When the members of the G20 convene in Pittsburgh this week, leaders representing emerging economies will wonder what the institution can do for them once the urgency of the global financial crisis has passed. As the crisis fades from memory, countries will inevitably get back to staking out positions on issues more closely associated with their particular foreign policy concerns.
Saudi Arabia is the only OPEC member in the G20. The Kingdom assumes a leadership position in both the Arab and broader Muslim worlds, representing a very diverse political constituency, and like other G20 countries, it has been increasingly exposed to the challenges of globalization. The Saudis have been particularly affected by three markets that have witnessed tremendous volatility in the past two years: international finance, oil, and food commodities.
More by design than default, Saudi Arabia has managed its overall market exposure quite well, maintaining a solid performance of its foreign financial assets, and balancing the downside risks of volatile food commodity markets with the upward price swings of oil and gas. But all three of these vital markets have witnessed tremendous swings in the past 24 months, and the Saudis cannot be comforted to know that their economic fortunes are so closely related to events beyond their borders and beyond their control. In the future, the Saudi leadership will look to the G20 process to help make these markets less volatile and easier to navigate.
Financial markets have become relevant to Saudi Arabia only in recent years. Driven by high oil revenues and prudent fiscal management, the Kingdom has made a formidable transition from a net debtor to a creditor country. The Saudi Arabia Monetary Agency (SAMA), the Kingdom’s central bank, manages the country’s foreign financial assets, which are assumed to amount to more than $500 billion. Apart from its stakes in sovereign wealth funds in some of the fellow Arab countries, SAMA has fared well in the past eighteen months, as it mainly invested in low-yield, low-risk U.S. treasury bonds.
But Saudi leaders recognize that the more their money becomes tied up in global financial markets, the more exposure they face to speculative forces that reside outside the reach of their influence. And outside of global oil markets, the Saudis are not in a position to exert dominant market power.
Therefore, SAMA governor Muhammad al-Jasser, appointed in February of this year, reminded G20 countries in an interview early September to adhere to the new banking oversight regulations agreed in the wake of the global financial crisis in order to avoid a future credit crunch. Al-Jasser also highlighted the risks of failing to follow through on effective supervision policies. But Saudi Arabia depends on the established global players at the G20 meeting to develop a workable compromise that meets its financial interests.
It has become standard practice for Saudi policy makers to claim that the “fair price” for a barrel of crude oil is between $75 and $80. This range is largely in line with medium-term price expectations, but how that price might be managed in the long run is subject to several challenges. One is President Obama’s push for U.S. energy independence from the Middle East, which has raised concerns with the Saudi establishment. Prince Turki al-Faisal, former Saudi Ambassador to the United States and the UK, rather urged the U.S. to recognize its energy interdependence with the Middle East, given the obvious lack of alternatives to meet its massive energy needs.
Another challenge relates back to international efforts to build renewable energy sources for the future, as the global climate change clock is ticking. The Saudi leadership has reacted nervously in this matter, too. Oil Minister Ali al-Naimi cautioned earlier this year that promoting the growth of renewable fuels too quickly could create a “nightmare scenario,” in which alternative energy supplies failed to meet overly optimistic expectations, while traditional energy suppliers scaled back investment. It’s unclear if Saudi Arabia is highlighting the need to ensure a smooth transition to a low-carbon world economy and suggesting a process to manage it, or simply trying to scare other countries into scrapping their alternative energy plans, but in either case, the G20 process could be a useful platform for Saudi Arabia to voice these concerns.
The food price crisis of 2007–2008, which correlated in part to the spike in oil prices, made it abundantly clear to countries with little land and water that alternative means of ensuring long-term food supply are essential. This may sound strange to Europeans and Americans, who benefit from fertile lands and sufficient water resources, but for Saudi Arabia—which, as former oil minister Ahmad Zaki Yamani implied some years ago, is unfortunate enough to be endowed with oil rather than water—food security becomes a real issue. Between 1980 and 1999, two-thirds of the country’s non-renewable water sources were used for agriculture. Given the unsustainable exploitation of the Kingdom’s water resources, Riyadh decided last year to phase out food production. This left Saudi Arabia with no choice but to turn to international food commodity markets, which would expose it to dramatic price swings, or to invest directly in food production outside the country.
In recent years, the Saudi government has made numerous attempts to invest in food production abroad. Amongst others, it committed $800 million to the Saudi Company for Agricultural Investment and Animal Production. In February 2009, Hail Agricultural Development Company, a private company, signed a lease with the government of Sudan for huge swaths of lands for wheat, vegetables, and animal feed. Saudi government agencies financed 60 percent of the deal. And Saudi officials reportedly held talks earlier this year with the Tanzanian government for a 500,000-hectare lease arrangement.
But political concerns were quick to emerge, suggesting that Saudi Arabia and other emerging Arab and Asian countries were embarking on a neocolonial investment strategy. In response, the Saudi government has become more engaged in the broader discourse about food security. In 2008, Saudi Arabia donated more than $500 million to the World Food Programme, in a one-off payment to help poor countries cope with high food and fuel prices. The Saudis also decided to finance the World Summit on Food Security at the UN Food and Agriculture Organization headquarters in Rome in November 2009.
As they face up to the very real challenges that globalization poses to their economies and national security interests, Saudi Arabia and other states will look to international fora like the G20 for help. One of the lessons the Saudi government has drawn from the global financial crisis—and the ensuing volatility of oil and food commodity markets—is that it’s hard to rely on forces beyond your control when it comes to meeting national interests. The desire to control these market forces, or at least manage their impact, is bound to drive the Saudi foreign policy agenda well beyond the G20.