October 20, 2018

How to Respond to Saudi Arabia After the Khashoggi Disappearance

17 October 2018

The US and European governments must move beyond rhetoric and implement sustained diplomatic measures to persuade Riyadh that political reform is its only option.

Dr Neil Quilliam

Senior Research Fellow, Middle East and North Africa Programme

@NeilQuilliam1

2018-10-15-MBS.jpg

A portrait Mohammed bin Salman appears during a show at the King Fahad stadium in Riyadh as a part of celebrations of Saudi National Day on 23 September. Photo: Getty Images.

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There is no doubt that the disappearance and likely death of Jamal Khashoggi will now damage Saudi Arabia’s relations with the US and Europe, should Riyadh be found responsible. (And as yet, Saudi Arabia has done little to convince that it is not responsible.)

They are already trading barbs. Donald Trump has said that Saudi Arabia will be ‘severely punished’ if found responsible for Khashoggi’s death, and while he has since walked back some of his remarks, leading Republicans are pushing for a strong response. Meanwhile, the Saudi commentator Turki al-Dhakheel claimed in an Al-Arabiya column that ‘more than 30 potential measures’ are being discussed by the kingdom as responses to potential sanctions.

But responses from either side would not and could not be as straightforward as the rhetoric suggests. 

Saudi Arabia’s relationship with the US and European states, the UK and France in particular, is multidimensional and comprises strong institutional links between militaries and intelligence agencies as well as in the education, finance and energy sectors, among others. It is far more than a simple transactional relationship based on oil and defence contracts – though their importance cannot be disputed. 

Although not strictly allies, Riyadh’s partners are engaged in a long-term association that has tied together their common security, economic and trade interests as well as, arguably, a common pursuit for stability in the Middle East. This factor alone means that the US and its allies cannot simply disengage and stop providing support to Saudi Arabia – defence sales are long-term, complex investments that cannot be turned off like a switch. 

At the same time, Saudi Arabia cannot simply switch arms suppliers and turn to Russia or China, as suggested by both Trump and al-Dhakheel – that is a fallacy. Not only would it take years to transition to new military operating systems, but Russia and China’s close relations with Iran would pose an immediate challenge. Buying additional pieces of military kit is very different from swapping security umbrellas. 

Like it or not, Saudi Arabia and its partners need one another; they share a long-held interdependency, and the US in particular now considers Riyadh to be an important plank in its effort to push back against Iran. Moreover, the US and European states have invested heavily in Crown Prince Mohammed bin Salman’s (known as MBS) domestic reform project and a lot rests on its success –for the long-term stability of both the kingdom and the region. To that end, neither the US nor its western European allies will wish to see the relationship with Saudi Arabia placed at risk or the reform agenda undermined.

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The UK-Saudi Arabia Relationship: A Closer Look

The UK-Saudi Arabian relationship is long-standing and heavily concentrated on security: a key pillar of the relationship is the controversial flow of arms from the UK to Saudi Arabia.

Instead, they will need to recalibrate the relationship and set terms that place a constraint upon the adventurism of MBS, accompanied by a list of measures they wish to see from the kingdom, aimed at advancing reforms, restoring lost confidence among international investors and helping to stabilize the region. 

It is a tall order. Those measures should include, among other things: releasing women reformers, social media activists, business leaders and clerics; ending arbitrary detention; observing the rule of law; pursuing a compromise with Qatar; working towards a solution for Yemen; and, more generally, ending impulsive foreign adventurism.

However, Saudi Arabia’s spat with Canada, which led to a downgrade in diplomatic relations, withdrawal of over 8,000 Saudi students from Canadian higher education institutions and the threat of divestment, made it clear that Riyadh is in no mood to tolerate public criticism or be advised in public by Western policymakers. Therefore, the US and European allies will need to use their leverage to make the Saudi leadership come to its senses.

They have a number of levers to pull. These include: downgrading diplomatic relations, withdrawing ambassadors (though there is currently no US ambassador to Saudi Arabia), cancelling visits to Riyadh and postponing meetings between ministers. King Salman would find these measures hard to resist, given his natural inclination towards a more conservative and consensual approach to decision-making and the fact that MBS is now rocking the family project.

