This article was first published here on ForeignPolicy.com on November 7, 2019.
If not for protests in Iraq and Lebanon and the still unfolding drama in northeastern Syria, Saudi Aramco’s pending initial public offering (IPO) would be by far the biggest story in the Middle East. Perhaps history will still remember it as such.
The two most important facts about Aramco are now directly in tension with one another. It has been central to the power of the House of Saud precisely because the royal family has had it under tight control. At the same time, Crown Prince Mohammed bin Salman has made it central to his plan to transform the country, known as Vision 2030, by promising to sell shares of the company to investors—thus giving them greater control over it.
So how to make sense of Mohammed bin Salman’s decision? The easy answer is money. Despite its reputation for vast wealth, Saudi Arabia needs more cash. But there is something else going on here: the political rehabilitation of the crown prince. His supporters will argue that he does not need to be rehabilitated because he has always enjoyed broad support in Saudi Arabia. That may be true, but to pull off Vision 2030, Mohammed bin Salman needs some of the international good will he enjoyed until mid-2017. There’s just one problem: The Aramco IPO is far riskier than the Saudis are letting on.
It is important to understand that although the media has reported extensively on the IPO, there is a lot of confusion about what is actually happening. The Saudis are offering stock in 2-5 percent of the company. One of the sticking points has been valuation, which after years of wrangling comes in at between $1.2 trillion (Bank of America) and $2.3 trillion, which is the high end of Goldman Sachs’s range. For their part, the Saudis say Aramco is worth anywhere between $1.7 trillion and $2 trillion. Whatever the valuation, the fact that the banks are estimating along a trillion-dollar range is unprecedented. If demand is weak and the Saudis sell 2 percent of the company at the Bank of America estimate, they will raise $24 billion. The best case would be strong demand (5 percent) and the Goldman valuation, netting the Saudis $115 billion. That is a big range, but either way, there is a lot of money at stake. Shares will be offered on Saudi Arabia’s domestic stock market, the Tadawul, reportedly beginning in December. The Saudi government is strongly encouraging Saudis to invest, meaning that there are investors (people within the orbit of the royal court and big business) who have no choice in the matter because their livelihoods and stature are dependent on proving they support Mohammed bin Salman’s program and retail investors who will invest because of all the hoopla and nationalist sentiment whipped up around the offering.
Clearly, the crown prince believes that the IPO comes at a good time. It will provide momentum to Vision 2030, which has not progressed as well as the Saudis had hoped. Just the act of floating shares means that he can cross something off his Vision 2030 checklist. It also means changing the narrative that has dominated discussion about Saudi Arabia since mid-2017 but certainly since the journalist Jamal Khashoggi’s murder in the Saudi Consulate in Istanbul in October 2018. It helps that global business leaders have indicated, mostly by showing up at Saudi Arabia’s recent investment conference (known colloquially as “Davos in the Desert”), that they want to move beyond Khashoggi’s killing and well … get back to business.
Still, there are risks that the current Saudi push to get an IPO done obscures. First, it may be a good moment politically for Mohammed bin Salman to move forward, but December is not an opportune time for an IPO. That is because international institutional investors who have met their target for yearly returns are reluctant to take on risk, while others who have not met their goal do not want to risk putting themselves further in the hole, and then you have the people who are so far off their mark that they are swinging for the fences. This is not a great investment environment, to say the least.
The second risk concerns the calculations made by international investors. The IPO is planned for two phases—a domestic offering and an international one. Although there has been much discussion about which international exchange Aramco will be listed on, analysts do not actually believe it will ever actually happen. Foreign investors will likely be able to get a piece of the action only through Saudi Arabia’s stock market, which means that there will be what investment professionals call a “roadshow” to build demand for the company’s stock. On these roadshows, institutional investors will independently set the price of Aramco’s IPO. If the price doesn’t end up where Mohammed bin Salman wants it, he will be left with two choices: Go ahead anyway, or pull the plug. Both would leave egg on the crown prince’s face after the long IPO buildup.
The final risk is that the current geopolitical environment is not conducive to an IPO. It is true that the Saudis have sought to de-escalate with Iran since the attacks on Abqaiq and Khurais on Sept. 14, but Iran’s Islamic Revolutionary Guard Corps (IRGC) has every reason to keep the Saudis on the defensive and mess with Aramco’s IPO. The IRGC does not need to do something as spectacular as going after crude processing facilities but rather cause just enough damage to be noticeable and make investors nervous.
Let’s assume that all goes well and the IPO nets the Saudis anywhere between $24 billion and $115 billion. That will be a windfall—but one very much needed. The conflict in Yemen is expensive, and the Saudis have big development plans and many obligations. Meanwhile, the price of a barrel of oil has ranged between about $46 and $64 in 2019, making things tight.
The money will apparently mostly be used to advance the crown prince’s goals of remaking the Saudi economy and society. But those goals should be taken with a hefty dose of salt. For as long as anyone can remember, the Saudis have been announcing that they will diversify their economy so they are not so dependent on oil, but it never seems to happen. More than a decade ago, the Saudis announced plans for a bunch of new cities geared toward exploiting various economic specialties. The plans (and promotional video) were impressive, but the effort failed miserably. It was an enormous waste. The Saudis now seem determined to build out Neom, a futuristic city (with robots!) planned for the Red Sea coast. No Saudi official has ever come up with a good reason for the city to exist other than to declare that international consultants say it is a great location. But if that is the case, then why has a city not developed there before? A better use of Saudi resources would be to retrofit and rebuild the infrastructure in places where people actually want to live.
More than anything, Saudi Arabia’s leaders are interested in maintaining control. Even the social reforms that the crown prince has embarked on (and deserves credit for) are ultimately about control. Mohammed bin Salman has calculated that he has a greater chance of eliciting the loyalty of his subjects—and thus shoring up his own power—by giving them movies, concerts, and WWE wrestling events; reining in the religious police; and granting women the right to drive. There is always the risk, however, that people will demand more than the crown prince is willing to give. It is similar with the IPO; it is good for the Saudi leadership’s image, so they want to control the process. Yet once they float shares of the country’s most important firm and an actual price is established, Mohammed bin Salman will lose control. Suddenly there will be investors who will demand transparency and rules and ways to seek redress that insulates them from the whims of rulers. That is called a market economy. Is that what the crown prince really wants? He and his supporters say he does, but his actions have repeatedly suggested something else.
The IPO is really little more than a show meant to highlight Mohammed bin Salman’s vision and his public relations-heavy effort to bring Saudi Arabia into the 21st century. Like with Neom and other white elephants of the past, he and his advisors do not seem to have thought through the implications of what they are doing in favor of flashy announcements and the good press that comes with them. An Aramco IPO will certainly produce a financial windfall, but with it comes uncertainty and potential for failure. Certainly offering shares of the company may impose market discipline and transparency on Aramco, but as the IPO comes down to the wire, it seems motivated less by the economic rationale than the political benefit of claiming that a portion of Aramco was sold to investors. That’s no reason for such a consequential and irreversible step.