Tracking Challenges and Changes – Exclusive – Seznec

August 2, 2010

Editor’s Note

We recently talked with Dr. Jean Francois Seznec, Middle East business and finance authority and Georgetown University Visiting Associate Professor, about his last visit to Saudi Arabia. We provided a preview of our conversation with his perspective on Islamic banking, in advance of his role as moderator of last week’s Islamic Finance Forum in Washington. Today we present for your consideration our conversation in its entirety.

Professor Seznec, a frequent visitor to Saudi Arabia, was in the Kingdom in April for two purposes. First, as a member of the Stimson Center’s Board of Directors he participated in a joint meeting at the King Faisal Research Center, tackling the subject of nuclear developments in the Gulf region. Second, as a Board of Advisors member for Georgetown University’s Center for Arab Studies he joined board members from the region for discussions. In our conversation we covered a variety of topics of interest to SUSRIS readers starting with the issue of regional nuclear programs.

Tracking Challenges and Changes:
A Conversation with Dr. Jean Francois Seznec

SUSRIS: What was on the table for the Stimson Center-King Faisal Research Center discussion of Middle East nuclear issues?

Dr. Jean Francois Seznec: There are two issues. One, the Kingdom is very worried about its need for electrical power, that it is increasing to the point where, some say, they will need to use over two and a half million barrels of oil in the near future to cover their needs. That, of course, would take away from oil available for export. They also are concerned about the availability of natural gas. So the Saudis see a future in the Kingdom that includes nuclear energy for power, just as the UAE is doing.

There may be a case for using nuclear power to offset other sources for power but you have to keep in mind the cost of gas in the Kingdom is low. It would be very hard for nuclear to compete with natural gas at seventy-five cents a million BTUs for methane. If natural gas was at the market price, say like in the U.S. at four dollars a million BTUs, then nuclear energy would make more sense. Nevertheless, this would actually be paid by the state, so price is not really so important. But from a purely economic position it would make more sense to increase the price of gas thereby making nuclear energy more feasible in the long-term.

The other nuclear issue, of course, is the question of Iran’s enrichment program and concerns in the Kingdom and elsewhere that its objective is a weapons capability. That worries them but no one is saying that the Kingdom should or would respond to the Iran program by producing its own weapons capability. I didn’t hear any conversation in that direction. Nevertheless developments in Iran are worrisome.

Many Saudis are also very worried that the United States reacting to efforts by groups in Washington, is being pushed into military action against Iran. That prospect may worry them more than the possibility of Iran building a weapon because it would mean retaliation from Iran against the Gulf countries including Saudi Arabia. That would bring the economic miracle to a halt. So there’s a lot of apprehension.

What is clear from discussions of the nuclear weapons question is that the Kingdom is very much in favor of a denuclearized Middle East. Although it’s not official policy, they want to pursue that goal. I imagine King Abdullah pushed the idea when he was in Washington last month. It would involve bringing Israel into the discussion but I think the Saudis see a nuclear free Middle East as the response to these challenges.

SUSRIS: Is there a connection between talks of nuclear programs in the Gulf to meet electrical power generation needs and the specter of a nuclear weapons program in Iran?

Seznec: Well, it is difficult to say one way or the other. But I would note the interest in nuclear power generation programs applies to the entire Gulf, not just Saudi Arabia. It certainly applies to the UAE, and to the discussions happening in Qatar, Bahrain, and Kuwait. All of a sudden there’s great attention to the future need for electricity and the prospects that these countries need to consider nuclear energy. They don’t have enough natural gas to produce electricity efficiently into the future and they don’t want to use oil because it’s not a clean source of energy and it’s not very efficient. So that leaves nuclear power.

Why is it happening now? The same issues could have been discussed ten years ago. It’s happening now because of Iran’s nuclear ambitions. Whether Iran is going nuclear just for electricity, or for electricity and weapons, they’re going nuclear. The rest of the Gulf wants to be on par with Iran on these matters. I don’t think one can argue that the Gulf Arabs’ interest in nuclear technology is masking intentions for anything beyond power generation. However, I would say there’s a technological competition part of it. Countries like Saudi Arabia need the electrical power to grow but that’s a separate question from the Iranian weapon program issue.

SUSRIS: So the pursuit of nuclear technology among Gulf Arabs also sends a signal to Iran?

Seznec: Absolutely. In fact, they would want to move faster because, let’s face it, as in the case of the UAE’s program – there’s a contract with a Korean consortium — the first nuclear power plant won’t be operational until about 2017. Iran may be on line with a nuclear power facility by then.

SUSRIS: You mentioned Saudi Arabia seeking a nuclear free Middle East in the context of Israel and Iran. When we talked with Anthony Cordesman last week he said the WMD genie was out of the bottle and a nuclear free region was not feasible, citing Israel’s longstanding nuclear weapons program. Do you think a nuclear free Middle East is a realistic expectation in Riyadh or is it political rhetoric, scoring points about Israeli intransigence? Or is it something else?

