Saudi Arabia: The Future of Investment amidst the Possibility of Regional Wars

The Kingdom of Saudi Arabia is not only the most valuable US ally in the Middle East, but a titan of global oil production. Its rulers, however, are desperately looking to diversify and open their economy up to foreign investment. With Israel and Iran inflaming tensions over Palestine and Lebanon, will an expanded war in the Middle East jeopardise that diversification and foreign investment?

Most likely not. The finite nature of Saudi Arabia’s oil extraction has long been known to its rulers. In 2016, Crown Prince Mohammed bin Salman announced the ‘Vision 2030’ program, which sees not only a move away from overreliance on oil, but a transformation of the entire kingdom. The vision sees change in citizens’ social contract, along with the establishment and growth of a private sector. For decades, Saudi citizens have enjoyed enormous government-funded benefits, such as subsidised housing, electricity and water, along with free healthcare and free education. Income tax does not exist for citizens in the kingdom, and VAT was not levied until 2018. Saudi citizens do pay a small tax of religious alms, however, with foreign businesses having been subject to a 20% corporate income tax since 2004. Women have not been employed in any major capacity until recent years under bin Salman’s governance. The majority of those (men and women) employed in the kingdom work in the public sector, which bestows generous salaries and good pensions. All these benefits have been provided by the enormous revenue generated by Saudi Aramco, the government-owned oil company that holds a monopoly on oil drilling and selling in the kingdom.

With oil reserves being finite and the Saudi government seeking to move away from oil, Aramco diversifying and losing its dominance is only a matter of time. As the country’s enormous but sole cash cow possesses a limited lifespan, the kingdom’s citizens cannot be supported by the state from cradle to grave in the future. Taxes will need to be levied on its citizens, subsidised housing shrunk, healthcare privatised and the labour force participation rate significantly raised in the private sector. All these changes will revolutionise not only the Saudi citizen’s social contract, but the country’s economy as well. The majority of workers in the kingdom are employed by, and the majority of the state’s GDP comes from, state-owned companies. While Saudi Arabia does already possess a small private sector, it must grow immensely if Vision 2030 is expected to succeed. This represents a foundational challenge, rather than a simple enlargement of an already thriving private sector.

It is this private sector gap that foreign investors can help fill. Beyond healthcare, the Saudi government seeks to fuel domestic and foreign-led private expansions in sports, (limited) entertainment, financial services and tourism. Manufacturing is not a target of the Vision. Mass privatisation of Saudi Aramco itself is very improbable, even in the long term – conflicts and depleting reserves keep pushing oil prices up, and the cash cow still has many years (if not decades) left in it. The company will no doubt become a broader and more diversified energy company.

Much has been publicised regarding the kingdom’s ambitious urban projects, such as NEOM - the 170km (105 mile) long linear city, planned to be fuelled by 100% renewable energy. Investors are advised to approach projects like these with caution. Construction on NEOM has fallen significantly behind schedule, with numerous press outlets having reported a downscaling of the original planned size.

This is not to say that investors should stay clear of all Saudi construction plans, regardless of what is planned to be built. The King Abdullah Economic City (KAEC) was indeed previously seen as a cautionary tale of overly ambitious Saudi projects. Founded in 2005, it was planned to attract foreign investment en masse and have a population of millions. As of 2024, there are a few select factories and offices there, with the city’s population numbering in the low tens of thousands. The KAEC, however, was founded long before Vision 2030 was announced and the subsequent drive to change the country from top to bottom began. Under bin Salman’s Vision and governance, it’s much likelier that projects such as Qiddiya and the Jeddah Economic City come closer to fruition (the former being an enormous tourist/entertainment resort, and the latter being another planned hub of foreign investment and domestic diversification).

Saudi Arabia’s foreign targets for diversification, privatisation and investment are primarily western economies and businesses. Vision 2030 has little relevance for any Middle Eastern countries to the north of Saudi Arabia, as they have few economic ties to the Saudi kingdom. Bahrain and Qatar, to Saudi Arabia’s east, are too small to compete with the Saudi kingdom. While the UAE (east of Saudi Arabia) is the Saudi kingdom’s biggest economic competitor in the Middle East, that competitiveness really only extends to Dubai and its financial/service industry. Saudi Arabia’s biggest trading partners are China, India, Japan, South Korea and the United States - Nearly all of the other Arab states are either too small and underpopulated, or too underdeveloped and war-torn to merit substantial trade with. This bodes well for Vision 2030’s security and future, as other Middle Eastern countries really cannot affect it. The kingdom has never fought a major war on its own territory and has not needed to. Its present and most recent military endeavours have consisted of supplying proxy forces in minor wars outside its borders. This is unlikely to change.

Strategically, Saudi Arabia is the United States’ most valuable ally in the Middle East. It does indeed have interests between Israel, Palestine, Iran, and the United States, but they are unlikely to engulf the kingdom in war. Religious and geopolitical differences have seen Iran and Saudi Arabia as enemies, but rapprochement in recent years has made some progress in normalising relations. As a religious state and custodian of both Mecca and Medina (two of the holiest sites in Islam), the kingdom is committed to a two-state solution for Israel and Palestine. The kingdom though, unlike most Arab states, is far from hostile to Israel. This is largely due to the United States’ support of Israel and the Saudi wish for military and economic support from the United States. The kingdom does not recognise Israel as a state, but has cooperated with them on military, economic and general diplomatic fronts. These relations have been strained since the new Gaza war’s outbreak in 2023, with polling having shown Saudi citizens as being far more hostile to Israel than the kingdom’s rulers evidently are. Saudi relations with Palestine have largely been deteriorating, but the kingdom still maintains a commitment to a two-state solution.

