Want to target Dubai? Saudi Arabia’s ultimatum to throw the headquarters offices in the kingdom

DUBAI, UAE – Saudi Arabia, in a bold and unexpected move, announced Monday afternoon that in 2024 its government would stop doing business with any international company that did not have its regional headquarters in the kingdom.

The news is causing investors, bankers and expatriate workers to boil over and scratch their heads.

In recent years, Saudi Arabia has emerged as a location for headquarters offices in its campaign to create private sector jobs and diversify its economy as part of Crown Prince Mohammed bin’s 2030 vision Salman.

But what began as a launch for global headquarters has now become an ultimatum for some: either move your headquarters to the kingdom or lose lucrative government contracts. And the measure, according to regional analysts and finance professionals, seems to be aimed at the current center of the region: Dubai.

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

So far, the policy only applies to companies that do business with the government; those who do not relocate their headquarters to Saudi Arabia can still work in the private sector.

The Saudis “try to attract companies from Dubai, I hope, and elsewhere,” Ryan Bohl, a Middle Eastern risk consulting firm at Stratfor, told CNBC.

A UAE-based financier, who spoke anonymously over his business operations in Saudi Arabia, described the move as “clearly aimed at the UAE” and a “face attack” on Dubai.

“It’s a terrible decision,” added the financier, a veteran of the region. “It’s an anti-communal market, it’s anti-competitive and it’s essentially business harassment.”

Saudi officials feel 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 positively reflected in how to create thousands of jobs for citizens, transfer knowledge and locate knowledge, and will also help develop local content and attract more investment to the Kingdom. ”

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

So far UAE officials have been silent, but former Dubai chief financial officer Nasser Al-Shaikh had some critical words for the kingdom.

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

“Forced attraction is not sustainable and the most effective is to improve the environment,” he said, arguing that because it is the largest market in the region that is already experiencing great development, the Saudi Arabian movement is not necessary.

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

Invest Saudi, the kingdom’s investment promotion arm, previously launched the “HQ Program,” which offered special tax rebates and other incentives to multinational blue chip companies. Consultants from leading U.S. consultants traveled weekly from Dubai to develop a strategy on how the conservative metropolis of Riyadh could compete and supplant Dubai as the region’s preeminent business hub.

Google Cloud, Alibaba and Western Union are some of the last big names to establish holdings in the kingdom. And during Saudi Arabia’s annual Future Investment Initiative in January, 24 international companies announced plans to relocate their regional headquarters to Riyadh, including PepsiCo, French oil services company Schlumberger and Canadian chain Tim Horton’s.

The Saudi government is investing $ 220 billion in projects aimed at placing Riyadh in the top ten economies of cities in the world and offering tax-free competitive salaries to employees who are willing to relocate there.

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

“The lifestyle in Saudi Arabia is not comparable,” said a venture capitalist based in Dubai, who spoke anonymously about 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 hang out … Dubai is a global city, Riyadh is far from that. It lacks the diversity that Dubai has. That’s very big deal for me “.

In fact, one of Dubai’s attractions for foreigners is its majority of expats: 90% in the UAE as a whole. The success of Dubai’s global opening-up model is also evident in figures: according to the UN trade database, the United Arab Emirates received 300% more foreign direct investment in 2019 than Arabia Saudi Arabia, although its economy was about half the size.

And the United Arab Emirates ranked 16th in the World Bank 2020 business ease index, while Saudi Arabia ranked 63rd.

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

“A country that actively silences women? No, thank you,” said an American expat who worked in Abu Dhabi. Riyadh has been attacked by rights groups and foreign governments for the assassination of Saudi journalist Jamal Khashoggi in 2018 and for the imprisonment of several women-led activists, among others.

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

However, many expats who have worked in the kingdom feel 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 already competes in salary matters.

“Now, with Vision 2030 and the radical changes the nation is pushing for, it will begin to regain its standard of living … as soon as the veil on lifestyle restrictions is lifted, expats will begin to pour yourself “.

Shane Shin, a founding partner of Abu Dhabi-based venture capital firm Shurooq Partners, is opening a second head office in Riyadh, where it will double its staff. “The pace and momentum at which Saudi has moved is simply mind-boggling,” he told CNBC.

The Saudi government “has also significantly facilitated the creation of offices and visas” than in the past, Shin said, adding that most of Shurooq’s portfolio companies operate in the kingdom.

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

The announcement has 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 “HQ” label while keeping most of its staff in Dubai? Will there be exemptions or loopholes? And what does the “region” include: only the Gulf states or further afield to Egypt, North Africa, and Turkey?

It’s important to note that this happened after consulting with Saudi Arabia’s neighbors, and what could be the implications of trying to displace the shopping malls of its Gulf allies?

The “first Saudi” procurement approach, while potentially intensifying competition with the UAE, “will likely end with a good number of exceptions,” to make it feasible for companies, Bohl of Stratfor said. . This is “particularly in strategic industries such as finance, construction or entertainment.”

Either way, the Saudi movement is likely to have major regional consequences and accelerate a modernization race between Saudi Arabia and the United Arab Emirates, as both compete to attract foreign companies.

Meanwhile, regional investors are waiting for clarifications on what constitutes the “headquarters” according to the definition of the kingdom and more details that may help them plan their next move.

Some think that the kingdom only tests the waters, as they have become accustomed to the sudden and dramatic statements of the Royal Court in recent years.

“His strategy is wrong: the strategy should be based on the economy,” said a Dubai-based banker, who spoke anonymously because of employers ’restrictions. “But finally, for now I think they’re just trying to test the market.”