Saudi Arabia could break the West’s financial architecture

Seeing efforts to seize Russian assets in the US and the EU, rich Gulf investors are getting worried about the safety of their own wealth

Private property has always been regarded as something sacred for humanity. Today, however, this sanctity and inviolability of private property are under threat. In the modern world, where economic and political instability are becoming increasingly common, the legal systems and international agreements designed to protect property rights are facing new challenges. Asset confiscation, economic sanctions, and political pressure threaten the traditional notions of property inviolability, forcing people to reassess their beliefs and seek new ways to safeguard their interests.

Last week, global media outlets reported that at the beginning of this year, Saudi Arabia hinted at the possibility of selling some of its European debt holdings if the G7 countries moved forward with plans to confiscate nearly $300 billion of Russia’s frozen assets. This information came from sources familiar with the situation, adding a layer of complexity to the already tense geopolitical landscape.

Saudi Arabia’s Ministry of Finance communicated to some G7 partners its strong disapproval of the proposed measure, which was intended to support Ukraine in its conflict with Russia. One insider described the communication as a veiled threat, highlighting the kingdom’s serious intent to protect its financial interests. The Saudis specifically mentioned French Treasury-issued debts, underscoring their strategic approach to leveraging their economic influence.

During the period from May to June, G7 countries deliberated over various options concerning the Russian Central Bank’s assets. The discussions were intense and multifaceted, considering both the legal and economic ramifications. Ultimately, the group reached a consensus to utilize only the earnings generated from these assets, leaving the principal intact. This cautious approach was adopted despite considerable pressure from the United States and the United Kingdom, which advocated for more assertive measures, including the direct confiscation of Russian assets. 

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The proposal to confiscate Russian assets outright faced significant resistance, particularly from some Eurozone member countries. These nations expressed concerns about the potential negative repercussions on their own currencies and broader economic stability. This internal opposition within the G7 highlighted a notable division among its members, revealing that not all were prepared to endorse radical measures. This divide persists even as the conflict in Ukraine continues and the necessity to support its beleaguered economy grows more urgent.

Additionally, the broader implications of Saudi Arabia’s stance cannot be ignored. The kingdom’s potential sale of European debt holdings could have a ripple effect across global financial markets, potentially destabilizing the delicate balance of international debt and equity markets. Such a move would also signify a significant geopolitical shift, demonstrating Saudi Arabia’s willingness to use its economic power as a tool of political influence.

The G7’s cautious decision to utilize only the earnings from Russian assets reflects a broader hesitation to escalate financial sanctions to the point of asset confiscation. This decision underscores the complexity of international financial diplomacy, where economic decisions are intricately tied to political and strategic considerations. As the situation evolves, the international community will be closely watching how these financial and geopolitical strategies unfold, particularly in the context of the conflict in Ukraine and the global economic landscape.

Riyadh has serious clout

Against the backdrop of escalating international tensions and economic sanctions, Saudi Arabia’s reaction to the potential measures by G7 countries to confiscate Russian assets has garnered significant attention. The kingdom not only voiced its discontent but also hinted at possible economic countermeasures, highlighting its growing influence on the global stage and its strategic intentions.

Saudi Arabia’s active investments in Western markets through its sovereign wealth fund, the Public Investment Fund (PIF), underscore its significant financial clout. The PIF is a cornerstone of the ambitious Vision 2030 program, which aims to diversify the economy and reduce dependence on oil revenues.

By the end of 2023, PIF managed assets totaling approximately $925 billion, with plans to increase this to $1.07 trillion by 2025. Additionally, the Saudi Arabian Monetary Authority (SAMA) holds substantial foreign reserves, estimated at $423.7 billion as of April this year. 

The PIF’s investment strategy spans various sectors and regions. For example, the fund invested $45 billion in the UK-based SoftBank Vision Fund, focusing on technological innovations. In 2023, PIF announced plans to invest $40 billion in US infrastructure projects, with $20 billion already allocated to a joint project with Blackstone. According to Gulf Business, in 2021, the fund acquired significant stakes in American video game companies such as Electronic Arts and Activision Blizzard, and in 2022, it purchased a 5% stake in the Japanese company Nintendo.

Beyond the technology sector, PIF is actively investing in real estate, infrastructure, and financial services. In November 2023, the fund acquired a 10% stake in Heathrow Airport, and in December, it purchased a 49% stake in the Rocco Forte hotel chain, valued at $1.8 billion. This year, the fund also acquired a 38% stake in the German company HOLON GmbH.

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Riyadh’s concerns are well-founded, as the authorities are anxious about the potential fate of their Western assets, which are estimated to be worth up to $600 billion. Currently, Saudi Arabia’s relations with the West are strained, both with Washington and Brussels, which continuously exert pressure on the kingdom due to its reluctance to join in isolating Russia and to pursue a pro-Western foreign policy.

