Visiting Western dignitaries wanting to highlight the reforms under way in Saudi Arabia gravitate to the same place these days. And so German Chancellor Angela Merkel went to the King Abdullah University of Science & Technology (Kaust) in Jeddah on 25 May, where she described the university as “a clear sign of the ambition of Saudi Arabia to be a serious competitor in our knowledge-based society”.

To make progress, Germany is learning that you need to show some diplomatic backing

Christian Koch, Gulf Research Centre

Kaust, with its modern campus and mixed-sex classes, is a symbolic of the programme of investment and reform under way in the kingdom as it tries to diversify its economy. For Germany, this programme represents one of the biggest commercial opportunities in the Gulf and Merkel’s presence was a sign that it is increasingly serious about exploiting it.

In numbers

$6.4bn: Value of imports by Saudi Arabia from Germany in 2009

$1.6bn: Value of exports from Saudi Arabia to Germany last year

Source: MEED

Investment programme

“You don’t have that many markets worldwide right now that have made huge plans and are sticking to them through the financial crisis. Saudi Arabia is,” says Gerd Doepner, head of the German-Saudi Arabian Liaison Office for Economic Affairs (Gesalo) in Riyadh.

“Given the huge investment into almost all aspects of its economy to provide employment for the young population, with all the attendant construction of housing and schools and of course, the industrial diversification going with it, Germany has something to offer.”

Merkel’s visit to Saudi Arabia, the second of her chancellorship and the first by any major European leader this year, is a sign that Berlin is finally learning what Paris and London have known for years – if you want to make the most of such opportunities in Saudi Arabia, or any other Gulf country, then it helps to ensure that political ties are as strong as possible.

Top 10 exporters to Saudi Arabia*  (SRm)
US 45,852
China 32,664
Germany 30,022
Japan 29,563
Italy 15,381
South Korea 15,162
UK 13,170
India 11,529
France 11,499
UAE 8,437
*Value of imports in 2007
Sources: Finance Ministry; Planning Ministry

“To make progress, Germany is learning that you need to show some diplomatic backing,” says Christian Koch, director of international studies at the Gulf Research Centre in Dubai. “France and the UK have traditionally always shown that.” If all goes to plan with its modernisation efforts, Saudi Arabia could one day be a rival to Germany in international export markets, for some products at least, but that is a trade off that Berlin is happy to accept. “We intend to support these [diversification] ambitions, and would like to offer our assistance,” Merkel said in Jeddah, adding that she hoped “our medium-sized businesses too are given access to the Saudi Arabian markets”.

One company she could have been thinking of when she spoke was Conergy. A week earlier the Hamburg-headquartered company had completed a 2MW solar power plant on the rooftop of Kaust’s laboratory buildings, making it the first renewable energy plant in the country.

Conergy was responsible for the design and engineering of the two 1MW photovoltaic units, supplied the components and supervised the installation of the plants. It also trained staff from its consortium partner on the project, the Al Khobar-based National Solar Systems (NSS), which will now operate it. The project is linked to the work of the university’s Solar & Alternative Energy Science & Engineering Centre.

It might be on a small scale, but the nature of the Conergy-NSS contract is typical of the type of deals that Saudi Arabia strikes with companies from industrialised economies – buying expertise and materials, and including some transfer of skills in the contract. To realise its ambitions of becoming a diverse industrial economy, Riyadh needs the assistance of many more companies like Conergy in many other areas of economic activity.

Larger companies are also keen to get involved. Accompanying Merkel on her Gulf tour was a delegation of chief executives from some of Germany’s largest businesses, including Peter Loscher of Siemens, Ruediger Grube of Deutsche Bahn and Wolfgang Reitzle of Linde. “To fulfil its own model of the future, to fulfil its vision that it has and is seriously investing in, for that [Saudi Arabia] needs foreign support,” says Doepner. “They need the knowledge in many cases and they need the products and services.”

Regional competition

But there are many places other than Germany where the Gulf countries can find the skills and materials they need to develop their economies – something which was brought home to Western firms by the UAE’s surprise decision to award its $20bn nuclear power contract to a South Korean consortium in December 2009.

Merkel acknowledged as much when she said during her visit to Abu Dhabi, prior to reaching Saudi Arabia, that “We also face robust competition in the field of economic cooperation, as in other fields, from Asian countries, such as South Korea and China. So we are determined to maintain strong and good relations with this region.”

