Saudi bid to become regional business hub

Reportedly, Saudi Arabia has issued licenses to 44 international entities to set up regional headquarters in the capital Riyadh, as the kingdom seeks to project an image of change to lure foreign capital and talent.

Multinationals in sectors including technology, food and beverages, consulting and construction are among the entities eligible to set up headquarters. They include South Korea's Samsung, Deloitte, Unilever, Baker Hughes and Siemens.

Crown Prince Mohammed bin Salman is spearheading a campaign to make Saudi Arabia a regional business hub. State news agency SPA cited Fahd al-Rasheed, President of the Royal Commission for Riyadh City, as saying the moves would add 67 billion riyals (US$18 billion) to the Saudi economy and create around 30,000 jobs by 2030.

The country has set out a Vision 2030 program ‑ a neoliberal reform agenda aimed at reducing the Kingdom's economic dependence on oil.

Saudi Arabia also needs to reassure foreign investors nervous about putting money into the kingdom due to reputational risks stemming from purported human rights violations at home and in Yemen, and the sour taste left by the murder in 2018 of Saudi journalist Jamal Khashoggi in Istanbul.

The world's top oil exporter and largest Arab economy is also setting a deadline, saying in February it would give foreign entities until the end of 2023 to set up shop in Riyadh or risk losing out on government contracts.

Saudi Minister of Investment Khalid al-Falih told Nikkei Asia that it was not a case of merely competing with the UAE for foreign direct investment.

"We believe all capitals of the Middle East will continue to grow and thrive with the growth of Saudi Arabia. With the achievements of Vision 2030 [and] with the growth of Riyadh, it will create a spillover effect into the region," al-Falih said in the interview.

"Riyadh's economic quality will transform into higher growth sectors such as technology, health care, logistics, advanced manufacturing, food processing [and] financial centers ... centered in Riyadh to serve the broader region."

Al-Falih said his country was working to improve lifestyles for foreigners based in Riyadh.

"We are only starting the climb. This is an escalator we are riding to improve liveability in Riyadh," he said. "We are on a continuous, never-ending journey to improve our liveability [and] ... investment environment. Boosting skills for our talent and improving our competitiveness for the Saudi economy."

Saudi Arabia investment minister Khalid al-Falih speaks to Nikkei Asia in an interview in Riyadh. (Photo by Saudi Ministry of Investment)

But Ryan Bohl, a senior geopolitical risk analyst for intelligence firm Middle East at Stratfor, said it is unlikely that Riyadh will be able to quickly make improvements in legal and banking services, social issues, entertainment and education.

"Riyadh will take years to create the natural pulls needed to get these Asian and International institutions to shift over to Riyadh," he said. "There is a real chance Saudi Arabia weakens these provisions before the deadline, which would reduce the challenge to Dubai's model."

"But even if they don't, the Emirati government might decide to either provide compensation for those that endure Saudi penalties -- create new policies that liberalize the UAE's labor market further to make it an easier place to live and work than Saudi."

During the recent Riyadh Future Initiative Investment Summit, dubbed "Davos in the Desert," international investors were reluctant to speak openly about moving their Dubai headquarters to Riyadh.

"The Gulf region is growing fast enough to sustain offices in multiple jurisdictions," Tarek Fadlallah, CEO of Japanese Nomura Asset Management (Dubai), told Nikkei.

Anthony Habis, head of the Middle East and North Africa for BNY Mellon, said the U.S. investment bank was expanding its presence in Saudi Arabia with its local entity and strategic partnerships. "We are proud to have a Saudi CEO and local team based in Riyadh, and we share in the Saudi Vision 2030 of building capital markets."

Hazem Ben-Gacem, co-CEO of Investcorp Bahrain, lauded Riyadh's recent progress. "Crown Prince Mohammed bin Salman has done an exceptional job to challenge the status quo, not just in terms of structural and fiscal reforms but also on the social front."

Chinese artificial intelligence company Sensetime said it will be growing its presence in Saudi Arabia, but did not comment further.

The assassination of Khashoggi prompted numerous investors, including the CEOs of BlackRock and JPMorgan Chase, to pull out of an investment event in Riyadh in 2018.

