Saudi Arabia key fact

The value of Saudi exports to the US fell to about $30bn in 2010 from $54.7bn in 2008

Source: MEED

When oil major ConocoPhilips exited the development of the $10bn Yanbu oil refinery, it was easy to see the events as a sign of the US’ dwindling importance as a trade partner to Saudi Arabia.

But that would be too simplistic a reading of events. At the same time as losing out on the Yanbu deal, US firms notched up deals to partner on a $10.8bn aluminium project, signed about $800m of contracts in the power sector and the government agreed a $60bn arms deal.

Historic relations between the US and Saudi Arabia

The ties between the two nations go beyond the purely economic and stretch deep into the kingdom’s history. Oil was first discovered in Saudi Arabia in the 1930s by US geologists, and the industry remains populated with US expatriates. Saudi Aramco, the cornerstone of the country’s economy, was initially a joint venture with the US. And despite every US administration since president Richard Nixon saying it wanted to reduce dependence on foreign oil, particularly from the Middle East, that dependence is actually increasing.

The US is not just a place to trade with, it is an ally, and a military and geopolitical one. That is more important

Local executive

Saudi Arabia is the third largest exporter of oil to the US, behind Canada and Mexico. In return, the kingdom is key customer for US goods. The $60bn arms deal, the biggest in the history of US-Saudi ties, is a prime example of this. That contract, and others such as Pennsylvania-based Alcoa’s involvement in the aluminium project, will not start to hit trade figures for a few years, and will continue to boost the number for some time. The rising oil price will also help to improve trade figures.

The value of Saudi exports to the US fell to about $30bn in 2010, from $54.7bn in 2008, as a result of the collapse in the oil price from nearly $150 a barrel to close to $40 a barrel. Trade flows in the opposite direction have remained much more robust, with Saudi imports from the US expected to increase slightly in 2010 from the $10.8bn in 2009.

US trade with Saudi Arabia
($m)
  Exports Imports
1985 4,474 1,907
1990 4,049 10,021
1995 6,155 8,377
2000 6,234 14,365
2005 6,805 27,193
2010 11,951 31,420
Source: US Census Bureau

But the example of the Yanbu refinery demonstrates the Saudi-US relationship is under strain from a rising China. Saudi Aramco is close to agreeing a deal with state-owned China Petroleum & Chemical Company (Sinopec) for it to become a joint venture partner on the Yanbu scheme. “Over the past few years, the US’ total market share of Saudi Arabia trade has declined, while it has been increasing for the Chinese,” says John Sfakianakis, chief economist at the local Banque Saudi Fransi. “The gap between the two is now only about $3bn.”

That is a concern for the administration of US President Barack Obama. In 2010, he announced the National Export Initiative (NEI), which included a ranking of countries that US firms should target for increasing exports. The White House has put Saudi Arabia in the second tier of the NEI group, along with five other countries.

As a result, Amer Kayani, commercial attache at the US embassy in Riyadh, says he has welcomed two high-profile trade missions from the US in the past six months, one for energy and infrastructure firms and the other for public health companies.

More are expected, with one in the information technology and communication sectors due in April, while defence companies are scheduled to visit the kingdom in May to see how they can increase business ties.

Nuclear cooperation between Riyadh and Washington

Riyadh’s recent moves to develop civilian nuclear power through the establishment of the King Abdullah Centre for Atomic and Renewable Energy has also attracted the attention of US firms.

“You cannot build a nuclear plant and just start running it,” says Kayani. “You need a lot of expertise and our approach is to start working now at training Saudis so that when the time is right to execute a project, the local manpower is ready to take a role in it.”

He adds that there are already two consortiums featuring US companies starting to work with Saudi firms in preparation for bidding on nuclear contracts.

In addition to US trade missions to the kingdom Arabia, Kayani says there are at least a dozen missions a year organised by the embassy to take Saudi Arabian firms to the US.

As a result of the global financial crisis, US firms are increasingly looking at opportunities in new markets. “There is not a lot of scope for growth in the US now, so you really have to look at exports and Saudi Arabia is definitely attractive,” says a US businessman based in Saudi Arabia.”

Diplomatic ties between Saudi Arabia and the US

Beyond commercial ties, Washington’s and Riyadh’s interests converge around other areas too. One of the key revelations in the release of diplomatic cables by whistleblower website Wikileaks was just how much the US and Saudi Arabia agree over Iran. King Abdullah bin Abdulaziz even urged aggressive action in response to Iran’s nuclear efforts.

While possibly embarrassing, a US diplomatic source says the release of the cables has not impacted relations. “I can honestly say that in all my meetings with Saudi officials, it has not been brought up by anyone,” says the source. “People understand that these are not policy documents, they are just reporting what diplomats hear.

“The relationship between Saudi Arabia and America is very deep and strong. It is not really dependent on any administration as our interests transcend administrations. Although we do not see eye to eye on everything, on the things that matter, we agree.”

The relationship is also about knowledge sharing. About a third of the 90,000 Saudi nationals studying abroad are in the US, the highest number in any country.

“The US is deeply ingrained in the minds of Saudi policymakers because so many of them are educated there,” says Sfakianakis. “That is an area where no other country can yet compete with the US.” He estimates about 80 per cent of current policymakers in Saudi Arabia were educated in the US.

Knowledge transfer is largely unilateral. Saudi firms offer US partners a huge local market for their products, but often want training and access to technology in return. US firms can choose an arrangement where a local partner is more of a facilitator, offering help with visas and company registration in return for a share of the revenues. Both can be profitable, but not always easy to manage.

The Saudi riyal’s peg to the US dollar also strengthens ties between the two countries. Despite frequent speculation that a revaluation or de-pegging will occur, it is unlikely in the foreseeable future. The peg offers US businesses the comfort of knowing that foreign exchange risk from their Saudi operations is minimal.

A bilateral deal to allow citizens from either country to receive five-year visas is also in place, although sometimes the agreement is not fully respected. “We give out five-year visas to the US for Saudi citizens and mostly the Saudis do the same,” says the US diplomatic source. “But I do meet female executives, who say they usually only get six-month visas.” 

This exemplifies the difference often found when having to deal with Saudi bureaucracy from the impression sometimes given. The kingdom was ranked as the 11th easiest country in the world to do business by the World Bank’s Doing Business survey in 2010. But it was ranked 140th in terms of enforcing contracts, with its position actually falling from 2009. Kayani says because of this taking time to choose a local partner is particularly important.

Poor business practice goes both ways. One local banker recounts how in the middle of the defaults on billions of dollars of debt by Saudi conglomerates Saad Group and Ahmad Hamad al-Gosaibi & Brothers, he was asked by a US banker with exposure where the heads of the two firms lived. The US banker was embarrassed to admit that he had no idea.

Long-term reality of trade relations between US and Saudi Arabia

Despite the occasional challenge, it is better to think of the relationship between the US and Saudi Arabia as one that is expanding to include other parties, rather than one in which the US will be replaced by someone else. The US is losing market share in bilateral trade, but that is inevitable as other economies increase in size.

China made up 4.1 per cent of total imports to Saudi Arabia in 2000, but by 2007, this had more than doubled to 9.6 per cent. The US’ market share fell from 19.7 per cent in 2000 to 13.5 per cent in 2007.

Wrestling the US from the top of Saudi Arabia’s trading partners will be tough, even for China. As one local executive puts it: “Its true China is building its position, but you have to remember the US is not just a place to trade with, it is an ally, and a military and geopolitical one. That is much more important.”