Saudi Arabia to Overhaul Military in Plan for Life After Oil

  • Plan includes setting up holding company for military industry
  • Military company to be offered later in an IPO, prince says

Saudi Arabia Prepares for a Post-Oil Economy

Saudi Arabia’s plans to overhaul every corner of its economy won’t spare the military.

The kingdom will put its armaments industry under a holding company as it prepares for a post-oil era. Part of that reboot will seek to meet more of its military needs domestically and diversify its economy, Deputy Crown Prince Mohammed bin Salman said.

Deputy Crown Prince Mohammed bin Salman.

Source: SPA

Prince Mohammed, second in line to be king and the power behind the throne, is leading the biggest economic shakeup since the founding of Saudi Arabia in 1932, with steps that include selling less than 5 percent of Saudi Arabian Oil Co., cutting subsidies and bringing more Saudis into the labor market. His goal: end eight decades of the dependency on oil.

“When I enter a Saudi military base, the floor is tiled with marble, the walls are decorated and the finishing is five stars. I enter a base in the U.S., you can see the pipes in the ceiling, the floor is bare, no marble and no carpets. It’s made of cement. Practical,” Prince Mohammed said in an interview with Saudi-owned Arabiya television before details of the "Vision 2030" plan were announced. “We have a problem with military spending.”

Saudi Arabian stocks surged the most in seven weeks led by a real-estate firm as the prince outlined plans that included pressing ahead with infrastructure projects, boosting home ownership and opening the real-estate sector to foreign buyers. For a related story on Saudi stocks, with charts on volume and RSI, click here.

QuickTake Saudi Arabia's Strains

Saudi Arabia has one of the biggest military budgets in the world, and was the leading Middle East spender on arms in 2015 at $46 billion, according to IHS Jane’s. It allocated 213 billion riyals ($57 billion) in its 2016 budget for defense spending. “We are the third- or fourth-largest in terms of military spending in the world, yet our army is ranked in the twenties. There is a problem," the prince said.

Saudi Market

“We are now about to establish a holding company for military industries, 100 percent owned by the government, that will be listed later in the Saudi market,” Prince Mohammed said. “We expect it to be launched by end of 2017 with more details."

Raising the proportion of military equipment bought from Saudi producers to as much as 50 percent would create jobs and boost the economy, he said. The kingdom will seek to restructure several military contracts to tie them to Saudi industry, he said.

The new initiative “could result in more maintenance and support done by Saudi enterprises, though that could mean U.S., European teaming -- which is already the case,” Byron Callan, a defense analyst with Capital Alpha Partners LLC in Washington, said via e-mail.

That means companies including BAE Systems Plc., Boeing Co., Lockheed Martin Corp. and Raytheon Co. are “all possibly impacted,” Callan said. Longer term, the question will be how far the the Saudis want “to reach in terms of major weapons systems,” he added.

Yemeni Rebels

Saudi Arabia’s military has been tested most recently in Yemen, where it’s leading a coalition of Muslim nations against the Shiite Houthi rebels the kingdom accuses of being backed by its chief regional rival, Iran.

“Building a military industry in Saudi Arabia would be difficult given its limited technology and skills base,” said Paul Sullivan, a professor of security studies at Georgetown University in Washington. “This could take decades. A functioning and sustainable military industry takes a lot of investment, education, training and proper policy making.” 

More broadly, Saudi Arabia wants to generate 35 percent of the economy from small and medium enterprises, up from 20 percent, according to the plan. It also aims to reduce unemployment among Saudis to 7 percent from 11.6 percent.

For a short explainer on key elements of Saudi Arabia’s blueprint for life after oil, click here.

James Smith, a former U.S. ambassador to Saudi Arabia, said the biggest hurdle with that could be creating a culture where people aren’t afraid to fail, a trait he said has helped make California’s Silicon Valley a center of innovation.

“The challenge in developing a private sector economy is figuring out how to empower a highly educated class of young people to become entrepreneurs,” Smith said in an interview on Bloomberg Television. “I don’t think I can overstate the challenges associated with it.”

While an expanded Saudi defense industry may provide competition to U.S. contractors, the Obama administration has urged Saudi Arabia and other Gulf Cooperation Council members to develop their own defense capabilities rather than depending on the U.S. as much as they have in the past. That doesn’t mean U.S. companies are at risk.

“Their principal supplier of arms -- the U.S. defense industry -- isn’t going anywhere soon as far as Kingdom is concerned,” James Russell, an associate professor at the Naval Postgraduate School and former Middle East specialist at the Pentagon, said in an e-mail.. “They still need our companies and will for the foreseeable future.”

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