A senior consultant who spoke to Nikkei on condition of anonymity said that "reputational risks are still a concern for some international and Asian investors." The person added, however, that while some investors "will be excited by the prospect and level of business activity in Riyadh, others will have social considerations."

Revival of Pakistan Bangladesh relations

Prime Minister of Bangladesh Sheikh Hasina reiterated her government’s desire for stronger trade ties and economic collaboration with Pakistan. She was talking to Pak­istan’s High Commissioner to Bangladesh Imran Ahmed Siddiqui during their meeting in Dhaka.

Pakistan’s Foreign Office, in a statement issued said the two sides agreed to promote bilateral relations. This was the second meeting between Hasina and Siddiqui in less than a year.

The meeting came amid warming of ties between the two countries after remaining in deep freeze for over a decade.

It is important to note that the meeting took place at a time when both countries have begun to prepare for Hasina’s first ever visit to Pakistan.

Bangladeshi Prime Minister has recently conveyed in writing to Pakistan her acceptance of Prime Minister Imran Khan’s invitation, which was extended in July 2020. No dates have been set as yet for the trip. Hasina has also invited Khan to visit Bangladesh.

Pakistani side has proposed to Bangladesh to prepare a road map for Hasina’s trip so that it is fruitful. Moreover, Islamabad is seeking revival of bilateral mechanisms like the foreign secretaries’ dialogue, which has not been held for nearly 13 years.

Pakistan-Bangladesh relationship, took a nosedive after Hasina started her second tenure as prime minister in 2009 when she resumed 1971 ‘war crimes’ trial.

Pakistan has always considered the bitter 1971 dismemberment of the country as a closed chapter in view of the tripartite agreement signed in April 1974 for the repatriation of war prisoners.

Relations started improving last year. The developments in the Pakistan-Bangladesh ties came in the backdrop of Delhi-Dhaka ties turning lukewarm following the enactment of controversial Citizenship Amendment Act by India last year. Moreover, growing Chinese influence in Dhaka has also brought Pakistan and Bangladesh closer.

Ambassador Siddiqui conveyed Prime Minister Khan’s message of goodwill and friendship to Hasina and the people of Bangladesh. He also presented a photo album of the late Prime Minister Sheikh Mujibur Rahman’s visit to Pakistan in 1974 to attend the OIC Summit; videos of his engagements in Pakistan during the summit; a photograph of Sheikh Mujibur Rahman’s portrait in Lahore Museum, as well as Bangla version of a coffee table book “Alla’ma bil Qalam” containing calligraphy-art rendered by Pakistani artists.

Prime Minister Hasina thanked the high commissioner for the gifts and reciprocated the greetings and good wishes by Prime Minister Khan.

Asia paying five times more than US consumers for natural gas

It is a phenomenon rarely seen in commodity markets, natural gas prices are skyrocketing across the world, Europe and Asia and consumers are paying up to nearly six times more for natural gas as compared to the US consumers. This is being attributed to a lack of the US liquefaction capacity.

On Tuesday in New York, front month contracts for Henry Hub gas futures closed above US$5.88 per million BTUs, more than doubling in the year to date. The fuel topped US$6.46 on October 6, marking the highest level since 2014. On top of climbing air conditioning demand in the summer, production in some places is still at a standstill due to hurricane damage.

Even though prices are higher, US natural gas prices lag sharply behind global bench marks. In Europe, the index price for the fuel soared six-fold over a year to the equivalent of around US$170 a barrel when using crude oil terms. Upward pressures include stagnant supplies from Russia that led to a shortage of inventory.

For Asia, liquefied natural gas spot prices are at the equivalent of roughly US$200 a barrel, quintuple from a year earlier. Meanwhile, US natural gas wallows at the equivalent of about US$35 a barrel.

The US can thank its limited LNG export volume due to capacity constraints for the relatively small rise in prices, insulating its market from the impact of European and Asian demand.

The combined capacity of US gas liquefaction plants stands at 10.8 billion cubic feet per day, according to the US Energy Information Administration. Although this metric has tripled over the past three years, the LNG only accounts for about 10% of the US total natural gas output.

