The Kingdom and the Power

DOD. King Salman -- pictured here while still crown prince -- has come to power at a difficult period for his kingdom.

Octavian Report: Why do you think King Salman is pushing an agenda of apparent reform — if he is in fact the one doing it?

F. Gregory Gause III: I think that it is completely driven by the collapse of oil prices. The ideas behind this aren’t new. I’ve always thought that this was the easiest money McKinsey ever made because you can pull off the shelf plans that the Saudis have been generating for decades about the need to reduce the oil dependence in the economy, to have non-oil sources of government revenue, to restructure the relationship between the private and the public sector, to encourage Saudis to work in the private sector. None of this is new. I think that the thing that’s new about it is that you have buy-in from the very top in a very public way. The question is how long does that last.

I think that they’ve taken some interesting steps. They’ve taken steps that impose real costs on Saudi’s citizens — reducing subsidies on utilities, on water and electricity, and on gasoline at the pump — and some symbolic things like cutting the salaries of the ministers and taking away some of the perks in terms of overtime and vacation from civil service. These things are real. There’s no question about it. But what they haven’t done is what I think are the core things.

One is taxation. There’s a lot of talk about a VAT and plans on the books to implement it in 2017 across the GCC. We’ll have to see. VAT is regressive, obviously, since it’s on consumption and not income. It would be an interesting way to tax the foreigners but you’re also taxing Saudis. At the same time that you’re cutting their benefits, you’re taxing them. It would be interesting to see how that works and if it gets implemented. The other thing — and I think there’s less of a sense in all of these government documents, the Vision 2030 and the national transformation plan, of how you’re going to do this — is the restructuring of the labor market.

The Saudis have been pursuing a labor policy called nitaqat — nitaqa just means “a level” in Arabic. Basically companies are assigned a grade in terms of how many Saudis they’ve employed; based on the sector they’re in, they’re supposed to hit certain benchmarks. If they hit their benchmarks then they get visas to hire foreigners. That’s led to some movement to include Saudis in the labor force in retail but it’s also led to a lot of shadow hiring. The core of the labor issue — and to me, doing something like this would be the real sign of seriousness — is taking steps to make foreign labor more expensive for the Saudis’ private sector. The Saudi private sector has been a job-creating machine. It’s probably created a million jobs in the last decade. If Saudis had filled 80 percent of those jobs or maybe 50 percent of those jobs, we wouldn’t be talking about employment as an issue. But they didn’t. Almost all of those hires were foreigners. The Saudi private sector has a business model that is predicated upon wage rates that you pay to foreign workers being lower than wage rates you’d pay to Saudis.

If you equalize the cost of labor as an incentive for these companies to hire Saudis, they will complain and moan, they will talk about how Saudis aren’t prepared for these jobs, that the education system is bad. They will bemoan the cost of training them. These are people with political influence. They will try to prevent that from happening and reverse it if it does. That to me is the real, real test of seriousness here. I’m not saying that they’re not serious. But if you look at the revenue gained from the changes in the subsidy policy so far — I saw one estimate that it’s one to two percent of GDP. But they’re running a budget deficit that’s going to be between 20 and 30 percent of GDP this year when they finally close the books, depending on how many people they don’t pay this year and kind of push out the payments.

Subsidies are not going to be able to put you on a sound fiscal basis if the price of oil is going to fluctuate between 40 and 60 in the out years.

OR: Do you see them engaging in serious social or political reform?

Gause: You mean loosening some of the restrictions on people on the social side? Maybe. I mean, the plan calls for movie theaters and increased amusement and in general a richer menu of choices in public entertainment. That would mean lifting some of the restrictions on people. We know that Muhammad bin Salman has talked publicly about the driving ban on women and said this has got to change. In that regard, maybe. I always thought if the driving ban was changed, it would be completely sold as an economic matter, not as human rights or women’s rights or anything like that. It’s going to be: do you know how many drivers we have in this country? Do you know how much money we pay them? Do you know how much money that leaves the country because of that? That’s going to be the argument. This would be the time to do it, obviously.

