Aiming at Dubai? Saudi Arabian Ultimatum to pull HQ offices into the kingdom

DUBAI, United Arab Emirates – Saudi Arabia, in a bold and unexpected move, announced late Monday that by 2024 its government would cease doing business with any international companies whose regional headquarters were not located in the kingdom.

The news got investors, bankers and foreign workers excited – and scratching their heads.

Saudi Arabia in recent years has presented itself as a location for HQ offices in its campaign to create jobs in the private sector and diversify its economy as part of Crown Prince Mohammed bin Salman’s 2030 Vision.

But what started as a campaign for global headquarters has now become an ultimatum for some: either relocating its headquarters to the kingdom or losing lucrative government contracts. And the shift, say regional analysts and finance professionals, appears to be targeting the current hub of the region’s headquarters: Dubai.

“The Kingdom of Saudi Arabia intends to terminate contracts with companies and commercial institutions with regional headquarters not located in the Kingdom. The termination will include government-owned agencies, institutions and funds and will take effect on January 1, 2024, ”Saudi state agency SPA reported on Monday.

So far, the policy appears to apply only to companies 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 out of Dubai, I suppose, and elsewhere,” Ryan Bohl, a Middle East analyst at risk consultancy Stratfor, told CNBC.

A financier based in the United Arab Emirates, who spoke anonymously due to business operations in Saudi Arabia, described the move as “clearly targeting the United Arab Emirates” and a “punch in the face” for Dubai.

“It’s a terrible decision,” added the financier, a longtime veteran in the region. “It is an anti-common market, it is anti-competition and it is essentially corporate intimidation.”

Saudi officials think differently. Although 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 “will be reflected positively in the form of creating thousands of jobs for citizens, transferring experience and localization of knowledge, and will also contribute to developing local content and attracting more investment to the Kingdom. ”

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

UAE officials have so far been silent, but former Dubai chief financial officer Nasser Al-Shaikh has criticized the kingdom.

The decision “contradicts the principle of the unified Gulf market,” wrote Al-Shaikh on Twitter late on Monday.

“Forced attraction is not sustainable and the most effective thing is to improve the environment,” he said, arguing that as the largest market in the region is already in great development, changing Saudi Arabia is unnecessary.

In fact, the oil-rich kingdom – the largest market in the region, with 34 million inhabitants, 70% of whom are under the age of 30 – has attracted a wave of new investment in recent years, coinciding with its liberalizing economic and social reforms .

Invest Saudi, the investment promotion arm of the kingdom, previously launched the “HQ Program”, offering special tax incentives and other incentives to top multinational companies. Consultants from leading American consulting firms came weekly from Dubai to develop strategies on how the conservative metropolis of Riyadh could compete and supplant Dubai as the region’s preeminent business center.

Google Cloud, Alibaba and Western Union are some of the most recent big names to establish stakes in the kingdom. And during Saudi Arabia’s annual Future Investment Initiative in January, 24 international companies announced their plans to move their regional headquarters to Riyadh, including PepsiCo, French oil 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 largest urban economies and is offering competitive tax-free salaries to employees willing to move there.

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

“The lifestyle in Saudi Arabia is not comparable,” said a Dubai-based venture capitalist, speaking anonymously because of her company’s financial interests in the kingdom. “You don’t have the same freedoms you have here – here I can go to a public beach and take a walk … Dubai is a global city, Riyadh is far from it. It doesn’t have the diversity that Dubai has. This is a big deal for me. “

In fact, one of Dubai’s attractions for foreigners is its expatriate population – 90% in the United Arab Emirates as a whole. The success of Dubai’s global opening model is also manifested in numbers: according to the UN trade database, the United Arab Emirates in 2019 received 300% more foreign direct investment than Saudi Arabia, despite its economy be about half the size.

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

There is also the question of reputation. Ask many foreigners what they think of Saudi Arabia and they immediately associate it with a precarious history of human rights and oppression of women.

“A country that actively silences women? No, thanks,” said an American expat who works in Abu Dhabi. Riyadh is under fire from human rights groups and foreign governments for the murder of Saudi journalist Jamal Khashoggi in 2018 and for the arrest of several female activists, among others.

The Saudi Arabian government “will do a lot of work to convince companies to move,” said Mike Stephens, a Gulf expert and researcher at the Foreign Policy Research Institute. He called the capture of the headquarters “a dramatic and bold move by the Saudis that is quite risky”.

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

“Now, with Vision 2030 and the radical changes the nation is going through, it will begin to catch up on quality of life … as soon as the veil is lifted over lifestyle restrictions, expatriates will begin to appear . ”

Shane Shin, founding partner of Shurooq Partners, a Abu Dhabi-based venture capital firm, is opening a second office in Riyadh, where it will double the number of employees. “The pace and momentum with which Saudi is moving is simply mind-blowing,” he told CNBC.

The Saudi government “has also made it significantly easier to open an office and visas” than in the past, said Shin, adding that most companies in Shurooq’s portfolio operate in the kingdom.

“The competitive nature of Saudi Arabia and the larger market, openness, really makes it much better to open an office than in Dubai,” he said. “Therefore, Dubai’s competitive advantage is unfortunately rapidly diminishing.”

The announcement left investors and analysts with more questions than answers. What will constitute a regional headquarters? Can a company have two regional headquarters or simply build a smaller office in Riyadh with the label “HQ”, keeping most of its staff in Dubai? Will there be exemptions or loopholes? And what does “region” cover: just the Gulf states, or further afield, to Egypt, North Africa and Turkey?

It is important to note that this happened after consulting Saudi Arabia’s neighbors – and what would be the implications of trying to displace the business centers of its Gulf allies?

The “Saudi first” hiring approach, while potentially intensifying competition with the United Arab Emirates, “will likely end with a good number of exceptions” to make it viable for companies, said Bohl of Stratfor. This is “particularly in strategic sectors like finance, construction or entertainment.”

In any case, the Saudi change is likely to have significant regional consequences and will accelerate a modernization race between Saudi Arabia and the United Arab Emirates, as both compete to attract foreign companies.

Regional investors, for their part, are waiting for clarification on what constitutes “headquarters” in defining the kingdom and more details that can help them plan their next move.

Some think the kingdom is just testing the waters, having become accustomed to sudden and dramatic statements by the Royal Court in recent years.

“Their strategy is wrong – the strategy must be based on the economy,” said a Dubai banker, speaking anonymously due to employer restrictions. “But at the end of the day, for now, I think they’re just trying to test the market.”