The fracking boom in the US transformed the country into a net LNG exporter in 2016. Exports of the fuel in the first seven months of the year grew 50% on the year to more than 2 trillion cubic feet.

However, July's exports were equivalent to 90% of liquefaction capacity. Many experts believe that liquefaction plants, where the gas is processed into liquid for transport, are operating essentially at full capacity when taking repairs and maintenance into consideration.

"It will be difficult to increase exports from this level," said Toshiyuki Makabe, Managing Director of commodities sales at Goldman Sachs.

Whenever gaps develop in international commodity prices, arbitrage trading that profits off the differences works to correct the margins. Because of those activities, nonferrous metal prices on the London Metal Exchange track closely with those on the Shanghai Futures Exchange.

Because of the limits to US LNG exports, international arbitrage trading is not operating at full swing. Liquefaction capacity is projected to grow by more than 20% by the end of 2022, according to US research firm Wood Mackenzie. The expansion will include newly operating facilities by the end of this year, but that is not expected to greatly expand the pace of exports.

“The US natural gas is being isolated from the global market, and price formation is reflecting domestic supply and demand," said Yutaka Shirakawa at Japan Oil, Gas and Metals National Corp.

Given that the US can satisfy its own natural gas consumption solely by domestic production, "market prices are less prone to volatility compared to other regions," said Hiroshi Hashimoto, senior analyst at the Institute of Energy Economics, Japan.

Rising energy prices within the US have led to higher electricity and gas bills for households. But the impact is not as severe as it is in Europe, which is facing the risk of inventory being depleted, or China, which is experiencing power shortages.

Finding legitimacy of freezing Iranian funds

The United States has long used sanctions to obstruct Iran’s access to its foreign exchange reserves. The Obama administration (2009-2017) used sanctions to pressure Iran to curtail its nuclear program and come to the negotiating table.

Through, a series of regulations and designations, Washington made clear that foreign companies and financial institutions that provided material support to the Iranian financial system – even by simply processing Iran-related transactions – could find themselves similarly designated and therefore cut off from the US financial system

Foreign banks that hold Iranian foreign exchange reserves responded to these sanctions by freezing Iran’s access to their reserves. Iranian requests to make transfers or payments have often been refused, even when transactions are technically permissible under exemptions intended to protect humanitarian trade.

Limiting Iran’s access to the reserves weakened Iranian currency, made the economy more vulnerable to a balance of payments crisis, and made it harder for the Iranian government and Iranian companies to do business abroad.

In 2014, Iran gained access to a small portion of its reserves after it reached an interim nuclear deal the world’s six major powers – Britain, China, France, Germany, Russia, and the United States. Iran was allowed to repatriate paltry US$4.2 billion in oil revenues held abroad.

In 2015, the same countries reached a final agreement, known as the Joint Comprehensive Plan of Action (JCPOA), in which Iran agreed to significantly curb its nuclear program in exchange for sanctions relief. As a result, Tehran regained access to more than US$100 billion in assets abroad.

In 2018, however, President Donald Trump withdrew from the JCPOA and reimposed wide-ranging US sanctions – effectively freezing Iran’s assets abroad again.

Iran’s total foreign exchange reserves amounted to US$115.4 billion at the end of the 2020 financial year, which ended on April 30, according to the International Monetary Fund (IMF). But as of October 2021, only US$12.2 billion was readily available and controlled by the monetary authorities after the re-introduction of financial sanctions, according to IMF estimate.

Most of Iran’s foreign exchange reserves have accrued in countries buying crude oil from Iran. Determining where exactly Iran maintains the reserves is difficult because the government treats information regarding the location and value of these reserves as a matter of national security.

Media reports, suggest that significant reserves are held in South Korea and Japan (historically major customers of Iranian oil) and Iraq (a country that buys electricity from Iran). Iran’s central bank also maintains accounts in several other countries, including China, Germany, India, Turkey, and the United Arab Emirates. Since the reimposition of US sanctions in 2018, Iranian economic diplomacy has focused in large part on bilateral negotiations with these countries to seek the release of funds.

