October 23, 2013 / 2:18 PM / 6 years ago

U.S.-Saudi diplomatic tension unlikely to fracture business ties

RIYADH (Reuters) - Saudi Arabia’s frustration with its main ally the United States over Middle East policy will not harm business relations or oil sales, despite a threat from its spy chief of a “major shift” in ties, businessmen and economists say.

Prince Bandar bin Sultan, the head of Saudi intelligence, warned European diplomats last week that energy and defense deals could suffer as a result of differences over the conflict in Syria and other issues, a Saudi source said.

Although mega-contracts have occasionally been used to strengthen political relationships, particularly in defense, economists and businessmen said business ties between U.S. and Saudi firms were generally immune to dips in the relationship.

“I don’t think there are direct links between trade and the political relationship. That’s not how the Saudis work. But it’s also true that when the bilateral relationship is good, it helps,” said a diplomatic source in the Gulf.

The United States is the main supplier for most Saudi military needs, from F-15 fighters to control and command systems worth tens of billions of dollars in recent years, while American contractors win major energy deals.

The world’s top oil exporter and its biggest consumer have enjoyed close economic ties for decades, with U.S. firms building much of the infrastructure of the modern Saudi state after its oil boom in the 1970s.

Younger Saudi princes were mostly educated in the United States as were many of the kingdom’s business executives, senior officials and cabinet members, including the oil, finance, economy and education ministers, and the central bank governor.


“When you hear Bandar threatening, it doesn’t mean we are going to sell our T-bills or stop the military contracts. That’s not going to happen. You are talking about a relationship and an alliance that goes back 60 years. But what they are doing is saying, ‘hey wake up, don’t take us for granted’,” said a Saudi businessman who declined to be identified.

Over the decades, Riyadh has pumped its earnings from energy sales, often to the United States, back into the U.S. economy, buying its goods and services and investing in government debt.

The Saudi riyal has been pegged to the dollar at the same rate of $1 = SR3.75 for many years, and the kingdom has put some of its $690 billion foreign holdings into U.S. treasuries.

As a result, trade has boomed, with U.S. goods and services exports to Saudi Arabia hitting $17 billion in 2011, and U.S. direct investment there reaching $8 billion in 2010.

“Commercial relationships on trade or oil won’t be affected at all. Saudi has had bad political relationships with many countries and still continued to deal with them commercially. This is just a political rift and doesn’t mean that it will affect the private or public businesses,” said a Saudi official.

In 2012, 15 percent of Saudi oil exports went to the United States, according to the U.S. Energy Information Administration.

Although Far East Asia received an estimated 54 percent of Saudi crude oil exports, the kingdom still ranked second after Canada as a petroleum exporter to the United States.

The sectors that appear most vulnerable to official Saudi ire are big defense and infrastructure construction projects with government clients.

However, the Saudis struck a $29.4 billion deal only in late 2011 to buy 84 new F-15s made by Boeing with Raytheon Co radar equipment. In November they also agreed to buy 25 C-130J transport and refueling planes built by Lockheed Martin Corp for $6.7 billion.

Riyadh has turned to Europe for more recent defense deals, ordering Typhoon Eurofighters to be delivered by BAE Systems Plc.

But existing U.S. contracts and Saudi military dependence on U.S. equipment, probably lock the kingdom into long-term relationships covering maintenance, spare parts and training.

Only last week, the Pentagon asked for permission to sell Saudi Arabia and the United Arab Emirates $10.8 billion in advanced weaponry, according to documents it put online.


One business area where strong political relations are important, is nuclear energy. Saudi Arabia has plans to build several reactors that would likely interest Westinghouse.

U.S. contractors have recently won major engineering design and project management contracts, including Hill International on the $5 billion Jabal Omar project in Mecca, Fluor Corp on a big railway and Foster Wheeler on gas and oil schemes.

Saudi state entities and large companies prefer to deal with firms they know, said a Gulf economist who asked not to be named. “It’s not easy to suddenly change these things in response to short-term political considerations. They’re driven by reputation, reliability and quality,” he said.

However, U.S. companies now have to face competitors from East Asia which vie for Saudi projects and implement them well.

In recent months Chinese, French, German, Japanese, South Korean and Greek companies have won engineering and construction contracts in power, energy, petrochemicals and rail projects with a cumulative value of billions of dollars.

The once-central oil element in the U.S.-Saudi relationship has eroded in recent years as U.S. domestic energy production surges and Saudi exports shift towards China.

Chinese firms have snapped up Saudi contracts on everything from power stations to railways - even though China has vetoed Saudi-backed U.N. resolutions and has given political support to Iran, Saudi Arabia’s principal regional adversary.

U.S.-Saudi ties plunged far lower after the September 11, 2001 attacks on the United States, in which Saudi militants played a major role, said Bishr Bakheet, a prominent Saudi businessman.

“Visas were targeted, there were class-action suits against our leadership. Our people were deported and arrested. It was a big mess, but we weathered it,” he said.

Today, nearly half the 150,000 Saudi students on overseas scholarship programs are in American universities.

“My generation, born in the 40s and 50s, were all U.S. graduates and the current generation are all U.S. graduates. It plays a role in strengthening the relationship,” Bakheet said.

Additional reporting by Amena Bakr in Doha and William Maclean in Dubai; Editing by Alistair Lyon

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