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On December 5, 2017, Kuwait Emir Tamim bin Hamad al-Thani announced the abrupt ending of the 38th Annual Gulf Cooperation Council (GCC) Summit on its first day.  According to the Emir, the GCC was considering ways to modify the GCC’s statute to allow for more effective dispute resolution. “Any dispute on the Gulf level must not affect the continuation of the summit.”   This was the first meeting of the GCC since the Arab world’s crisis with Qatar began in June 2017. The diplomatic rift began when several Arab countries (including Bahrain, Saudi Arabia, and the United Arab Emirates) cut their relationships with Qatar due to their belief that the Qatari government funded terrorism and has close ties to Iran. The crisis has persisted and still remains a difficult thorn in the side of the decades-old GCC. Holding this summit was an indicator for the world that the situation could be resolved and the GCC could remain, as noted by Emir Al Sabah.  But while there had been high hopes that holding the annual meeting may actually bring parties together to address concerns, the fact that only two heads of state (the Emirs of Qatar and Kuwait) attended indicated the rest of the Gulf was not ready to talk. The sudden conclusion of the summit is not a high indicator for success.

The Gulf Cooperation Council has been seen as a success since its inception in 1981. It provided a coordinating platform for the burgeoning oil-producing Arab Gulf countries and a solitary unit to counter the influence of Iran in the wake of the Iranian Revolution. The cultural and historical ties between the six-member states–Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates–is the foundation by which the large, coherent entity was formed. “It is also a fulfilment of the aspirations of its citizens towards some sort of Arab regional unity.”   The GCC has worked to align its economic, social, technological, and military efforts for the mutual benefits of each member state.

One aspect of the GCC that is not well-developed, however, is its dispute resolution mechanism. During the 2017 annual summit, Kuwait Emir Sheikh Al-Sabah noted that a task force may be set up to deal with the crisis between the GCC and Qatar, but the GCC already has such mechanisms to handle these problems. In fact, this is not the first rift among Qatar and the GCC. Kuwait mediated this issue in 2014 when similar concerns over Qatar’s foreign policy emerged and Bahrain, Saudi Arabia, and the UAE cut diplomatic ties.

The primary concern, of course, for the member states is survival of this unifying platform. “The last thing we need is for the GCC, the most perfect body in the Arab world, to catch the flu or catch the disease of Arab fragmentation and splintering,” says Abdullah Al Shayji, Professor of Political Science at Kuwait University. Various divisive issues have risen particularly since the Arab Spring protests in 2011 and the current U.S. administration’s approach to unifying the Sunni Arab world against the Shi’a Iranian threat leads to an additional pressure among GCC members. Part of this is being fueled by the Crown Prince of Saudi Arabia, Mohammed Bin Salman. The young prince’s ambitious modernization efforts have been rapid as of late and media reports indicate he was behind the UAE’s recent announcement of a new coordination effort with Saudi Arabia. “According to the Resolution, the Committee is assigned to cooperate and coordinate between the UAE and Saudi Arabia in all military, political, economic, trade and cultural fields, as well as others, in the interest of the two countries.”  There are concerns that such a step indicates the beginning of the end of the GCC in its current composition and unity may be no more.

Convening the GCC member states did indeed illustrate that the cooperation body still holds meaning for the Gulf, but the inability to resolve the crisis with Qatar may lead to additional long-term problems. The new Emirati-Saudi cooperation agreement could just be first of many launched among the member states to maneuver around the Qataris, but the fact remains that the blockade is costing all members billions of dollars in lost revenue. A break among the Gulf states could also mean a weaker Sunni front to the perceived encroachment Iranian influence in the region as the Syrian and Yemeni civil wars rage on. We may very well see rapid reform instituted in the GCC to deal with the diplomatic crisis, but it is unlikely to be successful as long as the Sunni Arab states demand foreign policy changes that the government of Qatar believes puts them in a difficult position.

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In April 2016, King Salman and Deputy Crown Prince Mohammed bin Salman Al Saud announced an ambitious ‘Vision 2030’, which mapped out the Kingdom’s social and economic future. It heralded a dramatic transformation in Saudi Arabia’s strategic approach moving forward. At the core of Vision 2030 is the partial sale of shares in Aramco, the world’s largest oil company, as a step toward creating what it hopes can be a country transforming wealth fund.

Is Saudi Aramco the planet’s most valuable company?

In October 2016 Aramco’s CEO Amin Nasser announced plans to sell a 5% stake in its entire business rather than just the downstream business. This puts Aramco in a position to emerge as the world’s most valuable company post-IPO. Aramco’s reserves are twelve times greater than those of their nearest Western competitor, ExxonMobil . The initial listing will be on the Saudi stock exchange and listings on London, Hong Kong and New York may follow.

Why an IPO?

Believe it or not, Saudi Arabia is running out of cash. Years of deficit funding, profligate public subsidies, lavish defense spending and an expensive war in Yemen combined to produce a budget deficit of $79 billion in 2016. All this, despite steep cuts to public spending and state subsidies. Using the Kingdom’s $2 trillion company valuation, a partial sale of Aramco could raise $100 billion, positioning Saudi Arabia for financial independence from oil. “IPOing Aramco and transferring its shares to PIF (the Public Investment Fund) will technically make investments the source of Saudi government revenue, not oil” Deputy Crown Prince Mohammed bin Salman Al Saud said last year. “What is left now is to diversify investments. So within 20 years, we will be an economy or state that doesn’t depend mainly on oil.”

Potential IPO barriers

Traditionally, oil has been one of Saudi Arabia go-to levers of ‘soft power’. Preserving that power has involved shrouding Saudi Arabia’s oil reserves and operating costs behind a veil of secrecy that is a poor fit with the levels of transparency investors expect. With management and the board all being government appointments, this sets the scene for potential conflicts between the demands of the Saudi state and the need to serve its public investors. Similarly, much of Saudi Aramco’s income from operating the world’s largest onshore oil field flows through a complex mix of royalties and taxes laid out in an opaque concession agreement. An IPO would require Saudi Aramco to open its books for the first time in 2017 and provide accurate data on the Kingdom’s total crude reserves as preparation. Yet that very mystery enables the Saudis to exert significant influence over global oil prices so effectively.

So what?

Turbulence can, of course, be the investor’s friend by opening up new opportunities. Equally, turbulence can wreak havoc with carefully weighted investment decisions. The mooted Saudi Aramco IPO offers a ringside seat to Big Oil’s river of cash and the October statement could be a game changer for investors now the whole Saudi Aramco business is likely to be included in the IPO. However, as always the devil is likely to lie in the detail around pricing, and the level of information investors can expect to receive around profits, operating costs and particularly – reserves.In April 2016, King Salman and Deputy Crown Prince Mohammed bin Salman Al Saud announced an ambitious ‘Vision 2030’, which mapped out the Kingdom’s social and economic future. It heralded a dramatic transformation in Saudi Arabia’s strategic approach moving forward. At the core of Vision 2030 is the partial sale of shares in Aramco, the world’s largest oil company, as a step toward creating what it hopes can be a country transforming wealth fund.
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