Saudi Arabia

EU states’ rejection of financial blacklist will ensure European firms retain access to Vision 2030 investment opportunities

ANALYSIS

EU member states unanimously rejected on 7 March a proposal by the European Commission to add Saudi Arabia to a list of nations it assesses as having lax controls against money laundering and terrorism financing. EU states said the blacklist, which named 23 countries including the Kingdom, had not been compiled in a transparent manner. The move means the Commission must now prepare a new list. Separately, in Riyadh, the trial of ten women’s rights activists began on 13 March. The women, who were arrested last May in the weeks before a ban on women driving in the Kingdom was lifted, have reportedly been charged under Saudi Arabia’s cybercrime law. One week earlier, 35 countries, including all EU member states, called on Riyadh to release the activists, in a rare censure of the Kingdom at the UN Human Rights Council.

The Commission added Saudi Arabia to its draft blacklist on 13 February despite opposition from member states including the UK and France (see our 15 February Report). The move would have led to increased scrutiny of financial transactions with Saudi Arabia and potentially raised costs for investors, negatively impacting Riyadh’s attempts to reverse a decline in foreign direct investment (FDI) that is needed to fund Crown Prince Mohammed bin Salman’s ambitious Vision 2030 reform programme. This explains the Kingdom’s significant lobbying efforts to secure its removal from the list, including threats to cancel contracts. Indeed, King Salman personally wrote to all EU leaders in an attempt to reverse the Commission’s decision.

The EU member states’ criticism of the list as lacking in transparency is not unwarranted as the inclusion of Saudi Arabia while omitting states such as Russia – which has also faced accusations of having lax anti-money laundering rules – made the list appear partial and damaged its credibility. Since the Commission is unlikely to expand the list even further, it is unlikely to risk including Saudi Arabia on a revised version. Had the list been approved, European firms would have found themselves at a disadvantage in regard to investment opportunities arising from Vision 2030, which seeks to increase the private sector’s contribution to GDP from 40% to 65% by 2030. This likely explains the receptiveness of Saudi Arabia’s Western partners to the lobbying from both businesses and the Saudi establishment. Riyadh has also signed a number of memorandums of intent over the last two years – including an estimated USD 10 billion deal in March 2018 to purchase 48 Eurofighter Typhoon jets from UK-based BAE Systems – which European companies and governments will have been wary of seeing cancelled.

Nonetheless, Western firms will remain cautious over the coming months of reputational risks connected to Saudi Arabia – and in particular Crown Prince Mohammed bin Salman – given the ongoing international fallout over the murder of Saudi journalist Jamal Khashoggi. For instance, on 9 March a major US investment firm returned USD 400 million it had received from Saudi Arabia’s Public Investment Fund to develop the Saudi entertainment sector as part of Vision 2030, highlighting how the incident continues to damage Riyadh’s reputation. That said, FDI into the Kingdom is likely to increase in the coming years, as concerns over the Khashoggi murder recede and Western companies look to secure long-term investments. In the meantime, the Government will take steps to improve the Kingdom’s reputation in order to rebuild investor confidence. Indeed, it is likely that Riyadh will pardon at least some of the women’s rights activists currently on trial as it attempts to repair its international image.

 

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