner in the far-reaching plans.

The blossoming relationship between Russia and Saudi Arabia signals yet another sea change in the ever-evolving global order. King Salman is to become the first Saudi monarch to visit Russia. The trip is expected this month with talks on the way to specify the date. The visit acquires special importance as the King has taken a decision not to attend the July 7-8 summit of the G20 summit in Hamburg, Germany.

On May 30, President Putin welcomed then Deputy Crown Prince Mohammed bin Salman in the Kremlin and both men said they would deepen cooperation in oil and work on narrowing their differences over Syria. The visit came on the heels of US President Donald Trump’s historic visit to Riyadh.

Prince Mohammed bin Salman was recently appointed to the position of Crown Prince and heir to King Salman of Saudi Arabia. This appointment bodes well for the Russia-Saudi relations. The crown prince has overseen the ties with Moscow and has visited Russia many times. Russian President Vladimir Putin has called him a «very reliable partner with whom you can reach agreements, and be certain that those agreements will be honored».

Russia and Saudi Arabia might launch joint projects in petrochemical industry, in the field of renewable energy and liquefied natural gas (LNG) technologies among others. The Russia-Saudi Arabia brokered and recently extended oil output cut agreement between OPEC and non-OPEC members has become the flagship symbol of cooperation.

On June 2, Russia's largest oil producer, Rosneft, and the Kingdom’s national oil company Aramco announced that they would look into joint investments in Saudi Arabia. The announcement was made after Rosneft head Igor Sechin and Saudi Aramco Chief Amin Nasser had held their first ever formal, scheduled meeting on May 30, going beyond brief encounters at international oil events.

The parties discussed possible ways of cooperating in Asia, including Indonesia and India, as well as in other markets. Cooperation in Asia between the world's two biggest oil exporters would be unprecedented. Saudi Arabia via its oil giant Aramco has openly stated to be interested in global gas investment opportunities, starting in Russia’s Siberian region.

Investments have all chances to be a true ram. Saudi Arabia would particularly consider the issue of participating in the Arctic LNG projects. Russia and Saudi Arabia give indications of a possible OPEC 2.0 scenario, with Russia becoming a member. This would confront the market with a renewed and stronger oil cartel.

Russian gas giant Lukoil has revealed that it will also consider marketing oil alongside Saudi Aramco. Another Russian oil company, Tatneft, has announced it is open for cooperation with Saudi Arabia.

Saudi Arabia has confirmed it would evaluate the possibility of joining Russia's arctic liquid natural gas (LNG) project. Saudi Aramco has always been heavily involved in the gas sector, as it is already a very large gas producer. It is pursuing shale gas in the future, with first production expected around 2020-2021.There are prospects for OPEC – non-OPEC cooperation going beyond crude oil to integrate the Gas Exporting Countries Forum (GECF). A new cartel would be powerful enough to stabilize the energy market and protect it from negative developments.

The parties do not agree on Syria and some other issues but the differences in political contacts are limited and do not affect the neutrality of Riyadh with respect to Crimea, the events in Ukraine and sanctions against Russia, which Saudi Arabia has never joined.

According to Dmitry Shugaev, the head of Federal service on military-technical cooperation (FSMTC), arms deals are being discussed. Russia's Rostec state corporation has been in talks with Saudi Arabia and on the T-90S third-generation main battle tanks deal. Riyadh wants to purchase Russia MiG-35 lightweight fighters. S-400 cutting edge air defense systems are also on the table.

No doubt, the Qatar crisis will be part of the agenda. Russia has not taken sides in the current dispute between Qatar and other Arab states and it has a recent history of cooperation with all sides of this conflict. As a result, Russia is well suited to act as a mediator and a communications channel between Riyadh and those who support Doha – such influential actors as Iran and Turkey.

Evidently, Saudi Arabia wants to introduce adjustments to its policy of one-sided focus on the United States. Russia has improved its strategic stance in the region significantly in recent years. The King’s visit will be a "turning point" in relations between the two countries. Riyadh’s desire to boost the relations with Moscow can be seen as a shift to affect the political dynamics of the Middle East and even global politics.