Why is Saudi Arabia Restricting German Business in the Kingdom?

Published May 30th, 2018 - 01:02 GMT
Limousines parked outside a government tourism office in Nusa Dua ahead of King Salman's visit to Bali. The Saudi State has a long history of trade with Germany.
Limousines parked outside a government tourism office in Nusa Dua ahead of King Salman's visit to Bali. The Saudi State has a long history of trade with Germany.

By Eleanor Beevor

Over the past week, business analysts have balked at the news that Saudi Arabia appears to have imposed a boycott on German businesses wishing to strike deals with the Saudi state. Though the “boycott” is not enshrined in policy yet, multiple reports have quoted both German and Saudi sources confirming an impasse.

And until there is confirmation otherwise, rumours of the boycott should be taken seriously. It appears that attempts to divest state projects away from German companies have been in the making for a while – infrastructure projects that seemed likely to go to German firms have changed hands in the last few weeks. Dr. Courtney Freer, a Research Officer at the Middle East Centre at the London School of Economics told Al Bawaba:

Boycott mulled for months

“I do think that Riyadh will follow through on blocking German businesses, at least from government tenders. This decision has likely been mulled over for months, as diplomatic ties between the two have gotten worse. I imagine this measure will primarily hurt large German companies active in the kingdom like Siemens, Bayer, and potentially Daimler; these companies’ employees will also of course be affected as well inside the kingdom.”

What is striking is how narrow the grievances are that reportedly sparked the boycott. Der Spiegel quoted German business owner Detlef Daues, 65% of whose business revenues come from Saudi Arabia, as saying that Crown Prince Mohammed Bin Salman has been “deeply offended” by German government statements and policy of late. Specifically, Prince Mohammed is still apparently upset by a remark six months ago by the then-German Foreign Minister Sigmar Gabriel.

 

File photo taken April 10, 2018, shows Saudi Crown Prince Mohammed bin Salman posing upon his arrival at the 
Elysee Presidential palace for a meeting with French President in Paris. (AFP File Photo/Ludovic Marin)

 

Hariri and regional issues

Last November, in the wake of Lebanese Prime Minister Saad Hariri’s temporary resignation, which was widely thought to have been coerced by Saudi Arabia, Gabriel met with the Lebanese Foreign Minister Gebran Bassil. He then proceeded to tell the press that Europe “could not tolerate the adventurism that has spread” in the Middle East.

Though he did not explicitly refer to Saudi Arabia, it seems that Riyadh interpreted this as a criticism of Prince Mohammed’s intervention in Lebanese politics, the Saudi-led war in Yemen, and the blockade of Qatar. Given the timing of the remarks, this was not an unreasonable assessment. However, Riyadh’s response was dramatic. They withdrew their ambassador to Germany, who has still not returned to Berlin half a year later.

There may be more behind the hit to German trade than just Gabriel’s remark. Certainly, Riyadh and Berlin have found little to agree on since then. The Jerusalem Post has said that Germany’s “pro-Iranian” policy, (that being their support of the Iran nuclear deal after President Trump’s withdrawal), is the reason that the blockade against German business is currently intensifying. But the image of Saudi Arabia in the broader German public has also affected Berlin’s policy towards the kingdom, something that Riyadh is keenly aware of. Professor Steffen Hertog, an expert in Saudi political economy at the London School of Economics, told Al Bawaba:

“The affected companies are likely to lobby Berlin to step down its rhetoric on Saudi Arabia, but the German public is quite critical of the kingdom, especially Germans with a left-of-centre persuasion – and it is the social democrats who continue to control the foreign office under the current coalition. The affair might still be de-escalated through informal consultations, but it is probable that Saudi-German relations will remain tense. Germany is the one major western power that MBS has not visited yet, and I believe this is deliberate.”

 

MBS not backing down

However, the headstrong Prince Mohammed does not tend to back down easily. He has had to fight off an array of competitors to become the kingdom’s biggest political player, and he is unlikely to make any moves that could be seen as acceding ground. Moreover, Riyadh has form when it comes to extracting displays of humility from diplomats. And if Germany ultimately wants to recover business with the Saudi government, it may have to do just that.