For now, the economic relationship between Saudi Arabia and Germany remains one-sided and in Berlin’s favour. Doepner estimates that Riyadh imported E5.2bn ($6.4bn) worth of goods and services from Germany in 2009, but only exported E1.3bn in return, most of which was oil. While Germany is the third largest source of imports into Saudi Arabia, after the US and China, it is not even among the kingdom’s top 20 export markets.

“There is a huge trade surplus as far as Germany is concerned,” says Doepner. “The holdback is not that Germany wouldn’t want to import more, quite the contrary. But currently Saudi exports are mainly based on energy and there is little else to import from Saudi Arabia that would make a difference in the trade gap.”

Free trade

A free trade deal would mean that the trade flows increased in both directions, but Brussels insists that an agreement can only be done on the basis of a inter-bloc deal between the GCC and EU, and has rejected the option of unilateral deals. Talks between the GCC and the EU over an agreement have been on and off since 1990 and have yet to produce a definitive result. The main recent sticking points have been the issue of Gulf export tariffs on petrochemicals products and the EU’s insistence on including a clause on human rights in any agreement, but there are signs that a deal could soon emerge.

As the largest economy within the GCC, Saudi Arabia has a lot to gain from a successful deal and is in a position to strongly influence the negotiations. Germany, as the strongest European economy, is in a similar position among members of the EU, and, while in Saudi Arabia, Merkel promised to make a renewed effort to persuade her European colleagues to finalise a deal. “The Gulf region can no longer understand why we are not making any progress,” she said.

Koch says that he is “cautiously optimistic” that a deal can be finalised soon. “The trade balance is heavily favoured in terms of Europe,” he says. “The GCC states would like to see the issue being discussed more. There is an increased political will to get these issues resolved.”

The interweaving bilateral and multilateral nature of the visit is an inevitable consequence of Germany and Saudi Arabia’s positions as the most important economies within their respective trade blocs. Their membership of the G20 group of rich countries, which is due to hold its next summit in Toronto, Canada, in the last week of June, is another point of connection, as are their similar positions on a number of the more contentious political issues around the region. German has, for example, given its backing for the Arab peace initiative first proposed by King Abdullah bin Abdulaziz al-Saud in 2002, when he was crown prince.

The diplomatic and military reach of Saudi Arabia within the region, and the role it can play in trying to calm some of the region’s many flashpoints, had been clearly emphasised a week before Merkel arrived in the Gulf, when Saudi security forces freed two of a group of five Germans kidnapped in Yemen in June 2009.

But despite the wide range of shared interests, there was no major breakthrough on the political or diplomatic front either during Merkel’s visit to the kingdom. Talks on the issues of the threat posed by Iran’s nuclear ambitions or on the stuttering peace process between Israel and the Palestinians failed to lead to any policy announcements or new initiatives.

The lack of major deals did not stop Doepner saying he was pleased with the visit. “In our mind, from the commercial and economic side, it was successful, particularly as the discussion appeared to have been open,” he says.

Cementing ties

“There are no major problems between Germany and Saudi Arabia,” he adds. “The opportunities are quite well known, but drawing attention to them is a major thing that can be and is being improved. Saudi Arabia’s opportunities are not as well known to German business people as they could be. A visit such as this one is a good way to prove the importance of the Saudi economy in Germany.”

Saudi Arabia seems to hold a similar view. Prince Salman bin Abdulaziz al-Saud, governor of Riyadh, described the meeting between Merkel and King Abdullah as “successful” during an official visit to Berlin, which began on 30 May.

As with Merkel’s trip to the Gulf, Prince Salman’s visit, at the invitation of German Foreign Minister Guido Westerwelle, was designed to boost German investment in the kingdom and coordinate Saudi-German positions on a range of political issues.

‘We want to enhance cooperation,” Prince Salman said in an address at a reception held in his honour by Klaus Wowereit, the mayor of Berlin, on 1 June. “The kingdom welcomes cooperation with everyone. It has a free and open system. We seek global experiences, including German expertise.”

Prince Salman also suggested making Riyadh and Berlin twin cities. Such symbolic ties are useful, but there is no doubt that both sides are hoping for rather more substantial links too, whether or not a free trade deal does emerge between the EU and GCC.