Threats of US sanctions could accelerate a Saudi shift eastward

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As the fallout over the killing of Saudi journalist and U.S. resident Jamal Khashoggi continues, age-old alliances are being tested.

In contradiction to President Donald Trump, who has voiced opposition to any interference in U.S. weapons sales to Saudi Arabia, members of Congress are openly calling for sanctions on America’s number one arms customer.

German Chancellor Angela Merkel on Sunday announced a hold on arms sales to the kingdom for the time being, a move lauded by many in the international community. But some now fear that severing arms sales to the Saudis will simply push them to turn eastward.

“If the U.S. and West in general move toward some meaningful sanctions of Saudi Arabia, we would be joking to imagine that the Saudis would just sit down and accept it,” Ayham Kamel, head of Eurasia Group’s Middle East and North Africa practice, told CNBC’s “Squawk Box Europe” Monday.

“The Saudis I think will begin to tilt — they were already doing that beforehand — they’ll be doing more business with China and Russia. I doubt Mr. Putin would’ve given the Saudis much trouble with this crisis as Mr. Trump has.”

Khashoggi, a columnist for the Washington Post and frequent critic of the Saudi royal family, disappeared after entering the Saudi consulate in Istanbul on October 2. Turkish officials allege he was murdered and dismembered by a Saudi hit squad. After initially insisting that Khashoggi left the consulate unharmed, the Saudi government last week said that he died in a “fistfight” while in the building, but provided few details and no evidence. Multiple investigations are underway.

The scandal has prompted scores of ministers and CEOs to withdraw from a major international summit being held this week in Riyadh, aimed at showcasing Saudi Arabia’s investment opportunities. But while U.S. Treasury Secretary Steven Mnuchin has pulled out along with heavyweight American CEOs like Jamie Dimon and Larry Fink, the heads of Russia’s direct investment fund (RDIF) will still be in attendance.

Saudi Arabia has already been increasing business with the Russians and the Chinese. In June, Vladimir Putin hosted Saudi Crown Prince Mohammed bin Salman at the Kremlin, where the two agreed to “expand cooperation in oil and gas matters” after working together on output deals to stabilize markets amid fluctuating global crude prices.

And October of last year saw the first-ever visit of a Saudi monarch — King Salman — to Russia, during which a $1 billion joint investment fund was created and 15 cooperation agreements were signed in the areas of technology, defense and agriculture, including Moscow’s readiness to sell Riyadh its S-400 missile defense system.

China, meanwhile, is the kingdom’s largest trading partner, with $42 billion in bilateral trade in 2017. Last March, the two signed a raft of deals worth a reported $65 billion in sectors ranging from energy to space technology. Some in Riyadh have also talked of trading oil in yuan instead of dollars as retaliation for potential U.S. sanctions.

But as trade tensions with the U.S. continue to put strain on China’s economy, it is likely to lay low at this stage to avoid further conflict with the U.S. administration. Additionally, China is far from able to match U.S. weapons production in terms of sophistication and capabilities, defense experts say. Beijing sold just $20 million in arms to the Saudis last year, compared to $3.4 billion in exports from the U.S., according to the Stockholm International Peace Research Institute.

Riyadh’s increasing engagement with eastern power centers is not necessarily new, but this diplomatic crisis could spur its acceleration, according to Saman Vakil, a research fellow at U.K. think tank Chatham House and a professor at Johns Hopkins’ School of Advanced International Studies.

“In Riyadh, diversification of relationships and not putting all their eggs in Washington’s basket has been a longstanding policy,” Vakil told CNBC, describing energy deals with China dating back to the 1990s. “And it could be in their continued interest, because if there are forthcoming sanctions from the EU or the U.S. on human rights issues, obviously China’s policy of non-interference would make sense for them, strategically speaking.”

Still, the nearly 90-year-old alliance — deemed a “special relationship” when diplomatic ties were first established in 1933 — remains paramount to the kingdom’s stability, something Riyadh knows very well.

“A break with the U.S., any obvious rupture in the relationship is also not in their interest,” Vakil added. “So they’re going to try to maintain these three different portfolios.”

“The House of Saud would be much weaker without U.S. support,” said Eurasia Group’s Kamel, acknowledging Washington’s decades of military and diplomatic backing.

But would it collapse? “Not necessarily immediately,” the analyst said. “But it would certainly be much weaker than it is today.”

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