Regardless of the motives, Saudi Arabia’s actions underscore its growing influence on the global stage and the challenges Western countries face in garnering support from the Global South for their anti-Russian policies. Under the leadership of Crown Prince Mohammed bin Salman, the de facto ruler of Saudi Arabia, Riyadh is increasingly positioning itself as a diplomatic force and diversifying its foreign policy and economic ties with Moscow, Beijing, and other non-Western power centers.

The end of the dollar era?

In recent months, the world has witnessed significant shifts in the global economic landscape. Saudi Arabia, long a key player in maintaining the US dollar as the dominant currency in global trade, is taking steps that could radically alter this dynamic. The kingdom’s decision to not renew the 50-year-old petrodollar agreement with the US and its active participation in de-dollarization raise critical questions: Will these actions herald the end of the dollar era, and what could be the consequences for the global economy?

The petrodollar agreement, signed by Saudi Arabia and the US on June 8, 1974, became a cornerstone of America’s global economic influence. This agreement established joint commissions for economic cooperation and meeting Saudi Arabia’s military needs. In return, the kingdom committed to selling oil exclusively in US dollars, bolstering the American currency’s position on the world stage and maintaining high demand for the dollar.

On June 9 of this year, Saudi Arabia decided not to renew this pivotal agreement. The kingdom now has the flexibility to sell oil and other commodities using various currencies, such as the yuan, euro, or yen, instead of the US dollar. Additionally, the possibility of using digital currencies like Bitcoin for transactions is being explored. This move opens new avenues for diversifying economic relations and reducing dependence on the US dollar, thereby accelerating the global trend toward using alternative currencies in international trade.

Particular attention should be given to the role of the BRICS group of countries, of which Saudi Arabia became a member on January 1, 2024. The BRICS nations actively promote the use of national currencies in international transactions and are developing their own financial institutions. De-dollarization is becoming increasingly relevant, especially for emerging economies seeking to reduce their reliance on the US currency and financial system.

Saudi Arabia’s decision and the BRICS countries’ push for de-dollarization could have significant repercussions for the global economy. If de-dollarization continues to gain momentum, it could lead to a decreased demand for the dollar, impacting its value. A weakening dollar might challenge the United States’ ability to maintain its financial stability and global influence. 

Despite significant strides toward de-dollarization, declaring the end of the dollar as the world’s primary currency is premature. The dollar still holds a central place in international transactions and the reserve assets of central banks worldwide. However, Saudi Arabia’s actions and the BRICS’ ambitions indicate a growing movement toward a multipolar currency system, where the dollar is no longer the sole dominant player.

One-way road to destruction

Amid global economic and political uncertainty, the G7 countries find it increasingly challenging to identify ways to support Ukraine and counteract Russia. Their decisions have far-reaching implications, influencing global economic relations and financial stability. In June, after extended discussions at the summit in Italy, a decision was made to establish a financial structure that would provide Ukraine with approximately $50 billion in new aid.

The seven participating countries and the EU agreed to extend loans to be repaid from the profits generated by around $280 billion in frozen Russian assets, most of which are held in Europe. This decision was a compromise, as there is no consensus even among Western states, given the potentially catastrophic consequences of confiscating Russian assets.

Firstly, the seizure of Russian assets sets a dangerous precedent in the international financial system. Traditionally, state reserves held abroad were considered untouchable. Their confiscation could undermine the confidence of nations in the safety of their funds stored in foreign banks and financial institutions. This might lead countries to reconsider their reserve placement policies and result in a mass withdrawal of assets from foreign financial systems, causing turbulence in financial markets and weakening the stability of the international financial system. 

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Moreover, such actions could push nations to seek alternative financial institutions and instruments independent of the G7 countries. This could strengthen regional economic blocs, foster the development of new financial systems such as China’s CIPS, and support BRICS initiatives to use national currencies, thereby reducing the influence of Western financial institutions and the US dollar in the global economy.

The seizure of Russian assets also raises serious questions regarding international law. Fundamental principles of international law, such as the sovereign equality of states and the inviolability of property, could be violated by such actions. Sovereign equality implies that all states have equal rights and sovereignty, and their assets cannot be confiscated without legal grounds. The inviolability of property is a fundamental right protecting states’ assets from unlawful seizure.

The situation surrounding the potential confiscation of Russian assets remains tense and reflects the breakdown of the old world order. Saudi Arabia’s decision to sell European debt obligations could significantly impact financial markets, especially if it occurs amid existing economic problems in Europe. Additionally, other concerned regional investor states like the UAE, Qatar, Kuwait, and others might follow Riyadh’s lead in selling off European bonds.

The modern global economy faces new challenges that require a reevaluation of existing mechanisms and strategies. The decision of the G7 leaders at the summit in Italy is seen as an attempt to balance interests and find compromise solutions amid global instability. However, the seizure of Russian assets and possible retaliatory measures from Saudi Arabia and other countries could significantly alter the balance of power in the international financial system. In these conditions, it is crucial to seek new paths for cooperation and stability to avoid destructive consequences for the global economy. Therefore, as the old world order, dominated by the West for decades, fades, an increasing number of countries from the global majority are interested in new mechanisms of global governance based on non-Western institutions, particularly BRICS.