If the above measures do not work, then key institutions, such as the US Congress and European national parliaments, will push for much harder measures, including sanctions against senior decision-makers, which would ultimately work against the collective interests of Saudi Arabia and its partners. These would cause severe damage to the relationship and constitute an act of self-harm for all countries involved, especially Saudi Arabia, which is locked into geopolitical conflict with Iran, Turkey and Qatar, in addition to a war in Yemen.

Therefore, it is important that the US and European allies move beyond rhetoric and implement sustained diplomatic measures aimed at persuading King Salman that, for his country’s future, he has no choice other than to continue down the path of reform.

A version of this article was first published inThe Hill.

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October 16, 2018

Humanability: harnessing the power of tech to add value to our lives

  Ever consider using data to reduce pollution by solving traffic congestion? What about enabling doctors to treat patients far away through technology? Verizon calls this phenomenon humanability: giving humans the ability to do more new and more good through tech. Learn more about it here.

Khashoggi puts global press freedom in spotlight

AXIOS Media Trends



Data: Reporters without Borders; Chart: Andrew Witherspoon/Axios

The disappearance (and presumed murder) of Washington Post contributor Jamal Khashoggi has the world wondering how much the U.S. and its allies will fight for press freedoms and justice.

Why it matters: Many in journalism worry President Trump's rhetoric on "the fake news media" has in part empowered authoritarian regimes to act out against the press without fear of U.S. repercussion.

Between the lines: The saga has also forced industry leaders to take a stand against the regime, which until this point has experienced a muted reaction from many world leaders, including U.S. allies.

New York Times columnist Nicholas Kristof told Axios' Dan Primack on his Pro Rata podcast yesterday that this is in part because the seemingly-progressive regime was able to form such a large network of business relationships with U.S. companies.

Media companies that were participating in an upcoming Summit hosted by the regime (CNN, Bloomberg, CNBC, NYT) have all pulled out of the event, with the exception of Fox Business, which says their decision is still under review.

Ari Emanuel's talent agency Endeavor is looking to dissolveits $400 million deal with the Saudi Public Investment Fund.The New Times has also shut down three Saudi tours that were scheduled as a part of its "Times Journeys" tour program.

The big picture: The U.S. ranks 45th out of 180 countries on the World Press Freedom Index, according to a Reporters without Borders study.

Countries under oppressive regimes in North Africa, the Middle East and Asia, like Saudi Arabia, North Korea, Somalia and Iran, are ranked the lowest.European countries, like Norway, Sweden, Finland, the Netherlands and Switzerland, take the top five spots on the Press Freedom Index.The U.S. ranking is similar to countries like the UK, Taiwan, South Korea, Romania, Italy, Botswana, and Senegal.

Madison Avenue's trust problem

AXIOS Media Trends

Illustration: Rebecca Zisser/Axios

 

The world's largest advertising companies face a growing threat from clients moving more of their media strategy and creative businesses in-house.

Why it matters: The trend is happening amid a trust fallout between agencies and companies over murky ad-buying and contract bidding practices, some leading to federal investigations.

Driving the news: A new report from the Association of National Advertisers (ANA) finds that agencies are suffering more than ever from companies shifting marketing functions that were typically outsourced to agencies to teams in-house.

Nearly 78% of the companiessurveyed say they now have an in-house agency function, compared to 58% in 2013 and 42% in 2008.Roughly 79% percent of in-house agencies have in-house video production capabilities and nearly half (49%) have established their in-house production capabilities within the past five years.This year, over 36% of companies say they are bringing media strategy and planning functions in-house, compared to 22% in 2013.

What they're saying... The head of marketing and communications at a well-known consumer packaged goods company put it this way to me on a call:

"Sometimes we feel bait and switched. An executive team will come in to pitch us on a great idea, and then it gets punted down to lower-level staffers for execution who don't have the right expertise. It becomes more efficient to bring some of the creative services in house so we don't waste our time."

Between the lines: Financial struggles and minimal oversight at some of the biggest global agencies have for years led to bad practices, like kickbacks and bid-rigging, that have led marketers to question whether their dollars are being wasted.

Federal prosecutors in Manhattan have opened an investigation into media-buying practices in the advertising industry, the Wall Street Journal reported last month. The Journal also reported that the feds are seeking help from the ANA in the probe.The investigation follows a 2016 DOJ probe over whether media agencies were undermining independent ad production companies by rigging the bidding process.