On that score, there’s a possibility of change. On the political side, all the trends are on the opposite direction. Saudi Arabia, from a very low bar, was a little bit freer in the Oughts after 9/11 and the Al-Qaeda attacks in Saudi that began in 2003. There was some loosening up in terms of what you could say in the newspaper, that kind of thing. After the Arab Spring that all closed down.

OR: What do you think the chances are that there is a real political implosion there in the short term?

Gause: I think they’re pretty low. I think that if you’re going to get a serious threat to the regime in Saudi Arabia, you have to have three things. You have to have an economic crisis. We’re in a ton of austerity but not crisis yet. The Saudis still have $500 billion in the bank. They’re not quite there in terms of crisis but, yeah, certainly austerity. It kind of clicks that button a bit. The second thing you’d need is a regional crisis, heightened pressures. We certainly have that. But the third thing you need is what’s at the top. Well, I know that there are members of the family that don’t like this concentration of power in the hands of Muhammad bin Salman. But I see no evidence of a concerted effort within the family to block him that will lead to the kind of split that we saw in Saudi Arabia in the late 1950’s and early 1960’s between King Saud and Crown Prince Faisal.

OR: What do you think the succession will look like?

Gause: This is, of course, all complete speculation. If there’s one thing that the Saudis hold very close to home it’s their own family business. There’s some families in the area that are more open; they play out their family problems in a more public way. Like the Al-Sabah in Kuwait. If you read the Kuwaiti papers between the lines, you kind of know how things are going inside the family. Saudis don’t do that. It’s all speculation. My guess is that it all depends on God — as everything does in Saudi. If God takes the King soon, my guess is that Muhammad bin Salman sees his power constrained by Muhammad bin Nayef. If God allows the King a number of more years, then perhaps the King will feel that things have settled in enough that he can ditch Muhammad bin Nayef and put Muhammad bin Salman in as crown prince. That’s just my speculative read.

OR: Do you think that would be a positive for stability long term?

Gause: No. This is a big enough family that I think that you have to try to keep some amount of, if not enthusiastic unity, then quiet acquiescence. Because if you get a strong front within the family that opposes the leadership, they can create all sorts of problems. They can try to mobilize constituencies in society that can open up politics in ways that could be dangerous.

OR: How do you see relations between Israel and the Gulf developing?

Gause: I think that the Israelis are more excited about this than a sober analysis of the situation would indicate. I think what drives Saudi’s foreign policy is Iran. I think that this is kind of the core of the disquiet between the U.S. and the Saudis right now because we see Salafi Jihadism as the major threat and they say Iran is the major threat. Not that they like the Salafi Jihadists — it’s just the way they prioritize things. Who else in the region sees Iran as the major threat? Israel. The Saudis and the Israelis are clearly talking. We’ve had some public signals of that and there are private signals of that. The Israelis would like this to become more public. They like having Arabs publicly acknowledge their existence, right?

My sense is that the Saudis would find that too risky right now. To some extent, I think the Saudis are getting a lot of what they want from the Israelis in terms of intelligence cooperation. Why buy the cow if you’re getting the milk? The only thing that might lead to Saudi’s rethinking is that the Israelis didn’t help them on the JASTA thing. The Israelis could be telling them, “Look, we want to cooperate with you but we cannot be your mistress — we want to be your wife. If you cannot be public with us then we’re not going to be help you in Congress.” There might be some of that going on. If the Israelis had helped the Saudis with JASTA, an override might still have gone through — but it would not have been seven to one.

OR: Do you think that JASTA will be a long-term issue for U.S.-Saudi relations?

Gause: Yeah, I think it is. It’s not immediate. The relationship is going to keep going at all sorts of functional levels of military stales and training and cooperation and intelligence cooperation and a ton of things. In the longer term, the problem here is that some of the pillars of the relationship no longer exist. One of the pillars of the relationship was the Cold War. Well, that’s over. But the minute the Cold War ended, so to speak, the Gulf War started and the U.S. and the Saudis cooperated enormously. It was considered very successful on both sides and that sustained the relationship for a while. But to the extent that you don’t have a Saddam Hussein and the United States tends to be looking to Iran or at least trying to think about another kind of relationship with Iran — if the Iranians don’t cooperate, of course, that strengthens the U.S.-Saudi relationship — that’s there.

