Are you targeting Dubai? Saudi Arabia’s ultimatum to attract headquarters offices to the kingdom

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

The news makes investors, bankers and expat workers humming – and scratching their heads.

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

But what began as a step toward global headquarters has now become an ultimatum to some: either move your headquarters to the kingdom, or lose profitable government contracts. And the move, say regional analysts and financial professionals, seems to be directed at the region’s current central hub: Dubai.

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

So far, the policy seems to apply only to companies doing 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 from Dubai, I expect, and elsewhere,” Ryan Bohl, a Middle Eastern risk consulting firm for Stratfor, told CNBC.

A financier from the United Arab Emirates, who spoke anonymously over trade operations in Saudi Arabia, described the move as “clearly targeting the United Arab Emirates” and a “blow to the face” of Dubai.

“It’s a terrible decision,” added the financier, a longtime veteran of the region. “It is an anti-common market, it is anti-competitive and it is, in essence, corporate aggression.”

Saudi officials feel differently. While the kingdom’s finance and investment authorities did not respond to CNBC’s requests for comment, Investment Minister Khalid Al-Falih wrote on Twitter that the decision “will be reflected positively in the form of creating thousands of jobs for citizens, transfer of expertise and localization of knowledge, and will also contribute to the development of local content and attract more investment in the Kingdom. ”

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

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

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

“Forced attraction is not sustainable and the most effective is to improve the environment,” he said, arguing that, being the largest market in the region that is already undergoing major development, the Saudi movement is useless.

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

Invest Saudi, the investment arm of the kingdom, has previously launched the “HQ Program”, offering special tax cuts and other incentives to multinational blue chip companies. Consultants from top US consulting firms were transported weekly from Dubai to develop a strategy on how the conservative metropolis of Riyadh could compete and replace Dubai as the region’s preeminent business center.

Google Cloud, Alibaba and Western Union are some of the most recent big names in the realm. Also as part of Saudi Arabia’s Annual Future Investment Initiative in January, 24 international companies announced plans to move 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 to place Riyadh in the top 10 economies of cities around the world and offer tax-free competitive salaries to employees willing to move there.

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

“The Saudi lifestyle is not comparable,” said a venture capitalist in Dubai, speaking anonymously because of his 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 stay … Dubai is a global city, Riyadh is far from that. It lacks the diversity that Dubai has. That’s big business. for me. “

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

And the United Arab Emirates ranked 16th in the World Bank’s Ease of Doing Business Index in 2020, while Saudi Arabia ranked 63rd.

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

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

The Saudi government “will have the task cut off for them to persuade companies to move,” said Mike Stephens, a golf expert and researcher at the Foreign Policy Research Institute. He called the seizure of the headquarters “a dramatic and daring move by the Saudis, which is quite risky.”

However, many expatriates who have worked in the kingdom feel different. “There is no doubt that Arabia will compete with Dubai,” said Alex Nasr, a consultant with several years of work experience across the country, adding that it is already competing for pay.

“Now, with Vision 2030 and the radical changes the nation is pushing for, it will begin to pick up the quality of life again … as soon as the veil is lifted on lifestyle restrictions, expats will begin to pour.”

Shane Shin, founding partner at Abu Dhabi venture capital firm Shurooq Partners, is opening a second headquarters in Riyadh, where it will double its number of employees. “The pace and momentum in which Arabia has moved is simply amazing,” he told CNBC.

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

“The competitive nature of the Saudi and the larger market, the openness, actually make it much better to open an office than in Dubai,” he said. “So Dubai’s competitive advantage is unfortunately shrinking rapidly.”

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

Importantly, this happened after consultation with Saudi Arabia’s neighbors – and what could be the implications of trying to replace the business centers of its Gulf allies?

The “first Saudi” contractual approach, while potentially intensifying competition with the United Arab Emirates, “will likely end with a fairly high number of exceptions,” to make it feasible for companies, Stratfor’s Bohl said. This is “especially in strategic industries such as finance, construction or entertainment”.

In any case, the Saudi movement is likely to have significant 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 clarification on what constitutes the “headquarters” as defined by the kingdom and more details that could help them plan their next move.

Some believe that the kingdom is only testing the waters, after getting used to the sudden and dramatic statements of the Royal Court in recent years.

“Their strategy is wrong – the strategy should be based on the economy,” said a Dubai banker, speaking anonymously because of employer restrictions. “But in the end, for now, I think he’s just trying to test the market.”