War leaves Saudi prince's dream of a new Mideast in tatters

At Saudi Arabia's flagship investment conference in October 2018, a defiant Prince Mohammed bin Salman took to the stage to promise that a new era was dawning for the Middle East.

"The new Europe is the Middle East," the country's de facto ruler, commonly known as MBS, said to applause from the crowd. "The coming renaissance in the next 30 years will be in the Middle East."

Five years later, as the world's top executives flocked to Riyadh last week for the latest edition of the Future Investment Initiative — dubbed 'Davos in the Desert' by many — fresh comparisons with Europe are being drawn.

But not for the reasons Prince Mohammed had in mind.

While Europe is dealing with the impacts of Russia's invasion of Ukraine, the war between Israel and Hamas is bringing the region's political fissures back to the forefront of everyone's mind. The event was overshadowed by the only thing on everyone's mind: war involving Israel. The war now threatens to engulf the entire region and draw in the US and other powers.

That is complicating Prince Mohammed's efforts to focus the neighbourhood on economic development rather than old feuds.

It may be too early to assess the impact of the Israel-Hamas conflict on Saudi Arabia's economy. A spike in oil prices could translate into a short-term boon for the world's largest oil exporter but a wider and more protracted conflict could delay and even derail Vision 2030-linked goals like luring substantial foreign direct investment, expanding the Saudi private sector's share of the gross domestic product and attracting more international tourists this winter.

"The headlines are an unwelcome development for the kingdom given its focus to attract foreign investors and convince firms to expand their operations in Saudi Arabia," said Ayham Kamel, head of Eurasia Group's Middle East and North Africa research team. "Riyadh must be feeling the geopolitical heat, but its economic transformation programme still presents some interesting opportunities."

Panel discussions, side-room conversations and media interviews at the Future Investment Initiative conference were dominated by the war and its security and economic repercussions for the region and world.

The Saudi jamboree, held in the gilded halls of the Ritz Carlton complex in Riyadh, was launched in 2017 as one of the most high-profile parts of an effort to sell the world on a new Middle East, with Saudi Arabia at its core.

"We need wisdom, we need to collaborate, to bring calm and to make sure that we de-escalate," said Saudi Finance Minister Mohammed Al-Jadaan on Wednesday at a session focused on how countries can balance domestic policies with the need to strengthen cooperation with others.

"Before 7 October, a lot of de-escalation has happened, which brought a lot of hope for the region," he said. "We don't want the recent events to derail that so we are making a lot of efforts with our partners to make sure we go back to where we were."

Prince Mohammed was opening up the country, eager to bring in more foreign investment and tourists, while projecting soft power abroad through deals involving the powerful sovereign wealth fund he chairs.

MBS also resolved disputes with Qatar and Turkey, and was pushing for a resolution to the war in Yemen. He even normalised relations with arch-rival Iran in March, in a deal facilitated by Chinese President Xi Jinping.

"In Saudi Arabia, we have always looked to Europe as an inspiration," Saudi Investment Minister Khalid Al-Falih said at an event in Riyadh. "We admire how, time and again, out of the darkest moments, Europe has forged a new, prosperous future."

"Today, during this period of political and security challenges in Europe and the Middle East, we draw on each other's strengths to create prosperity through partnership," Falih said.

Despite the gloomy mood among a large number of attendants, the conference organisers tried to push on with the show. Notably, the fighting between Israel and Hamas, which is designated a terrorist group by the US and Europe, is continuing to escalate.

Highlighted at the event were some of MBS's most ambitious projects, including building a vast new city in the desert called Neom that is expected to cost over $500 billion and plans to turn stretches of the Red Sea coastline into eco-tourism resorts.

How investment flows and tourism travel to the kingdom are impacted by the prospect of the Israel-Hamas war remains unclear, but the threat of a wider conflict could slow Prince Mohammed's ambitions.

"Investors – particularly those new to the region — are likely to exercise some caution over the short term," said Alice Gower, director of Geopolitics and Security at Azure Strategy. "However, the kingdom is eager to avoid escalation and will continue coordinating with regional capitals to that end," she said, adding "the vision for a 'new Europe' can only be seen as a long-term ambition."

Yet, the Saudi crown prince has repeatedly said regional stability is crucial for the success of his multi-trillion-dollar 'Vision 2030' plan to transform the Saudi economy — a move away from a near total reliance on oil exports.

Bridgewater Associates' Ray Dalio pointedly said he was pessimistic, citing conflicts and disorder and high levels of public debt. Fink warned of potential consequences from the war, including contraction in economies and less hope in general. Fraser said it's hard not to be a "little pessimistic" sitting there against the unfolding events, which she called "desperately sad."

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.