The big picture: The biggest agency holding groups, such as WPP, Omnicom and Publicis Groupe, have been struggling to drive growth over the past year.

The bottom line: "Investors are generally negatively oriented around agency holding companies at present, largely understandably," writes Brian Wieser, a Senior Research Analyst for Advertising at Pivotal Reearch, in a Q3 research note.

"Concerns around the potential impact of an FBI investigation into transparency related topics have re-emerged, and the regular drumbeat of doom and gloom from news reports of marketers' cost-cutting exercises, in-housing and use of consultants is ever-present."

— Wieser

What's next: Some marketing executives say this conundrum has pushed them to move away from agency retention models and instead move toward a fixed-fee project billing model.

Iran Nuclear Deal Breakdown: What Does It Mean for European Business?

Geopolitical Monitor

OPINION - October 15, 2018

By Ben H. Quandt

The Joint Comprehensive Plan of Action (“JCPOA”), as it is formally known, is the culmination of a decade of intensifying economic sanctions, diplomacy, and negotiations. The deal was finally agreed on 14 July 2015 in Vienna between Iran and major world powers: China, France, Germany, Russia, the EU, the UK and the United States. It was adopted unanimously by the United NationsSecurity Council on 20 July 2015 as Resolution 2231.

The deal trades a halt in Iran’s nuclear program, along with verification protocols, for relief from economic sanctions and opening to global trade. The Obama administration never fully relieved all US-imposed sanctions; most of the primary sanctions on Iran’s ballistic missile program and the US trade embargo remained in place.

Fast-forward to 8 May 2018 and President Trump’s announcement that he will not sign the sanctions waiver. The US has decided to unilaterally reimpose economic sanctions on the Islamic Republic to be activated in two tranches, in August and November. The November round will hit Iranian oil exports, the lifeblood of the economy. This would be the second time Iran’s oil exports have been surgically targeted by US sanctions, the first being in 2010 under the Obama Administration, which was cited as a major factor in bringing Iran to the table on the nuclear deal. The reimposition of US sanctions has contributed to a slide in the Iranian rial, which has lost approximately two-thirds of its value against the US dollar this year.

 

The European Response

As recently as 6 August European Union Foreign Minister Federica Mogherini announced that the EU would update its Blocking Statute to protect European firms engaging in legitimate business with Iran, going as far as to encourage Europe’s small and medium enterprises to “increase business with Iran,” referring to the action as a “security priority.” The Blocking Statute is designed to protect European firms from the effects of extra-territorial sanctions imposed by the United States; that is, sanctions the US seeks to impose outside of its jurisdiction. The EU Blocking Statute has yet to be tested. Mogherini further stated that the remaining parties to the deal would commit to maintaining financial channels for the export of Iranian oil and gas. On 23 August, the EU commissioned its first round of financial support for Iran totaling EUR 18 million. This is part of a EUR 50 million package to support private enterprise in the country.

One of the key problems for the EU and European companies is their exposure to, and dependence on, the US dollar. The global financial system is based on the dollar and those transactions eventually wind up remitting through the US Federal Reserve, which is why the United States can exert extra-territorial leverage. The first option being tabled by Germany, France and the UK, is around establishing an alternate financial channel in order to facilitate trade with Iran. This could take the form of a legal entity, a Special Purpose Vehicle (“SPV”) – essentially a barter trade account – which would hold Euro-denominated credits from Iranian exports to spend with European suppliers. High-level meetings held on the sidelines of the United Nations General Assembly in September 2018 have seen Mogherini and Iran’s Foreign Minister Javad Zarif announce the creation of such an SPV. The final details are yet to be released. This alternate financial channel is the best option for ensuring continued trade and potentially saving the nuclear deal.

With the unique creation of this SPV, European companies can conduct legitimate business with Iran. The SPV has the support of the remaining parties to the Iran Deal: Russia, France, Germany, China, the UK and the EU. The European Union will be in the spotlight as to whether they can stand firm in the face of pressure from the US. It will be a telling moment for the EU leadership, which will have lasting repercussions either way.