Seznec: That’s hard to say for sure but I tend to think there is hope, not just in the region but also in the United States and Europe, about a nuclear-free region. Some in the Kingdom feel sooner or later there will be enough pressure put on Israel to come clean on the facts about their weapons program. This may come to a head next year with the UN nuclear proliferation conference. The United States favors this, and Israel is actually mentioned by name in the document that came out of the non proliferation review conference in May. So some Saudis may believe there’s a deal to be made but it would require American pressure on Israel. That probably wouldn’t happen with the Netanyahu government but things do change in Israel.

SUSRIS: Let’s talk about other highlights of the visit. What did you do at Saudi Aramco?

Seznec: As is always the case at Saudi Aramco we were received extremely well. We toured the command center, which is an absolute technological marvel. Truly amazing. We went to Shaybah, the field in the desert on the northern edge of the Empty Quarter. I had been there before, but they have since expanded production by fifty percent. They now produce 750,000 barrels a day, and they have a third gas separation plant. So it is much larger than when I last saw it. It is very interesting, and it’s still as beautiful a place as ever. Aramco is preparing to export natural gas liquids by pipeline out of the field into the center of Saudi Arabia. There was nothing revolutionary to note but the operation is really quite remarkable. They’re doing very well with their planning and operations. Whatever project they take on it is well done. It’s really an amazingly professional organization.

SUSRIS: What did you notice on your visit that was new?

Seznec: Perhaps most interesting in my two weeks in the country, especially in Riyadh, the presence of women in many more places than I had noticed in my numerous visits to the Kingdom. This time I was struck by their involvement in many things. It’s apparent there’s an enormous effort by the King to bring women into the development of the country, and that is proving to be successful.

In Riyadh I was also struck by the enormous development at the Princess Nora University. It was unbelievable. It is absolutely humongous. The construction is night and day as they’re hoping to finish it very soon. I understand they will have the capacity for about 40,000 women attending the university. The fact that it’s called Princess Nora University is also very interesting to me, because after all Princess Nora was probably the first and most important Saudi feminist in her day. She was sister of the founder of the country King Abdulaziz, and an advisor. She was very highly respected. So I think this new university is pretty exciting.

SUSRIS: After the King Abdullah University of Science and Technology opened last year as a coeducational institution there was much discussion and some dissension over gender mixing.

Seznec: People were talking about the issue and there was a rear guard battle by the more conservative factions. They appeared to have lost that battle, and I think they accepted their lost. I don’t think there will be much more discussion of the issue. What we may see next is discussion of opening up other campuses to both men and women. There was a lot more discussion that I noticed about the mixing of genders in public places so I think it’s moving very much in the right direction. People are becoming more open on these matters.

SUSRIS: What other trends did you notice?

Seznec: There were a couple of developments, small things, I thought were interesting. For the first time I discovered restaurants in Riyadh which specialize in Najdi food, the native food of the region. It was a relatively new concept for me and I have lived in the Kingdom and traveled there over 120 times. In the newer part of Riyadh they’ve established restaurants that are like big villas built in the old style. Everything inside is just like it was in the old houses. And the food is Najdi food. There is a pride of the culture which was much more apparent than before and it’s extremely successful. What I found interesting was most of the patrons were Saudis — mostly Saudi families, women and children running around all. It was really quite interesting and the food was very good, by the way. I think it was a very good sign, a way to preserve tradition.

SUSRIS: As you know there was a very successful event in Chicago about the time you were traveling in the Kingdom, the US-Saudi Business Opportunities Forum. There was a very optimistic atmosphere among the thousand plus people, including over two hundred Saudis who made the trip. Do you get a feeling in the business sector, the business-to-business relationship, that Americans and Saudis are getting more in-sync?

Seznec: Yes, I agree with that. It’s interesting because although I wasn’t at the Forum I talked to a lot of people who were about to go. Its success is consistent with my view that the business-to-business component is really what’s saving the relationship between the United States and Saudi Arabia. I think that business people on both sides are really the true representatives and the true ambassadors of their countries. I’m convinced the Saudis like to deal with American people and they like to deal with American businesses. However they’re absolutely amazed at the government’s relationship and what it is doing about Palestine, Iran, Iraq and Afghanistan.

The Saudis still like to deal with American companies. The U.S. companies working in Saudi Arabia and the Saudi companies make a perfect match. They like to work together. It is very good that we see more and more American investments in Saudi Arabia.

SUSRIS: There was a large representation at the Chicago Forum from business people who had not previously done work in the Kingdom or with Saudi businesses, who were learning the ropes.

Seznec: The economic slowdown in the U.S. in 2008-2009 and the difficulties companies have to this day have contributed to American businesses wanting to see about doing business with Saudi Arabia. It is, after all, a country not suffering too much from the economic slowdown. So, yes, it was probably convenient for people to be in Chicago to learn about the possibilities. It’s very easy now for Americans to do business in Saudi Arabia. They have made a terrific effort to facilitate doing business in the Kingdom. I believe they are number 13 on the “ease of doing business” list of countries. I think this is really paying dividends for both sides. I think people take a look at the prospects and say let’s try it.

