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Feeling Abandoned, Saudi Arabia Ups the Ante

Our weekly commentaries provide Euro Pacific Capital's latest thinking on developments in the global marketplace. Opinions expressed are those of the writer, and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff.
By: 
John Browne
Tuesday, January 12, 2016
Last week a major diplomatic crisis developed between Saudi Arabia and Iran over the Saudi execution of Nimr al Nimr, a charismatic  Shiite cleric and anti-Sunni political activist. Nimr’s execution was an important political decision. On its face, it served to increase tensions in the developing struggle between Saudi Arabia and Iran for regional influence, a drama that has come to full boil as a result of decades of American policy mistakes. This Middle Eastern cold war, which divides Islam along Sunni/Shia sectarian lines, now threatens international oil supplies and regional peace.
 
To understand Saudi reasoning requires a brief look at history. In 1902, Abdulaziz bin Abdulrahman bin Faisal al Saud (known widely as ibn Saud) left Kuwait with British money and covert support to retake the lands on the Arabian Peninsula that had formerly been ruled by his father. Successful, he was the first man since the Prophet Mohammed to reunite the Arabs of the peninsula (excepting those of the British protectorates) to form the Kingdom of Saudi Arabia in 1932. He was a warrior chieftain of great charisma and shrewdness.
 
In 1945, ibn Saud met President Roosevelt in Egypt as he was returning from the Yalta Conference. Exuding charm, Roosevelt succeeded in convincing Saud that America, rather than Britain, was the only country that could guarantee the Kingdom’s security. This encounter produced a most important treaty in which Saudi oil was traded for America’s military muscle. This understanding formed the basis of Gulf War I, when President George H.W. Bush was shrewd enough to leave the tyrant Saddam Hussein in power to keep a lid on the simmering tensions between Sunni and Shiite Muslims and to hold Shiite Iran at bay. This was similar to President Truman leaving the Japanese Emperor on his Throne in 1945.
 
Unfortunately, the second President Bush toppled Hussein to unleash mayhem in the area. President Obama compounded this catastrophic error by withdrawing unilaterally to leave his Sunni Arab allies politically and militarily exposed. In addition, Obama appeared to drop Saudi Arabia as a key regional ally in favor of Iran to conclude a nuclear deal that seemingly threatens the Sunnis, Israel and any future perceived enemies of Iran. As well as appearing weak and indecisive, Obama has made the U.S. appear disloyal to its allies and has fermented growing distrust, unrest and war-risk in the Middle East.
 
I met Saudi Arabia’s present King, Salman bin Abdulaziz al Saud (ibn Saud’s sixth son by Queen Hussa al Sudairi) many years ago when he was governor of one of Saudi Arabia’s provinces. My opinion of him, that is apparently shared by many in the diplomatic world, is that he is a very deliberative man, not one particularly inclined to rash actions. As a result, many are wondering why he would authorize the execution of the highly followed Shiite leader al Nimr, especially when his country is already in crisis as a result of falling oil revenues. Doubtless, the Saudis believe they have to act to protect themselves from a growing crisis that they are facing on their own.
 
An emboldened Iran is exerting influence in the collapsing Syria, is  fomenting revolt inside Saudi Arabia from the Kingdom’s Shiite minority (of which Sheik al Nimr was a part), and is using surrogate states such Yemen to threaten Saudi borders. Given the U.S.’ prior withdrawal of support to Egyptian leader Hosni Mubarak during his “Arab Spring” crisis a few years ago, and the Obama Administrations courting of Tehran with its nuclear treaty, the Saudis are coming to believe that they can no longer rely on Washington.
 
Another problem for Saudi Arabia is that the Sunni Jihadist movement, which first gave birth to Al Queada, and now ISIL, has some origins within Saudi Arabia. In addition to waging war against the “infidels” and the “apostate” Shiites, many jihadists have called for the toppling of the Royal family in Riyadh, which they see as a puppet of Washington.
 
Third, as the sons of ibn Saud are ageing, there is a growing power struggle within the Royal family for succession.
 
Facing these three major threats, King Salman appears to believe that firm deterrence must be forceful and exhibited publicly, with no exceptions.
 
The radical cleric Nimr al Nimr was arrested initially in 2012 at the height of the ‘Arab Spring’ and the Saudi military support of Bahrain’s Sunni ruling family. Nimr was tried in 2014 and his sentence upheld by the Saudi Supreme Court in 2015. Given the historic context, Nimr’s execution was to be expected sooner or later.
 
It appears that King Salman weighed Nimr’s execution carefully, even trying to reduce its profile by including it among those of 46 Sunni Al Qaeda suspects. He also needed time to secure a clear demonstration of  support by his allied nations to build further upon the Saudi claim to be a regional player. Seeing a common threat, Bahrain, the UAE, Kuwait, and even Sudan fell in line, with Egypt in somewhat laggardly support. Meanwhile, however, the U.S. weighed in with criticism of the Saudis, likely weakening further any remaining faith her allies have in her support, even possibly outside the Middle East.
 
Regardless, the message is clear. Insurrection will not be tolerated by Saudi Arabia especially if Shiite inspired. Meanwhile, the U.S. will bend over backwards to secure its potentially ill-fated nuclear deal with Iran.
 
For investors, the outlook is for further turmoil in the Middle East with a growing risk to oil supplies and even of regional war. The problem with regional wars is that they have a risk of escalating, particularly now that Russia is playing a more active role in the area.
 
Middle East Arabs are famously fond of gold. Realistic threats to their homelands may result in major acquisitions, particularly as it is rumored that the House of Saud has combined wealth of some $1.4 trillion!