Iran’s inability to access the reserves is more a function of the hesitance of financial institutions to process any Iran-related transactions – including humanitarian trade – without a green light from the US Administration. (Under U.S. law, humanitarian goods are not subject to sanctions, but some foreign companies and banks have been reluctant to do business with Iran for fear of violation of the US sanctions.) Faced with this predicament, Iran has pressured the South Korean, Japanese, and Iraqi governments to seek approvals from the United States.

For years, critics of the JCPOA have warned that unfreezing some or all of Iran’s foreign exchange reserves could be a windfall for the government. A key concern is that Tehran could use the billions of dollars to fund militant proxies and other malign activities. 

Historically, Iran has not drawn down large sums from its reserves. Part of the reason why Iran has accrued significant foreign exchange reserves is that, like most countries, it is happy to let its reserves grow. In 2002, Iran had around US$21 billion of foreign exchange reserves. By 2015, total reserves had risen to US$128 billion. In 2016, Iran regained access to its assets abroad as part of the JCPOA. By 2017, reserves had only fallen to US$112 billion. 

Even if the outflow of funds from the reserves were limited, the economic impacts of unfreezing could be significant. The accessibility of reserves serves to stabilize the value of Iranian currency and restore a degree of economic resilience in the face of crises.

Had Iran access to its reserves during the COVID-19 pandemic, it would have been better able to weather the economic impacts. Easier access to reserves would have helped Iran pay for imported medicine and medical equipment, especially Personal Protective Equipment (PPE) and devices such as ventilators that were in short supply in the first phase of the pandemic. Payment challenges put Iran at the back of the line for these goods, despite it being one of the first countries hit by the pandemic.

In March 2020, Iran applied for an emergency financing package from the IMF worth US$5 billion because its reserves were not readily accessible. Iran technically qualified for such a loan, drawn from a pool of financing earmarked for economies facing balance of payments crises. In the end, the loan did not come through because of the opposition by the US and technical challenges posed by US secondary sanctions.

Tehran maintains that it needs the reserves at least in part for humanitarian reasons, to pay for COVID-19 vaccines and medical supplies and to pay dues to the United Nations.

Iran has also called on the Biden administration to unfreeze some of its reserves as a goodwill gesture. In September 2021, Foreign Minister Hossein Amir Abdollahian urged the US to release at least US$10 billion before resuming talks on restoring the JCPOA.

“The Americans tried to contact us through different channels in New York (at the U.N. General Assembly) and I told the mediators if America's intentions are serious then a serious indication was needed,” Abdollahian later explained in a televised interview.

The United States, however, refused to offer concessions to bring Iran back to the negotiating table. From April to June 2021, Iran and the world’s six major powers held six rounds of talks. Diplomacy stalled in June during Iran’s presidential campaign and the political transition as Ebrahim Raisi took office and appointed his cabinet in August. On October 27, Iran’s new lead negotiator announced that nuclear talks would resume by the end of November.

Notably, Iran has complained that the US is obstructing the release of around US$7 billion of reserves reportedly held at two South Korean banks, the Industrial Bank of Korea and Woori Bank. In October 2021, Foreign Minister Abdollahian warned that Iran’s central bank could sue the South Korean banks if they didn’t release the funds. “US pressure (on Seoul) is a fact, but we cannot continue... to turn a blind eye to this question,” he said. 

Beyond the need for humanitarian aid, Iran is seeking access to the funds for two main reasons. First, at a political level, unfreezing the reserves is perhaps the clearest way that Iranian officials can indicate to domestic audiences that sanctions relief has been implemented. Just as critics of the JCPOA view the release of billions of dollars of reserves as a threat, Iranian officials point to those large numbers as a boon.

Second, Iran cannot operate normally in the global economy without the ability to use its foreign exchange reserves and to make transfers between currencies. For example, Iran runs trade surpluses with some countries and deficits with others. Effective reserve management requires converting reserves earned in countries where Iran runs a surplus, into the currency of those countries in which it is necessary to make up for a deficit.

Israel war mania

Israel will do what is necessary to protect itself against the Iranian existential threat, Israeli Prime Minister Naftali Bennett said on Thursday. His utterings came at a time when world powers are getting ready to hold talks in Vienna with Tehran on the renewal of the 2015 nuclear deal.

