The huge deals announced during President Donald Trump’s visit to Saudi Arabia last week, amounting to hundreds of billions of dollars, marks a significant shift in the country’s economy, and represents a ratcheting up of the trading relationship with the US. But the Kingdom has to ensure it is a two-way street.
A final figure on the value of the deals is difficult to calculate. Some are still in the negotiating process, others are confirmations of deals already partially announced, and others still are open-ended transactions that could lead to further multi-billion-dollar deals later down the line. But a conservative estimate of the value of the new deals suggests an aggregate of about $300 billion — a little way short of half the Kingdom’s gross domestic product (GDP).
That is without calculating the effect of the estimated $100 billion Saudi Aramco initial public offering, in which US financial institutions are expected to play a big part. There was no announcement from the Riyadh meetings of any deal to list Aramco shares on the New York Stock Exchange (NYSE), which many observers assume will be the logical next step.
In fact, NYSE was not formally represented on the presidential visit, although its junior rival, Nasdaq, was on the list of organizations attending the chief executives’ forum that coincided with the Riyadh visit. A separate trip by NYSE officials to the Kingdom is planned for later this month.
But the deals that were announced add up to a massive transfer of financial and industrial assets between the two countries. The historic partnership between America and the Kingdom has been taken to the next level.
The defense element is the most eye-catching. The principle US beneficiaries were Lockheed Martin, Raytheon, Boeing and General Dynamics, which announced deals totaling $110 billion, some of which was confirmation of transactions already under negotiation.
Black Hawk and Chinook helicopters, fighter aircraft, air defense missiles and other military systems were part of the deal, which also included a significant civil element in the shape of an order by SaudiGulf Airlines for wide-bodied passenger aircraft at a time when the market for these planes is soft.
Regardless of the strategic significance of these deals — and that is enormous in a region where geopolitical strains are on the rise — the business repercussions are also important. Some of the US contractors accompanied the announcement with pledges to support the “Saudization” of the defense industry. More of this later.
Going in the opposite direction, the most significant transaction was the commitment by the Kingdom’s Public Investment Fund (PIF) to partner with Blackstone, the big US private equity group, in a fund that could eventually inject as much as $100 billion into American infrastructure.
The revived relationship with the US defense industry should result in the necessary transfer of sophisticated technology to the Kingdom.
PIF, which stands to benefit massively from the Saudi privatization program, pledged $20 billion to an initial $40 billion fund that could rise to as much as $100 billion with debt financing. Most of the investment is likely to end up in the Midwest US states that voted crucially for President Trump in last year’s election.
That cements an already close relationship between PIF and Blackstone, under its chief executive Stephen Schwarzman, who also chairs the US president’s economic advisory think tank in Washington.
PIF, advised by former Citibank dealmaker Michael Klein, also inked a deal to confirm its $45 billion investment in the Vision Fund set up recently by SoftBank, the Japanese technology and telecommunications conglomerate. That is likely to lead to big investment in the US West Coast and Silicon Valley, its primary technology development hub, which was not in the pro-Trump camp during the election.
US politics aside, it is to be hoped that Klein will be actively involved in the new investments. As a sovereign wealth investor, PIF has an obligation to ensure the Kingdom’s national interests are advanced by its investment stance, as well as the straightforward financial return.
But seen from the American side, too much hands-on influence by Saudi investors could also present a problem. It should not be forgotten that, just over a decade ago, American politicians were up in arms over a deal that gave the UAE’s DP World ownership of key infrastructure assets — commercial ports — in the US; the US side of that deal was eventually shelved.
Against this background, an announcement that came out just before President Trump touched down in Riyadh was also highly significant.
As part of the plan to transform the Kingdom’s economy away from oil dependency, PIF is to set up a new national defense industries company, Saudi Arabian Military Industries (SAMI).
In effect, SAMI will be the Kingdom’s very own military-industrial complex, researching, designing and manufacturing the full range of armaments and hardware. The revived relationship with the US defense industry should result in the necessary transfer of sophisticated technology to Saudi Arabia.
By 2030, this will reverse the current situation in which the Kingdom is one of the top-five spenders on defense, but sources only a small percentage of that domestically.
President Trump, while in Saudi Arabia, talked about the attractions of “beautiful military equipment because nobody makes it like the United States.” If all goes to plan, by 2030 Saudi Arabia will also be turning out “beautiful” ordnance.
• Frank Kane is an award-winning business journalist based in Dubai. He can be reached on Twitter @frankkanedubai