On Friday, The New York Times reported that the Trump administration is set to impose some kind of sanctions on Saudi Arabia in response to the extrajudicial killing of dissident journalist Jamal Khashoggi.
The measures, expected within days, will likely amount to an end around, whereby the White House will attempt to claim that “justice” has been served and thus further pressure from Congress is unnecessary. Trump has made it abundantly clear over the past month that harsh sanctions against Riyadh targeting the Crown Prince are a non-starter, despite international pressure and public backlash.
If there’s anything positive that came out of the Khashoggi killing, it’s renewed focus on the humanitarian crisis in Yemen, which has been decimated by a Saudi-led campaign against the Iran-backed Houthis. The Saudis have so far ignored Pentagon calls for a cease fire and that recalcitrance (along with pressure from Capitol Hill) appears to have been behind Trump’s decision to end air refueling flights for the Saudi Arabian military.
As noted on Friday evening, the wild card in the Khashoggi case is still Turkish President Recep Tayyip Erdogan, who has used the incident as leverage to try and compel a royal shakeup in Riyadh.
Having cemented his own authority after consolidating power in June, Erdogan sees an opportunity to undermine Mohammed bin Salman, in the process snatching victory from the jaws of defeat after the Arab Spring fizzled out. This is, at heart, a kind of revenge, exacted by Erdogan on behalf of the Muslim Brotherhood and on behalf of Ankara’s allies in Doha.
The problem for Erdogan is that the world has a short attention span these days and he needs to keep the Khashoggi story in the news. To that end, he said on Saturday that Turkey has turned over the infamous audio recording of Khashoggi’s murder and dismemberment to Germany, France and Britain. The tape was shared with CIA Director Gina Haspel earlier this month.
“We gave the tapes. We gave them to Saudi Arabia, to the United States, Germans, French and British, all of them. They have listened to all the conversations in them. They know,” Erdogan said, before reiterating that the Saudis have been unhelpful in the investigation.
The incident is still weighing on Saudi stocks, which fell again on Sunday. The Tadawul All Share Index has logged declines in every session but one in November after hitting its lowest levels since January last month when news of the murder precipitated an international firestorm.
Although volatility has dropped sharply on the index (thanks in part to late-day buying by Saudi institutional investors who were hard at work last month shoring up the market), foreign investors abandoned Saudi equities in droves in October.
As Bloomberg reports, citing EFG-Hermes, net foreign outflows from Saudi Arabia totaled $1.7 billion in October, a record exodus.
This comes at a pivotal time for Saudi markets. Back in June, MSCI announced that starting in June 2019, it will include the MSCI Saudi Arabia Index in the MSCI Emerging Markets gauge and the MSCI ACWI Index, a nod to the country’s efforts to provide more transparency to foreign investors. The MSCI news came less than three months after the Kingdom won EM status from FTSE.
Riyadh has attempted to deflect blame from the Crown Prince, but nobody believes them. Bin Salman’s “Davos in the desert” spectacle was boycotted by a number of high profile executives, although as Larry Fink’s unfortunate comments make clear, it’s going to take more than the death of a journalist (and apparently, more than a humanitarian crisis in Yemen) to force the business community to abandon the Kingdom.
Now let’s see how local markets react to the imposition of watered down sanctions from Steve Mnuchin, assuming of course Trump green lights Treasury to move ahead on the measures.