SAUDI ARABIA

The relevance of Saudi Arabia for Germany’s economic interests results from the country’s fundamental importance for stability and development in the Near and Middle East, its efforts to modernise and diversify its economy, as well as its oil wealth.

The Kingdom, which has been ruled by the Al-Saud family since it was founded in 1932, is the most populous of the Sunni Gulf states with a population of more than 35 million (of which 20 million are Saudi citizens). As the home of the two holy cities of Islam, Mecca and Medina, Saudi Arabia also has an ideological claim to leadership in the Arab-Muslim world. In the period of political upheaval that the region experienced since the so-called Arab Spring of 2011, Saudi Arabia has also been able to boost its reputation as an anchor of stability.

The regime’s concentration of power, which goes hand in hand with the narrowing of political space, is as controversial as the increasingly robust Saudi foreign policy of recent years, as evidenced, for example, by the military intervention in Yemen. However, today and in the foreseeable future, Saudi Arabia is one of the few Arab policy-shaping powers that could make a contribution to stabilising the region (and thus to securing trade routes, raw material supply and sales markets).

Since 2016, the young Crown Prince Mohammed bin Salman (MbS) has been the driving force behind the “Vision 2030“ development plan, which aims at further opening up and diversifying the Saudi economy- apart from reforming society and adapting the Saudi social contract. One of the hoped-for effects is to reduce the country’s dependence on oil. By means of large-scale infrastructure projects, such as the futuristic city project Neom, on the Red Sea, the Crown Prince wants to modernise Saudi Arabia and attract private international investors.

Despite the continuing constitutional and political uncertainties, this creates opportunities for the German economy. Saudi Arabia is seeking to transform their rentier state model into an investment and innovation-based economic system, an approach that is also necessary for other countries in the region. A partnership with Saudi Arabia and German economic projects in this area could have a corresponding impact in the Near and Middle East as a whole. Especially with regard to the energy transition (renewable energies, blue and green hydrogen), Saudi Arabia is, potentially, a very promising partner for German businesses and could also play a pioneering role for future energy policy. However, it remains questionable how sustainable Saudi modernisation can really be without significant political reforms.

Saudi Arabia is one of the three largest oil producers in the world. No other country exports as much oil as the Gulf State, which (together with Venezuela) also has the largest currently known reserves. Although most of it is delivered to Asia, with Germany hardly purchasing any Saudi oil, the Kingdom plays a key role in the global economy (and in the OPEC oil production cartel) – at least until the advent of the post-fossil era.

Riyadh’s traditional alliance with Washington, which was reinforced under President Donald Trump, continues under President Biden- even if some cracks have appeared due to Biden’s harsh criticism, especially of the Crown Prince MbS, and the de-classification of the Kashoggi intelligence report. Still, over the past decade the Saudis have increasingly diversified their international relations; the disappointment over an allegedly too revolutionary and Iran-friendly Obama ran too deep, as was the concern regarding Trump’s unpredictability and Biden’s tougher stance on human rights violations. The Saudi leadership is mainly looking east to countries such as China, India and South Korea and – in terms of security policy – also to Russia.

Nevertheless, there is a fundamental willingness to work more closely with Europe and especially Germany, whose economy and culture are highly regarded in Saudi Arabia. Admittedly, the image of Germany in Saudi Arabia, where there is an unjustified feeling that the country is being excessively criticised by German politicians and the German public, has lost some of its luster in recent years. However, the Saudi leadership knows that it also needs Western partners to implement its ambitious plans for economic transformation and the opening-up of society. Global efforts to de-carbonise the world economy in the long term increase the pressure to implement reforms.

Germany is the fourth most important supplier country for Saudi Arabia (after China, the USA and the UAE). However, exports to Germany remain at a fairly low volume (around 6,5 billion euros for 2020, compared to 25,5 billion euros from China), and have even gone down since 2016. While many large German businesses such as Siemens, Bayer or Allianz have been active in the Kingdom for decades, many small and medium-sized companies continue to shy away from investment risks. Saudi Arabia, in turn, is Germany’s second most important trading partner in the Arab region behind the UAE. After the diplomatic crisis caused by German criticism of Saudi foreign policy between 2017 and 2018, a stable dialogue has now been reestablished at the political level.

German industry has by no means exhausted the potential resulting from the transformation of the Saudi economy, the young population, which is also large by the standards of the Arabian Peninsula, and the opening-up of society in conjunction with its own financial resources. German expertise is particularly in demand in the transport and healthcare sectors, for example. In addition, other sectors can be developed with a view to the post-oil age that Saudi Arabia is preparing for, for example renewable energies and hydrogen. With the opening-up of society, the country will also become more of a consumer society with new business opportunities, for example in the entertainment industry.

The safety of the sea routes around the Arabian Peninsula (including the Strait of Hormuz) is essential for the German export industry, just as it is for Saudi Arabia, which relies on it for its oil exports. There is room here for joint initiatives which would ideally form part of a European-Arabian Gulf collaboration and which could also contribute to de-escalation in the region and be a building block for a regional security structure.

The German Federal Government could use guarantees and other financial support programmes to support small and medium-sized companies in order to help them in getting more involved in Saudi Arabia’s economic transformation. In the field of science, private and public sponsors can develop initiatives, such as a joint tech or MINT campus. Social exchange programmes, including in the educational, cultural or sports sectors, can help to solidify the necessary knowledge and basis of trust for German-Saudi economic cooperation.

For this, there must be a consistent and honest dialogue, just as in the political discourse in general. On many issues, such as governance and civil rights, Germany and Saudi Arabia have different views that can be critically discussed within the appropriate framework. However, this does not exclude cooperation and specific projects in socio-economic and technological fields.

At the political level, Germany must make an effort to work with Saudi Arabia in order to stabilise the region. To this end, the Kingdom should be encouraged to commit itself to a regional policy of conflict de-escalation and settlement, such as in Yemen, and to expand the direct dialogue with Iran, which has already started. Also, Germany should take Saudi Arabia’s security concerns seriously and propose or support joint initiatives, for example in the area of maritime security.

Edmund Ratkaheads the KAS Office in Jordan.
Simon Engelkesis policy advisor for the Middle East and North Africa in the European and International Cooperation Department.

Last update: 13 May 2022