Target Dubai? Saudi Arabia’s ultimatum to move headquarters to the kingdom

DUBAI, United Arab Emirates – Saudi Arabia announced in a bold and unexpected move late Monday that its government will stop doing business with international companies whose headquarters are not based in the kingdom by 2024.

The news has investors, bankers and employees abroad buzzing – and scratching their heads.

Saudi Arabia has placed itself as a place for headquarters in its campaign over the past few years to create jobs in the private sector and diversify its economy as part of Crown Prince Mohammed bin Salman’s Vision 2030.

But what started as a pitch for global headquarters has now become an ultimatum for some: either move your headquarters to the kingdom or lose lucrative government contracts. And the move, according to local analysts and professional financiers, appears to be aimed at the region’s current headquarters: Dubai.

“The Kingdom of Saudi Arabia intends to contract with companies and commercial institutions with regional headquarters that are not in the kingdom. The strike will include government-owned agencies, institutions and funds and will take effect on January 1, 2024. step, “the Saudi state reported to the agency SPA on Monday.

So far, it seems that the policy only applies to businesses that do business with the government; those who do not move their headquarters to Saudi Arabia can still work in the private sector.

The Saudis are trying to attract companies from Dubai, I expect and elsewhere, Ryan Bohl, an analyst in the Middle East, a risk consulting firm Stratfor, told CNBC.

One UAE-based financier, who spoke anonymously because he had business operations in Saudi Arabia, described the move as ‘clearly aimed at the United Arab Emirates’ and a ‘jerk in the face’ to Dubai.

“It’s a terrible decision,” added the financier, a longtime veteran of the region. “It’s anti-common market, it’s competitive and it’s essentially corporate bullying.”

Saudi officials feel differently. While the kingdom’s financial and investment authorities did not respond to CNBC’s requests for comment, Investment Minister Khalid Al-Falih tweeted that the decision would be ‘positively reflected in the creation of thousands of jobs for citizens, the transfer of expertise and the localization of knowledge, and it will also contribute to the development of local content and to attract more investment to the Kingdom. ‘

The government intends to significantly increase Saudi Arabia’s current share of less than 5% of the region’s headquarters.

UAE officials have been silent so far, but Nasser Al-Shaikh, former chief financial officer of Dubai, has had critical words for the kingdom.

The decision “contradicts the principle of the United Golf Market”, Al-Shaikh wrote on Twitter on Monday night.

“Forced attraction is not sustainable and the most effective is to improve the environment,” he said. He argued that the move of Saudi Arabia as the largest market in the region, which is already undergoing major development, is unnecessary.

The oil-rich kingdom – the largest market in the region, with a population of 34 million, 70% of whom are younger than thirty – has attracted a wave of new investments in recent years, which coincided with the liberalization of economic and social reforms.

Invest Saudi, the kingdom’s investment promotion arm, has previously launched ‘Program HQ’ and is offering special tax cuts and other incentives to multinational companies with ‘blue chip’. Weekly consultants from top American consulting firms are flown in from Dubai to develop strategies on how the conservative metropolis Riyad can compete with and displace Dubai as the region’s leading business hub.

Google Cloud, Alibaba and Western Union are some of the latest big names that have established interests in the kingdom. And during Saudi Arabia’s annual Future Investment Initiative in January, 24 international companies announced their plans to relocate their regional headquarters to Riyadh, including PepsiCo, French oil services company Schlumberger and Canadian chain Tim Horton’s.

The Saudi government is investing $ 220 billion in projects aimed at placing Riyadh in the world’s ten best city economies, and offering competitive tax-free salaries to workers willing to relocate.

But will that be enough to attract expats from Dubai, where they can drink, wear bikinis on the beach and enjoy a much more liberal lifestyle, which can be compared to the West on many levels?

“The lifestyle in Saudi Arabia is not comparable,” said a venture capitalist in Dubai, anonymously because of the financial interests of her firm in the kingdom. “You do not have the same freedoms you have here – here I can go and hang out on a public beach … Dubai is a world city, Riyadh is far from it. It lacks the diversity that Dubai has. It is a big deal for me. ‘

Indeed, one of Dubai’s attractions for foreigners is the majority of residents from abroad – 90% in the United Arab Emirates as a whole. The success of Dubai’s global openness model is also manifested in numbers: according to the UN’s trade database, the UAE received 300% more foreign direct investment in 2019 than Saudi Arabia, even though its economy was about half as large.

And the UAE ranked 16th on the World Bank’s 2020 Ease of Business Index, while Saudi Arabia ranked 63rd.

There is also the reputation problem. Many foreigners ask what they think of Saudi Arabia, and they immediately associate it with a poor human rights record and oppression of women.

” A country that actively silences women? No thanks, ” said a U.S. expat who worked in Abu Dhabi. Riyadh came under fire from rights groups and foreign governments for the assassination of Saudi journalist Jamal Khashoggi in 2018 and for the jail time of, among others, several female management activists.

The government of Saudi Arabia will “have its work cut out to persuade companies to move,” said Mike Stephens, a Gulf expert and research fellow at the Foreign Policy Research Institute. He calls the headquarters “a dramatic and daring move by the Saudis that is very risky.”

Yet many expats who worked in the kingdom feel differently. “There is no doubt that Saudi Arabia will compete with Dubai,” said Alex Nasr, a consultant with several years of experience in the country, adding that he is already competing on the salary front.

“Now with Vision 2030 and the drastic changes that have permeated the nation, it will start to catch up with the quality of life … as soon as the veil is lifted over the lifestyle restrictions, the expats will start pouring in.”

Shane Shin, a founding member of venture capital firm Shurooq Partners in Abu Dhabi, is opening a second head office in Riyadh, where he will double his staff. “The pace and momentum that Saudi Arabia is moving at is just staggering,” he told CNBC.

The Saudi government has ‘also’ made it easier ‘to set up an office and visas’ than in the past, Shin said, adding that most of Shurooq’s portfolio companies operate in the kingdom.

“The competitive nature of Saudi Arabia and the larger market, the openness, actually make it much better to open an office than in Dubai,” he said. “Unfortunately, Dubai’s competitive advantage is declining rapidly.”

The announcement left investors and analysts with more questions than answers. What will be a regional headquarters? Can a company have two regional headquarters, or simply build a smaller office in Riyadh called “HQ”, while the majority of its staff live in Dubai? Will there be releases or loopholes? And what does ‘region’ include: just the Gulf states, or further to Egypt, North Africa and Turkey?

Importantly, this happened after consultation with Saudi Arabia’s neighbors – and what could be the implications of the attempt to displace the Gulf allies’ business points?

The “Saudi first” contracting approach, while likely to drive up competition with the UAE, “is likely to end with a fair number of exceptions,” to make it feasible for companies, Bohl of Stratfor said. This is ‘especially in strategic industries such as finance, construction or entertainment.’

Either way, the Saudi move is likely to have significant regional consequences and accelerate a modernization race between Saudi Arabia and the United Arab Emirates, as both compete to attract foreign businesses.

Regional investors, meanwhile, are awaiting clarification on what ‘headquarters’ is under the definition of the kingdom and more details that could help them plan their next move.

Some believe that the kingdom is only testing the waters, after having become accustomed to sudden and dramatic rulings by the Royal Court over the past few years.

“Their strategy is wrong – the strategy must be based on economics,” said a Dubai banker, who spoke anonymously due to employer restrictions. “But in the end, I think they’re just trying to test the market.”