Jane Kinninmont, a Senior Research Fellow at Chatham House and an expert on Gulf politics told Al Bawaba:

“If that really is the reason for discriminating against German companies, it smacks of pettiness. The move may also reflect German reluctance to sell arms to Saudi Arabia while it is directly involved in Yemen. Saudi Arabia treated Sweden in a similar way in 2015, when the Swedish foreign minister criticised its human rights record and cancelled an arms and defence agreement.

Swedish business suffered as a result - but the issue was resolved after a few months. Sweden smoothed things over by sending its prime minister, who made a number of flattering comments during his visit, which included the line that women in Saudi did face some barriers "just like they do in Sweden". I suspect the Germans will reach out to Saudi Arabia to try to wind this down - perhaps sending an envoy and proposing some trade delegations to discuss Vision 2030 in a flattering light.”

Vision 2030 versus fixers and brokers

Vision 2030 is the Crown Prince’s signature policy package. It is a strategy that aims to liberalise Saudi Arabia by 2030, economically as well as socially. The chief economic goal is to wean the kingdom off its near-total dependence on oil revenues, by opening up the private sector to encourage investment. This will, Riyadh hopes, help to tackle high unemployment, and the Saudi peoples’ widespread reliance on state benefits.

Currently, doing business in Saudi Arabia is not an easy process, particularly as a foreign company. A perplexing state bureaucracy has generated an economy of brokerage, in which fixers or brokers are often necessary to acquire government documents or meetings. And the services of the fixers are not free. The state is still by far the largest conductor of business in the country, and these fixers exist at every level for it. Notably, many of the princes have had infamous roles in brokering business deals by granting access to more senior officials.

Vision 2030 is meant to change all that. It is meant to free the private sector from the restraints of political interference. But incidents such as this blockade on German business casts the likelihood of that vision into doubt. Robert Mogielnicki, a senior analyst at the Siwa Group Consultancy in Washington and a specialist in Gulf political economy told Al Bawaba:

“Increased state intervention in commercial spheres complicates Riyadh’s efforts to strengthen the private sector. Following a recent mission to Saudi Arabia, the IMF issued an upbeat statement regarding the country’s progress toward removing barriers to private sector growth and reducing the role of the government in the economy. Rather than building upon this positive assessment, the rift between Saudi Arabia and Germany adds an additional element of uncertainty to the economic transformation process underway in the Kingdom.”

Double-edged sword

 

What remains to be seen is whether it is Saudi Arabia or Germany that will be harder hit by the spat between them. On the one hand, Germany is the chief exporter in this relationship. According to Robert Mogielnicki, Germany exported $10.9 billion worth of goods to Saudi Arabia in 2016, whereas Saudi exports to Germany represent less than a billion dollars. Nevertheless, this is very much a double-edged sword that Riyadh is wielding. Dr. Kristian Ulrichsen, a Middle East Fellow at Rice University said to Al Bawaba:

“If the Saudi authorities followed through with concrete actions to actively block major business deals with German firms, I suspect it would blow back more on Saudi Arabia than on Germany. It would raise further questions about political interference in commercial decision-making in the aftermath of the detention of large parts of the Saudi business elite last November and the ongoing Saudi blockade of Qatar.”

 

Holding German business hostage in order to extract an apology from Berlin is a bold move, but not one that is going to inspire confidence in the kingdom’s stated ambitions.

There is no doubt that this sends a signal that Saudi Arabia will not be toyed with, and it will certainly boost diplomatic cautiousness when dealing with the kingdom. But rarely are nations’ foreign policies for sale, especially not those of global powers like Germany. And if Riyadh continues to believe that it can effectively buy and sell the international relations it likes by tying them up with its commercial future, then talk of Saudi Arabia being “open for business” will start to ring extremely hollow. 


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