Then there’s the very strong belief in policy circles in Washington — I think an exaggerated one, but it’s very strong — that Wahabbism is one of the problems. That view is very strongly held in Washington. Then the third issue is that all sorts of people in Washington say, “Hey, we don’t have to care about oil. We got plenty of oil here and look at the price, it’s way down.” Again, I think that’s somewhat shortsighted. I think you’d like to have a decent relationship with the largest oil exporter in the world. But impressions are more important than facts a lot of times in how you deal with things.

I think that those are the longer-term pressures on the relationship. I think that the day-to-day cooperation between the U.S. and the Saudis is strong enough that it will be sustained for the immediate and medium-term future.

OR: Do you believe that the Saudis will go nuclear in response to the Iran deal?

Gause: The only way they could do it is if the Pakistanis had a deal with them. The Saudis asked the Pakistanis last year to send troops to Yemen. The Pakistani said no. I’m not really sure there’s a 100 percent certainty that the Pakistani would say, on nukes, “Sure, here. Have a couple.”

The Saudis really don’t have any infrastructure to go nuclear. They haven’t devoted the kinds of money that even the UAE have to develop a nuclear infrastructure in the country. If they’re not going to be able to get it on loan from somebody else, then it seems to me that they’d have to develop it domestically and I don’t see them taking the kind of steps that would be necessary to do that. I think in the end there’s probably a sense that they can rely on a U.S. nuclear umbrella. I never thought for the Saudis that the main issue was nuclear with Iran. I think for the Saudis the main issue was Iranian behavior in the region.

The Iranians don’t need a nuclear weapon to play into the politics of Syria, Iraq, Lebanon, Yemen — the places where they have been extending their influence. The Iranians are successful not through conventional or unconventional military means. They’re successful through supporting clients and allies in domestic conflicts and civil wars in weak Arab states. That’s what they’re good at. You don’t need a nuclear weapon to do that. Having a nuclear weapon I don’t think makes you better at that. For the Saudis, I think the problem with the nuclear deal was always they wanted the deal to include some limitations on Iranian regional policy. Of course, that was never on the table.

OR: How do you see the Yemen conflict playing out?

Gause: I think the Saudis are looking for an off-ramp. But the off-ramp basically has to be the Houthi leaving Sana’a. Obviously, the war’s gone on longer than the Saudis thought. I think the Saudis were ready for a deal when the negotiations were going on in Kuwait. But the Houthis, I think understandably, are basically saying: why should we give up when we’re doing okay? Of course, the Iranians could tell the Houthis, “Cool it. Let’s get a deal here.” They have no incentive to do that right now either.

OR: How do you see the relations between Saudi and the Emirates at the moment? Do you see the Saudis playing any role against ISIS?

Gause: I think that there are two questions here. One is the Emirates and the other Gulf states. I think to the extent that the countries in the GCC feel there’s a real threat out there, they tend to cooperate more. To the extent that they think that their situations are pretty secure, they tend to go off on their own. The Saudis kind of pulled the Qataris back into the tent because they thought there were really serious things going on. Now, there are divisions here. The Qataris are very close to the Brotherhood. The Emiratis are 100 percent against the Brotherhood. The Saudis are playing in-between on that these days. Everybody’s against ISIS. But I think this goes back to the whole issue of priorities. I just don’t think that for the Saudis ISIS is the top priority. I don’t think the ISIS is the top priority for the Emiratis right now. I don’t think ISIS is the top priority for the Qataris.

It’s hard to have a unified GCC position on ISIS that goes beyond the rhetoric. Rhetorically, yeah: they’re all against ISIS. But where are the Emiratis putting their military resources? They’re putting them into Yemen, mostly against the Houthis. Maybe once in a while against Al-Qaeda or the ISIS guys in Yemen, but mostly against the Houthis. We don’t see the Gulf states particularly active against ISIS in Syria and Iraq.