Keep in mind that Saudis have worked very hard to improve the business climate there as reflected by their World Trade Organization accession and inclusion in the Group of Twenty. The G20 role is very important. It gives Saudi Arabia an important role in world affairs. It’s the only Middle Eastern country that’s part of the G20, and I think that’s very important.

SUSRIS: You’ve been asked to moderate a panel of distinguished financial leaders tackling questions about Islamic financing. Can you give us a brief view on how that is working in Saudi Arabia?

Seznec: What’s interesting to me is that over twenty years ago many in the Kingdom were somewhat opposed to Islamic banking. Financial authorities, the central bank, the Ministry of Finance, and so forth, were not really in favor of it. I think many of the civil servants there were wary of using the name of Islam to do banking business, and they may have been afraid money could be placed in the wrong hands.

Over the years, however, not only have they learned to deal with it, they now are somewhat ahead of the curve. There’s a sense among most of the banks that they should be involved in Islamic finances. In fact every Saudi bank today offers Islamic services. For example, National Commercial Bank is doing deposit business on an Islamic basis. Of course the Riyadh-based Al Rajhi Bank is the largest Islamic bank in the world. They have assets in the range of forty-one billion riyals. That’s big.

There is a new bank, called Alinma, created basically by the state. The General Organization and the Public Investment Fund backed it as minority shareholders but they hold a very large chunk of shares. The remainder was made available to the public.

The views in the civil service regarding Islamic finance has evolved to not only support it but to make it into one of the prominent financing systems in the Kingdom. They use Islamic banking features to develop the economy, to lend money — long-term using Sukuks — and so on. So I think it’s now very popular in the Kingdom. It’s become very successful.

SUSRIS: For businesses considering working in the Kingdom what would they have to know about Islamic finance? Should they be concerned about a different system?

Seznec: No. Anyone doing business in the Kingdom can work with a local bank using regular, traditional banking formats, or they can use Islamic banking formats. By the way they are not all that different. They will find that if a bank offers Islamic features it doesn’t necessarily mean that there will be more deposits in the banks, that they will be more liquid, or that they’ll lend more money.

It’s a transformation of banking into a slightly different system where the concept of ethics is more a part in the decision process. Ultimately, however, it’s not that different from the regular banks. It’s not a revolution; it’s an evolution.

SUSRIS: Do you have any last notes from your visit to Saudi Arabia? Were there discussions about leadership issues?

Seznec: King Abdullah is certainly more popular than he’s ever been. People are praying that he can continue what he is doing. And of course in the question of royal succession everybody has a different rumor, and rumor is really news. So rather than go into what the rumors are, because there’d be hundreds of them, I would just comment that people are sitting tight and waiting and see how it develops.

SUSRIS: The Economist recently had an article about the Kingdom that addressed the question of succession. Did you see that? They referred to Second Deputy Prime Minister Prince Nayef as “crustily conservative” who has not endeared himself to reformers.

Seznec: Yes I did. A lot of people say that about Prince Nayef because he is very strong, and his son is very strong, and his department, the Interior Ministry, is really in control of so many things. There probably is some truth to that. But I personally feel that if Nayef eventually ascended to the throne he wouldn’t be much different from King Abdullah. People think he’s very close to the conservatives, but I think that’s because that’s his duty to be close to the conservatives. He could just as well be close to the liberals. It’s a way for each member of the family to have their own constituency but ultimately what the King has to do is develop the country. And whoever is in power will do that.

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Jean-Francois Seznec

Dr. Jean-Francois Seznec

Jean-Francois Seznec is Visiting Associate Professor at Georgetown University’s Center for Contemporary Arab Studies. His research centers on the influence of the Arab-Persian Gulf political and social variables on the financial and oil markets in the region. He is focusing on the industrialization of the Gulf and in particular the growth of the petrochemical industry. He is Senior Advisor to PFC Energy in Washington, DC. He holds a MIA from Columbia University [1973], a MA and his Ph.D. from Yale University [1994]. He has published and lectured extensively on Petrochemicals and energy based industries in the Gulf and their importance in world trade. He is interviewed regularly on national TV, radio and newspapers, as well as by the foreign media.

Dr. Seznec has 25 years experience in international banking and finance of which ten years were spent in the Middle East, including two years in Riyadh at SIDF and six years in Bahrain covering Saudi Arabia. Dr. Seznec is a founding member and Managing Partner of the Lafayette Group LLC, a US based private investment company. He uses his knowledge of business in the Middle East and the United States to further his analysis of the Arab-Persian Gulf.

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Tagged as: Business, defense, economy, energy, foreign policy, foreign relations, iran, king abdullah, nuclear, oil, relationship, security, the relationship

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