 

The Role of China

Arguably the most influential party to the agreement is China, as Iran’s largest trading partner and the biggest export market for Iranian crude. The European Union has in recent years been looking East, cozying up to Beijing as there is a stronger realization that trade with China is paramount to Europe’s future prosperity. At this stage, the Chinese have indicated they are not going to be cutting crude purchases from Iran. The China-Iran relationship is transactional in nature and Beijing sees Iran as a “valuable non-US-aligned partner in a geostrategic region,” according to RAND’s Scott Harold. Harold also asserts that: both countries share “a skepticism of the US-led international order.” China has repeatedly thwarted international (EU and US) pressure to comply with international sanctions regimes imposed on Iran. In 2012 when the Obama Administration again pressured China to cut imports of Iranian oil Beijing voiced its opposition, though ultimately agreed to lower purchases by 20 percent.

The Chinese leadership has been taking concrete steps toward internationalizing the yuan, which importantly means paying for crude oil purchases in their own currency. As the world’s largest importer of crude, this is significant. In March this year, the Chinese launched crude oil futures on the Shanghai stock exchange, denominated in yuan. As of July, the yuan-based crude futures contracts already had won a sizeable 14.4 percent market share. China has already tested yuan-based payments for crude with both Russia and Iran via the Bank of Kunlun, a subsidiary of China National Petroleum Corporation.

Alternate payment channels are now widely being tabled. In addition to the EU proposal for the creation of an SPV, Russia, Turkey, and Iran have been in discussions – as recently as September – about ditching the US dollar in transactions between the three nations. Over the past five years, Iran’s trade with Russia has averaged USD 1.8 billion per annum, and with Turkey USD 6.6 billion. Second, there is the option of utilizing a bank with no exposure to US dollars. There is precedent for this in Russia. Rossiya and SMP, both Russian banks with close ties to Putin, have been under US sanctions since 2014. In that time, both banks have seen increases in their assets, primarily based on financing construction projects and establishing retail banking operations in Crimea.

 

What Does This Mean for European Businesses?

European businesses have a new 80-million-strong and largely untapped market to enter. Despite decades of economic sanctions, Iran is the 26thlargest economy in the world (2nd in MENA to Saudi Arabia) with a gross domestic product (GDP) of USD 440 billion. This ranks on par with Thailand, slightly behind Poland, and ahead of Austria, Norway, and Nigeria. The Iranian economy grew by 13.4 percent in 2016 and 4.3 percent in 2017. Between 2000 and 2011, the economy averaged over 5 percent growth. However, with crude sales sliding over the past three months and uncertainty over the EU’s financial vehicle, the Iranian economy is forecast to contract by about 1-1.5 percent over the next three years.

These numbers alone make Iran a genuinely attractive emerging market. It is no coincidence that European majors rushed into the country after the JCPOA was formalized. Airbus signed an agreement to deliver 100 planes, Daimler entered into a joint-venture with an Iranian automotive manufacturer to build Mercedes trucks, French oil and gas firm Total earmarked USD 1 billion for Phase-2 of South Pars, and Swiss company Stadler Rail had a USD 1.4 billion deal for the production of railway cars. All of these deals have been withdrawn from or placed ‘on hold.’ Large European multinationals face uncertain regulatory risks at present. The threat stems from secondary sanctions imposed by the US given their large exposure to the US market and the US financial system, plus potential global brand reputation risk.

The situation is markedly different for European small and medium enterprises. Those with low- to no exposure to the US market could benefit from the fast-growing Iranian market. The EU is actively encouraging this strategy. It remains to be seen how much, and what type of, support the EU is willing to provide, and the effectiveness and strength of the Blocking Statute. For Iran, increased European business offers some hedging against the overwhelming Chinese influence in the economy by diversifying their trading partners, and also serves to internationalize their position with increased vested interests. That said, the EU is mired with its own contentious issues: the ongoing migrant crisis, surging populist parties including the rise of the Alternative for Germany (“AfD”), Brexit less than six months away, and upcoming European parliament elections in 2019.

Ultimately, international public opinion presently sides with Iran, not the US. There is growing resentment even among Western allies of US unilateral and extraterritorial sanctions. Beijing’s drive to increase international acceptance of the renminbi coupled with the EU’s proposal to build a new financial mechanism to evade the US financial system will only serve to strengthen the knowledge base of how global markets will operate in a post-USD dominated system.

 

The opinions, beliefs, and viewpoints expressed by the authors are theirs alone and don’t reflect the official position of Geopoliticalmonitor.com or any other institution.