In March, Saudi Arabia told Muslims all over the world not to be in a rush to buy airplane tickets for the hajj pilgrimage to Mecca. The closure of the holiest sites of Islam, along with the banning of Muslim public prayer and the shuttering of mosques has made it clear just how powerful the religious blow inflicted by the coronavirus has been on Muslims.
It’s still too early to know whether this year’s hajj, which is scheduled for the end of July, will be canceled or whether in a post-coronavirus period, Saudi Arabia might permit all or some of the 2 million pilgrims to come and fulfill one of the fundamental obligations of Islam.
It’s not just an epidemiological dilemma. Its financial implications are also enormous. The pilgrimage during the hajj season and the other periodic occasions during the year have generated annual average revenues of about $16 billion in recent years – about 5 percent of Saudi Arabia’s gross domestic product. Thousands of Saudis, including staffers, hotel owners, business owners, guides, drivers, supervisors and maintenance people rely on the hajj season as a critical source of income – and tens of thousands of people living elsewhere in the Islamic world also make a living in connection with the pilgrimage.
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Saudi Arabia had announced that it would be diversifying its revenue sources as part of its Saudi Vision 2030 plan, an effort to reduce its dependence on oil revenues, but it could now find itself facing a shattered dream in this regard if the hajj does not take place this year.
This is not the only misfortune that the pandemic has inflicted on the kingdom. Saudi Finance Minister Mohammed al-Jadaan told the Saudi television station Al Arabiya that it will be necessary to impose belt-tightening for at least the next year, meaning a reduction in nonessential expenditures, in order to continue providing basic services to the country’s citizens. In addition, Saudi Arabia will have to borrow about $50 billion from international institutional lenders. That’s almost twice as much as it planned to borrow before the coronavirus outbreak and follows forecasts that revenues could shrink by more than half.
Jadaan calmed matters, promising that bank liquidity was not at risk and that customer deposits were guaranteed. And when it comes to foreign currency reserves, even if they have shrunk due to the enormous investment in projects that are part of the vision plan for the coming decade, the reserves still provide a long-term cushion for ongoing spending. But Jadaan failed to explain what he meant when he talked about reducing nonessential expenditures.
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Will the ambitious construction of the futuristic city of Neom, which will extend across the borders of three countries, Saudi Arabia, Egypt and Jordan, be put on hold? Will investment in the entertainment industry be forced to wait for healthier times? Perhaps Saudi Arabia might also decide that the war in Yemen is an unnecessary expenditure that would best be ended as soon as possible.
And the war in Yemen is not the only huge drag on the Saudi treasury. The Saudi coffers are also bound up in the oil price war that the country has been engaged in with Russia, which has caused a free fall in the world price of oil.
Nothing short of an ultimatum
The Reuters news agency recently revealed an April 2 telephone conversation between U.S. President Donald Trump and Saudi Crown Prince Mohammed bin Salman in which Trump made it clear to the prince that if OPEC – the Organization of the Petroleum Exporting Countries – failed to decide on cuts in oil production by its members, Trump “would be powerless to stop lawmakers from passing legislation to withdraw U.S. troops from the kingdom,” as Reuters reported it, attributing the information to four sources.
That was nothing short of an ultimatum, and within 10 days the Russians and Saudis reached agreement on cutting 10 million barrels of oil production per day. But despite these understandings, the oil war has not subsided. There is still an oil glut on global markets. Oil storage tank farms are full, oil tankers have been leased for storage of the surplus oil being produced, and the oil-producing countries’ revenues are evaporating.
Trump’s contribution to the oil war has so far been limited to a promise that the United States would reduce the amount of oil it produces – but without providing details regarding precisely how much oil and for how long.
Russia is not Saudi Arabia
Russia got itself into the war to lower oil prices to render unprofitable America’s production of shale oil, a source of oil that had freed the United States from dependence on imported oil. But the Russians found themselves trapped in a cage of their own making.
The huge losses damaged its foreign currency reserves. The markets, which shrank due to the coronavirus pandemic, put a halt to the momentum that Russia had enjoyed in taking control of new market share, and Russia failed to be able to force the Saudis’ hand.
By contrast, the Saudis still have impressive foreign currency reserves and the ability to keep their spending plans flexible. Russia may only need an oil price of $45 a barrel to balance its budget, while the Saudis need $75 to $80 a barrel, but the difference between the two countries is that Saudi Arabia can make do with a much lower price as a result of its ability to suspend – or even scrap – future plans that it has already budgeted for.
In other words, if the construction of the city of the future or investments in culture are postponed by a few years, that wouldn’t be a major disaster. Saudi Arabia would still be able to afford to meet its ongoing needs appropriately. And if the Saudis would decide to withdraw from Yemen, they could save tens of billions of dollars more without being dramatically affected by the fall in oil prices.
Russia doesn’t have that flexibility. It doesn’t have huge projects that could be frozen to save money, and it needs an oil price of $45 a barrel for its regular, ongoing expenditures.
The coronavirus pandemic has dictated a new oil strategy in which the American administration is even willing to put the country’s historic relationship with Saudi Arabia to the test as part of Trump’s oil diplomacy policy.
It is still too early to panic over a possible rift between the two long-time allies, but the very fact that Trump created a linkage between the price of oil and the American military presence in Saudi Arabia could very well force the Saudis to reconsider their next steps – and the nature of their alliance with Washington.