OR: Where do you see U.S.-Saudi relations going over the next five to 10 years? How do you see the Cold War between Saudi and Iran playing out over that same time period? How do those two interface with each other?

Gause: I’ve called this a Middle East Cold War because I don’t think the Iranians and the Saudis are going to shoot at each other — but they are going to arm people who are shooting at each other just as we and the Soviets did during the Cold War. I mean, I see a lot of analogies. I think it goes on. I think it really is in the hands of the Iranians because they’re winning. The Saudis are losing. The question is: do the Iranians want to draw back to some extent in terms of their advances and try to make a deal with the Saudis? The only thing that pushes in that direction right now is lower oil prices.

The Saudis and the Iranians are talking; the Iranians are driving a hard bargain. It’s always on oil prices. But the Saudis and the Iranians have a common interest in having oil prices higher than they are now. That’s the one thing that might lead to some kind of dialog. But right now, as I said, the Iranians are winning — and my read of Iranian politics is that this element of their foreign policy is not in the hands of the more moderate folks who might be willing to cut deals. This is in the hands of the Revolutionary Guard and people for whom the spread of Iranian influence and the Iranian ideological message is much more important.

I think that the folks who are running Iranian regional policy and are conducting a very aggressive policy still have the upper hand in Tehran, and that this will drive the Saudis and the Americans together. I think the Obama administration thought it was playing a long game: do the nuclear deal — which in and of itself brings benefits; it pushes back Iranian breakout, for one thing, and the stupidities that we hear in the political debate about how this assures that Iran will get a nuclear weapon 15 years down the line are just about the dumbest things I’ve ever heard — and hope that by doing this deal and “empowering the moderates” in Iranian politics, you might be able to then go on to have conversations about Syria and Yemen and regional stability.

That hasn’t happened. To the extent that that doesn’t happen, that drives the Saudis and the Americans closer together. Because even though I think that there are plenty of people in Washington who would like to have a more normal relationship with Iran, nobody in Washington wants Iran to dominate the Middle East. We don’t want anybody to dominate. We want us to dominate the Middle East. I think that to the extent that the long game that the Obama folks thought about with Iran doesn’t work out, then the U.S. and the Saudis are pushed together by a common enemy.

OR: What warning signs should we be looking for on the economic and geopolitical fronts that might indicate a real threat to the stability of the regime in Saudi?

Gause: On the economic side, I would say that it would come when the Saudis weren’t able to borrow anymore. Now, they have a pretty low debt-to-GDP ratio. In the past, they ran up their debt-to-GDP ratio to over 100 percent back in the 1990’s because of the oil-price collapse in the mid-80’s and then the flat prices through the 90’s. The Saudis basically funded their operations three ways. A, they borrowed domestically. They didn’t do much foreign borrowing. They basically borrowed domestically, borrowed from their own social security system. They borrowed from their own banks. B, they tried to play oil diplomacy to prop up prices. We saw that certainly in the late 1990’s. C, they did the whole Soviet thing. They rationed goods by making people stand in line. To the extent that we see them unable to borrow either domestically or in foreign markets, I think that would be a really interesting indicator and we certainly aren’t there yet. It seems like banks are lining up to lend them money. On the fiscal side, that would be it. I mean, obviously this is a place where all during the Arab Spring, you had very, very few public manifestations of protests and they were all in the Shia area. If people actually take to the streets, that would be amazing and really important — but I kind of don’t see it.

On the international side or the regional side, I think that what I would look at is open efforts by Iran to stir up the Shia community, combined with open efforts by ISIS to carry the campaign into Saudi Arabia. Right now the Saudis would tell you, “Oh, yeah, the Iranians are screwing around with our Shia.” But the Iranians aren’t doing it publicly and I don’t think they’re devoting that many resources to it. If they really said, “All right, this is it. We’re going to play all our cards against the Saudis,” we’d see that. If that happened at same time that there was an ISIS campaign, that would strain Saudi’s internal security forces — which would be interesting.