Iran and its Lebanese-based proxy militia, Hezbollah, have been edging closer to war with Israel, due to the latter’s campaign in Gaza. Iran has been launching numerous (and largely impotent) airstrikes on Israel, while Israel has been consistently assassinating top Hezbollah officials. The most recent of these took place on Iranian soil, with Iran once again vowing (probably unsuccessful) revenge. Hezbollah has been regularly bombing Israel’s northern (Lebanese) border, and a slow, attritional Israeli invasion of Lebanon looks to be imminent.

With its interests balanced between multiple parties in the Middle East, will Vision 2030 be jeopardised in an Israeli-Iranian-Lebanese war? Almost certainly not. While opposed to Iranian expansion, the Saudi kingdom does not even recognise the Israeli state and will not engage in any major military actions should Iran and Israel escalate their conflict. The conflict itself will consist of exchanging air strikes between the two countries, along with a slow and attritional Israeli invasion of Lebanon (which Iran does not border). Iranian rockets and drones headed to Israel are unlikely to even pass over Saudi airspace. Saudi Arabia also does not share any land border with Israel, Lebanon or Iran. In such a scenario, oil prices would be likely to rise but not catastrophically.

The greater threats to Vision 2030 are quite improbable, and represent greater threats to the economies of the Middle East and the world at large. They are (in descending order of probability): a US air campaign against Iran, the Israeli occupation and demolition of the Al-Aqsa mosque, and the Chinese invasion of Taiwan.

As was feared by some Islamic media outlets in April of this year, if Israel were to seize the Al-Aqsa mosque in Jerusalem, demolish it and start construction on the Third Temple in its place, the Arab world could erupt into war. The Al-Aqsa mosque is one of the holiest sites in Islam, and a built third temple would become the holiest site for all Jews. In case of such a move by Israel however, the Saudi economy and socio-economic project would persist, albeit in a more limited fashion. Saudi Arabia does not border Israel, and a limited air campaign at most would be fought between them. Military spending would take priority, and mass privatisation would be slowed down. Foreign investment from any Israel-friendly countries would, however, be greatly jeopardised. This represents the greatest obstacle to foreign investors in the event of an Israeli move on Al-Aqsa. Oil prices would of course skyrocket - Sanctions, boycotts and potentially even embargoes led by OPEC (of which Saudi Arabia is member) would target any countries giving aid to Israel. If many western governments sided with Israel in such a scenario, most foreign investment in the kingdom would cease. An Israeli move on Al-Aqsa is highly unlikely though. The Israeli government is well aware of the potential ramifications of such an action, and does not want to fight more than a three-front war (let alone a religious one against the entire Arab and/or Muslim world).

If the US initiated a large air campaign against Iran, the ramifications would be either slightly larger or world-crashing. Saudi air bases would likely be used by US air forces and, if used, would be hit by Iran in retaliation. Civilian areas would also be hit, but to a very light extent. Oil prices would, again, skyrocket, but foreign investment into the kingdom would not be jeopardised. The United States and its allies would come out on top in the war, and Saudi Arabia would only draw closer to the United States and its allies; politically and economically. The non-military targets in Saudi Arabia that Iran would be likely to strike are oil refineries, oil rigs, airports and seaports – As the state-owned monopoly controls the kingdom’s oil, foreign businesses cannot invest that much into, and thus cannot really lose investments in, Saudi Arabia’s oil industry. While the kingdom’s eastern ports would be shut down, its western ports would be largely untouched, due to the distance required for Iranian projectiles and aircraft in hitting them. Iran possesses a much smaller missile and aircraft inventory than the United States, and every rocket sent at an oil refinery is one not sent at a US military aircraft.

However, if war in Ukraine still continues at full pace, if Israel is stuck fighting in Gaza and Lebanon, if the Houthis step their attacks in the Red Sea up and if the United States strikes Iran, China could hypothetically perceive the United States as overstretched, and subsequently attack Taiwan. This would of course have ramifications extending far beyond the Saudi economy. A substantial proportion of Chinese maritime shipping would cease (on account of sanctions and US blockade measures), the semiconductor exports of Taiwan would stop, and the global economy would take a severe hit. Electronics manufacturing would halt and take months or years to recover. This is a worst-case scenario however, and unless they are egregiously provoked, a Chinese invasion of Taiwan is highly unlikely (regardless of Iran’s actions).

Barring extremely improbable worst-case scenarios, the kingdom’s societal and economic transformation is poised to continue. Despite increased tensions and potential conflicts in Lebanon and Iran, Saudi Arabia’s geopolitical importance to the United States, and advantageous geographical position, will very likely safeguard it against any major economic collapse. The shift towards a diversified and private sector-driven economy, attractive to foreign investors, is more than likely to continue. While some conflicts (within the realm of possibility) could certainly raise oil prices, they would only temporarily disrupt Vision 2030 and foreign investment in the kingdom. The Saudi economy is the most promising one on the Arabian Peninsula - little looks to be changing that.

Augustus Redman is a Lead Analyst at Autran Group, specialising in defence and military policy. Redman is currently reading History at Trinity College, Oxford.

Email: aredman@autrangroup.com