“We will not tire, we will be relentless, when we are talking about the very existence of the Jewish state, we will do what we need to do,” Bennett said in a virtual address to a United States-based virtual conference by the group ‘United against a Nuclear Iran’.

“Iran poses a strategic threat to the world and an existential threat to Israel, and they ought not to be allowed to get away with it.

“If Iran goes nuclear, you will get Turkey, Egypt, Saudi Arabia, the whole Middle East will go nuclear. We have to keep up our pressure on Iran, and we have to stay united in our efforts to do so,” Bennett said.

Former US Ambassador to the UN Nikki Haley, who served under the Trump administration, said she believed the Iran deal, also known as the Joint Comprehensive Plan of Action, was outdated. 

She accused Biden administration of abandoning US Middle East allies on Iran and in specific of sending Saudi Arabia into the arms of Tehran. 

"We should never go and give concessions to Iran and play on their terms," but there should be a conversation with the Arab countries and Israel, Haley said.

"Israel now is contemplating how to deal with Iran without us, that is an unbelievable scenario, and they are not wrong to do that. If I was advising Israel I would say do not count on the Biden administration to help you with Iran, because they are not going to be there," she said.

Republicans and Democrats alike want to stop a nuclear Iran, but the Biden administration lacks bi-partisan support for the revival of the 2015 deal, said Haley. Like Israel, she does not believe the 2015 deal would stop Iran from becoming a nuclear power.

Iranian President Ebrahim Raisi, who is under personal US sanctions over allegations of human rights abuses in his past as a judge, said on Thursday that Iran seeks the “lifting of all US sanctions and neutralization of sanctions,” as he issued an uncompromising tone ahead of the Vienna discussions.

“The negotiations we are considering are result-oriented ones. We will not leave the negotiating table... but we will not retreat from the interests of our nation in any way,” Iranian state TV quoted Raisi as saying.

Under the 2015 deal between Iran and six world powers, Tehran curbed its uranium enrichment program, a possible pathway to nuclear arms, in return for the lifting of US, UN and European Union sanctions.

But former US president Donald Trump quit the deal in 2018 and reimposed harsh sanctions on Iran’s oil and financial sectors that have crippled its economy, prompting Tehran to breach limits set by the pact on its nuclear work.

In spite of six rounds of indirect talks, Tehran and Washington still disagree on which steps need to be taken and when with key issues being what nuclear limits Tehran will accept and what sanctions Washington will remove.

Separately, the chief commander of Iran’s elite Islamic Revolutionary Guard Corps, Hossein Salami, said US pressure on Iran had failed.

“The Americans have used all means, policies and strategies to surrender the Iranian nation... but the Islamic Republic has become stronger,” Salami said in a televised speech to mark the siege of the US embassy in Tehran after the 1979 Islamic revolution.

Mansour Abbas: Most unpredictable politician of Israel

In Israel people know well what a politician will say, except Ra’am leader Mansour Abbas. It is difficult to predict what he will do, whom he is going to join forces with or what he is going to say – which makes him among the most refreshing figures on the Israeli political scene today.

Abbas, who scrambled the political deck earlier this year by bolting from the Arab Joint List and ran Ra’am as an independent party, surprised everyone by displaying a willingness to be a part of any government in order to have an impact and get badly needed funds for the country’s Arab sector.

Following the elections in March, he delivered a watershed speech in Nazareth declaring a willingness to work with all parts of the Israeli political spectrum.

What made that speech so different and noteworthy was that he did not stick to the predictable script. He didn’t slam Israel – as other Arab MKs do reflexively – for racism, oppression, apartheid and the occupation. Instead, his message was one of conciliation, of working together so everyone benefits.

He surprised even more when he signed the coalition agreement in June, marking the first time that an Arab party would be a part of the Jewish state’s governing coalition, not just any Arab party, but an Islamist party.

Abbas surprised again this week when he pledged to United Torah Judaism’s Moshe Gafni to move NIS 100 million of the billions the Arab sector is slated to get in the new budget to the haredi parties to assist their communities.

Abbas is taking money earmarked for the Arab sector and passing it on to the ultra-Orthodox, why? According to Abbas, he was moved by a speech Gafni gave in the Knesset saying that Israel will never accept those not in the mainstream – neither the Arabs nor haredim – and that the country’s weaker elements need to stick together.

