Saudi Aramco’s IPO: A Central Pillar in Saudi Arabia's Great Game

Published February 5th, 2018 - 11:24 GMT
The stock market flotation of Saudi Aramco is expected to be the world's largest ever initial public offering. (AFP)
The stock market flotation of Saudi Aramco is expected to be the world's largest ever initial public offering. (AFP)

By Eleanor Beevor

It is no secret that Saudi Arabia’s political calculus is made with an eye on the Sunni-Shia struggle for religious dominance. The kingdom’s recent misadventures abroad, from Syria to Yemen to Lebanon, have all aimed to stem Iranian and broader Shia influence.

This is particularly unsurprising given how Shiism has gained significant political victories since the 1970s, including a national seat of power in Iran, a formidable armed wing and quasi-government in Hezbollah, and an embattled but enduring Shia presidency in Syria. More importantly,
Shiism as an identity has emerged largely united.

It does have internal factions and schools of thought, but not to the extent that they impede cooperation. Certainly, they have been nowhere near as damagingly divisive as the identity struggles within Sunni Islam.


These Sunni struggles over identity are manifested everywhere from scholarly debates to religious violence, but the question is nowhere more fraught than in contemporary Saudi Arabia. The ultra-conservative theology of Wahhabism, that which backed the House of Saud and their foundation of the Saudi state, is now reckoning with the radical vision of the kingdom’s newest power broker.

Mohammed bin Salman, the 32-year-old crown prince and Deputy First Minister, has outlined his plans for a new Saudi Arabia, complete with fundamental economic restructuring, but also social reforms in line with a moderate, more tolerant Islam.

A push for both privatization and greater religious freedom might easily be read as a generic desire to “modernize” Saudi Arabia. However, a closer look at the relationships between these goals suggest a more complex series of political trade-offs, which could reshape the stories of numerous struggles across the Middle East.

In financial circles, however, there is only one story that matters now. It is the anticipated Initial Public Offering (IPO) of a share of Aramco, the national oil company. The company has an estimated value of over $2 trillion, and all major international stock markets are vying for Aramco’s attention.

According to kingdom statements, the IPO is intended to provide a huge cash injection for the Public Investment Fund that is going to finance Prince Mohammed’s signature reform plan. The plan, known as
Vision 2030, intends to see the economy diversified, the private sector empowered, and Saudi Arabia’s youthful population freed from reliance on state subsidies.

Despite the mind-blowing sums the IPO would generate, it is a double-edged sword for the kingdom. The IPO’s advantages are considerable, and perhaps indispensable to Mohammed bin Salman’s vision of liberalizing the economy. “Privatizing a portion of Aramco acts as a litmus test for how much of an impact privatization would make on the Saudi economy's efficiency," said Samuel Ramani, a specialist in International Relations at the University of Oxford.

“If this succeeds, Saudi Arabia is likely to expedite the process of shrinking the number of government jobs available and replacing them with private sector jobs. Many foreign workers will also either be sent back to their home countries or turned down, as Saudi government workers take over their jobs in the private sector.” Fears of the currently low levels of investment in oil exploration will also likely increase support for public trading.

There are significant political risks involved in the IPO, which have left some analysts questioning whether the deal is as imminent as the kingdom claims, or even whether it will happen at all. Aramco has always operated with a high level of secrecy, to the point that it was commonly feared that they were exaggerating the size of their reserves, a rumor they had to counter with an external audit in 2016.

Nonetheless, as state institutions go, their secretive dealings are unusually independent of much of the kingdom’s politics. This discretion has allowed Aramco to maintain an exceptionally competitive practice. Opening up the business to politicians’ and public investor’s scrutiny risks jeopardising this freedom. Ironically, a move towards privatization risks making Aramco more vulnerable to political process.

The greatest risk to the deal, however, is the potential loss of domestic political support it could result in. Numerous powerful actors in the kingdom have diverging opinions and interests in state resources, and will fear the precedent that privatisation sets.

Rob Mogielnicki, senior analyst at The Siwa Group consultancy, commented: “While the IPO itself is unlikely to cause an immediate physical disruption to power structures in the Kingdom, the plan may produce opposition driven by an emotional response. Some Saudi officials and citizens oppose the state-led efforts, which they see as reducing national control over the country’s most valuable resource. This opposition is heightened by those who view the IPO as a unilateral decision by the Crown Prince.”

A reduction of public subsidiaries and an increasingly powerful private sector, which the IPO will set a precedent for, will also likely force young Saudis to work longer hours, possibly for less money than they currently receive from the state. In this light, Prince Mohammed’s rapid social reforms have another advantage. The young generation of Saudi Arabia are globally connected, self-conscious of their international image, and anxious to refresh it. Harder work and less prosperity may prove an acceptable price for greater social freedoms.

“Liberalization in the political sphere doesn't appear to be on the agenda for Mohammed Bin Salman, but moderate secularization of the Wahhabi system is an arguably more effective and less destabilizing way to compensate for changing the work habits of Saudi nationals.

So one can expect especially conservative interpretations of Wahhabism to be loosened and day-to-day civil liberties to be somewhat enhanced in the years to come,” added Samuel Ramani. As the House of Saud are the symbolic guardians of Wahhabism, Mohammed bin Salman’s decisive shift may reverberate across Sunni Islam as a whole. Whether it will help to ease the divisions within Sunni identity remains to be seen.

However, as with all of Saudi Arabia’s major decisions, it must be asked what this means for Iran, and for a sectarian balance of power. Iran is also clamoring to increase exports of its own oil. After decades of sanctions, which began to lift after the 2015 nuclear deal initiated by Barack Obama, Iran finally has a chance to sell its black gold globally and aid its economic recovery.

This is a particularly prescient moment for the Islamic Republic. President Trump has grudgingly extended the terms of the nuclear agreement, despite repeated campaign promises to end what he called a “very bad deal”. For now, Iran is safe from further sanctions, and its oil exports are recovering. Iran shipped 777 million barrels of oil last year, primarily to India and China, whose oil-hungry economies are unlikely to be deterred by U.S. sanctions in the short and long-term.

Riyadh is palpably keen to divert attention from Iran’s oil markets, and announcing a forthcoming IPO was an extremely effective way of doing so. More to the point, whichever stock market the IPO is eventually floated on, a public offering is a sure-fire way to keep global powers and oil importing states invested in Saudi Arabia’s economic wellbeing, at Iran’s expense.

In politics not everything is for sale, but nothing is above tactical reform. Young Saudis are unlikely to be sold on the merits of privatisation for its own sake, given the changes in lifestyle they will face.

Mohammed Bin Salman can only hope they will agree that new liberties, and a new national religious identity is worth the price. Either way, the results of this trade-off will tell us a great deal about the next phase of sectarian competition throughout the Middle East.

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