Riyadh skyline in Saudi Arabia.

Simon Dawson | Bloomberg | Getty Images

DUBAI, United Arab Emirates – Saudi Arabia announced late Monday in a bold and unexpected move that the government would cease doing business with international companies whose regional headquarters are not in the Kingdom by 2024.

Investors, bankers and expat employees are buzzing in the news – and scratching their heads.

Saudi Arabia has positioned itself for the past few years as part of Crown Prince Mohammed bin Salman’s Vision 2030 as the location for headquarters offices in its campaign to create jobs in the private sector and diversify its economy.

But what started as a pitch on global headquarters has now turned into an ultimatum for some: Either move your headquarters to the kingdom or lose lucrative government contracts. According to Middle Eastern analysts and finance professionals, the move appears to be aimed at the region’s current headquarters: Dubai.

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

So far, the policy only appears to apply to companies doing business with the government. Those who do not move their headquarters to Saudi Arabia can continue to work in the private sector.

Riyadh versus Dubai

The Saudis are “trying to lure companies out of Dubai and elsewhere,” Ryan Bohl, a Middle East analyst for risk consultancy Stratfor, told CNBC.

A financier based in the United Arab Emirates, who spoke anonymously because of his business activities in Saudi Arabia, described the move as “clearly aimed at the United Arab Emirates” and a “slap in the face” to Dubai.

“It’s a terrible decision,” added the financier, a long-time veteran of the region. “It’s an anti-common market, anti-competitive and essentially anti-bullying by companies.”

Saudi officials feel different. While the kingdom’s finance and investment authorities did not respond to CNBC’s requests for comment, Investment Minister Khalid Al-Falih tweeted that the decision “translates positively into creating thousands of citizens’ jobs, transferring expertise and locating knowledge becomes”. and it will also help develop local content and attract more investment to the kingdom. ”

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

UAE officials have been calm so far, but Dubai’s former CFO Nasser Al-Shaikh had some critical words for the kingdom.

The decision “contradicts the principle of the single golf market,” wrote Al-Shaikh on Twitter on Monday evening.

“Forced attraction is unsustainable and the most effective is environmental improvement,” he said, arguing that Saudi Arabia’s move as the region’s largest and already developing market is unnecessary.

Can Saudi Arabia overtake the UAE?

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

Invest Saudi, the UK’s investment promotion arm, previously launched Program HQ, which offers blue-chip multinational companies special tax breaks and other incentives. Advisors from leading American companies were flown in from Dubai weekly to develop a strategy for how the conservative metropolis Riyadh could compete with and replace Dubai as the region’s pre-eminent business center.

Google Cloud, Alibaba, and Western Union are some of the newest big names to be involved in the Kingdom. During Saudi Arabia’s annual Future Investment Initiative in January, 24 international companies announced plans to move their regional headquarters to Riyadh, including PepsiCo, French oilfield service company Schlumberger and Canadian fast food chain Tim Horton’s.

The Saudi government is investing $ 220 billion in projects aimed at getting Riyadh into the top 10 economies in the world, and offering competitive tax-free salaries to employees who are willing to move there.

Women sunbathers sit on a beach in the Gulf emirate of Dubai on July 24, 2020, while the Burj al-Arab Hotel can be seen behind it.

KARIM SAHIB | AFP via Getty Images

But will that be enough to lure expats out of Dubai, where they can drink, wear bikinis on the beach and enjoy a far more liberal lifestyle comparable on many levels to the West?

“The lifestyle in Saudi Arabia is not comparable,” said a Dubai-based venture capitalist, who spoke anonymously because of his company’s financial interests in the kingdom. “You don’t have the same freedom as here – I can go to a public beach and hang out here … Dubai is a global city, Riyadh is far from it. It lacks the diversity that Dubai has. This is a big deal for me . “

In fact, one of Dubai’s attractions for foreigners is the majority of expats – 90% in the United Arab Emirates as a whole. The success of Dubai’s global openness model can also be seen in numbers: According to the United Nations trade database, the UAE received 300% more foreign direct investment than Saudi Arabia in 2019, even though its economy is about half the size.

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

The picture problem

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

“A country that actively silences women? No, thank you,” said an American expat who works in Abu Dhabi. Riyadh has been targeted by human rights groups and foreign governments, among others, after the Saudi journalist Jamal Khashoggi was killed in 2018 and several female driving activists were detained.

The Saudi Arabian government will “have to stop working to get companies to move,” said Mike Stephens, golf expert and research fellow at the Foreign Policy Research Institute. He called the headquarters grave “a dramatic and courageous move by the Saudis that is quite risky.”

A Saudi woman plays in a playground ahead of Saudia Ad Diriyah’s 2018 E-Prix Formula E Championship in Riyadh on December 15, 2018 in Riyadh. (Photo by FAYEZ NURELDINE / AFP) (Photo credit should be FAYEZ NURELDINE / AFP / Getty Images)


Still, many expats who have worked in the UK feel differently. “There is no doubt that Saudi Arabia will compete with Dubai,” said Alex Nasr, a consultant with several years of experience across the country, adding that it is already competing on the salary side.

“Now, with Vision 2030 and the radical changes the nation is going through, it will begin to get a grip on the quality of life. Once the veil is lifted on lifestyle restrictions, expats will start pouring in.”

Shane Shin, founding partner of Abu Dhabi-based venture capital firm Shorooq Partners, is opening a second main office in Riyadh, where he will double his workforce. “The pace and dynamism with which Saudi has moved is just amazing,” he told CNBC.

The Saudi government “has also made it a lot easier to set up an office and visa” than in the past, Shin said, adding that most of Shorooq’s portfolio companies operate in the Kingdom.

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

More questions than answers

The announcement left investors and analysts with more questions than answers. What will a regional headquarters be? Can a company have two regional headquarters or just set up a smaller office in Riyadh called “HQ” while the majority of its employees stay in Dubai? Will there be exceptions or loopholes? And what does “region” include: only the Gulf States or further out in Egypt, North Africa and Turkey?

What is important is that this was done after consulting with Saudi Arabia’s neighbors – and what effects could Riyadh’s attempt to oust the economic pillars of its allies have?

The “Saudi-first” contract approach, which may increase competition with the UAE, “will likely end with a number of exceptions” to make this feasible for businesses, Stratfor’s Bofor said. That’s “especially in strategic industries like finance, construction, or entertainment”.

In both cases, the move to Saudi Arabia is likely to have significant regional ramifications and accelerate a modernization race between Saudi Arabia and the United Arab Emirates as both compete to attract foreign companies.

Regional investors, meanwhile, are waiting for clarification on what the kingdom’s definition of “headquarters” is, and for more details that could help them plan their next move.

Some think the kingdom is only testing the water after getting used to sudden and dramatic statements from the royal court in recent years.

“Your strategy is wrong – the strategy should be based on economics,” said a Dubai-based banker, who spoke anonymously due to employer restrictions. “But in the end, I think they’re just trying to test the market.”