Others say it was nothing but a shrewd political move. Abbas likes life in the governing coalition – any governing coalition – so when this government ceases to exist, possibly to be replaced by a right-wing Likud-led government, he wants to ensure that he has allies on the Right who can help him join that coalition as well.

Either way, something is refreshing and even magnanimous about the gesture, something sorely lacking these days when it often seems as if the opposition and coalition parties view one another as mortal enemies.

The gesture did not prove contagious. No sooner did Abbas make the offer, that Religious Zionist Party head Bezalel Smotrich urged the haredi parties – his allies in the opposition – to turn it down, saying it is all part of a nefarious Muslim plan to present themselves as the patrons of the Jews.

And former finance minister Israel Katz (Likud) responded by saying during a Kan Bet interview that Abbas is to the Islamic Movement in Israel what Ismail Haniyeh is to Hamas, thereby trying to link Abbas and Ra’am in the minds of the listeners to Hamas and terror.

When Katz was then asked, if that was indeed the case, why Netanyahu tried to woo that same Abbas into a government he hoped to form earlier in the year, Katz hemmed and hawed and had no real answer.

Here was a senior Likud official blasting Abbas and trying to delegitimize him and his party, when just a few months ago his own party’s head was trying to lure that same leader and party into his coalition. As unpredictable as Abbas is, this was the exact opposite: unabashed cynicism and hypocrisy that was completely unsurprising.

Will BoE and US Fed be on the same page?

The US Federal Reserve has made it official that starting later this month, it will reduce their monthly bond purchases by US$15 billion ($10 billion Treasuries, $5 billion mortgage backed securities). By June 2022, the bond buying program should come to an end. 

The Fed explains that pandemic stimulus can start to be unwound as “substantial further progress in the economy has (been) made toward the Committee’s goals since December 2021.” They left interest rates unchanged, which was expected and continued to use the word “transitory” to describe inflation.  

While some investors believed they would drop this language, it did not seem to matter as once the dust settled, USD ended the day virtually unchanged (slightly lower) from its pre-FOMC levels against other the major currencies. Stocks and bond yields ended higher which should benefit JPY crosses.

Looking ahead to Friday’s non-farm payrolls (NFP) report, economists expect a significant recovery in job growth during the month of October.  A large part of this has to do with the slowdown in September, when non-farm payrolls rose by only 194,000. That number is expected to more than double this week with a consensus forecast of 450,000. 

According to ADP, private sector payroll growth was very strong last month but even though service sector activity hit a record high in October, the shortage of workers drove the employment index lower. As one of the most important leading indicators for non-farm payrolls, this suggests that while more jobs are expected in October, the increase may fall short of the market’s lofty forecast. 

Will BoE hike rate today?

While the countdown to Friday’s NFP report has started, analysts have shifted focus to the monetary policy announcement by the Bank of England (BoE) on Thursday. In many ways, the BoE rate decision should have a greater impact on GBP than FOMC did on the USD because the UK central bank is close to raising interest rates.

As the second major central bank to reduce asset purchases, the BoE has been leading the pack in unwinding pandemic support and with inflation surging, a small contingent of investors believe they could hike as quickly as Thursday. The market is pricing in a 60% chance of 15bp hike which means a full quarter point move is unlikely. However the central bank has done a smaller adjustment before so we can’t rule out that possibility completely.

BoE Governor Bailey and monetary policy committee member Saunders have suggested that an immediate hike may be needed but other policymakers want to see further improvements in labor market activity or evidence that inflation is less transitory before making the move.

With the Reserve Bank of New Zealand raising rates, Bank of Canada announcing ending to Quantitative Easing and the Fed beginning to reduce asset purchases, there is a decent chance for a rate hike by the BoE. It may not be a full quarter point, but it could be 15bp increase. 

The immediate tightening should be wildly positive for the greenback as it is not really anticipated. However, if they forgo a rate hike in November, then a hike in December becomes very likely.

In this scenario, analysts expect no change to be accompanied by hawkish comments which could be initially negative but ultimately positive for GBP. Either way, barring an unexpected surprise analysts see GBP strengthening post BoE announcement, particularly against EUR.