Focused on Dubai? Saudi Arabia’s ultimatum to move the headquarters offices to the kingdom

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

The news has investors, bankers and expat workers buzzing – and scratching their heads.

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

But what started as a pitch for global headquarters has now become an ultimatum for some: either move your headquarters to the kingdom, or miss out on lucrative government contracts. And the move, regional analysts and finance professionals say, appears to be targeting the region’s current headquarters, Dubai.

The Kingdom of Saudi Arabia plans to stop contracting with companies and commercial establishments with regional headquarters not located in the Kingdom. The shutdown will involve government-owned agencies, institutions and funds. and will take effect on January 1, 2024, “SPA agency 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 lure companies out of Dubai, I expect, and elsewhere,” Ryan Bohl, a Middle East analyst with risk consulting firm Stratfor, told CNBC.

A UAE-based financier, speaking anonymously for his business activities in Saudi Arabia, described the move as “clearly targeting the UAE” and a “punch in the face” to Dubai.

“It’s a terrible decision,” added the financier, a longtime veteran of the region. “It’s an anti-common market, it’s anti-competition, and it’s essentially business bullying.”

Saudi officials think otherwise. While the kingdom’s financial and investment authorities did not respond to CNBC requests for comment, Investment Minister Khalid Al-Falih tweeted that the decision “ will be positively reflected in the form of creating thousands of jobs for citizens, transferring expertise and localizing knowledge, and it will also contribute to the development of local content and to attract more investment to the Kingdom. ”

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

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

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

“Forced attraction is not sustainable and the most effective is improving the environment,” he said, arguing that as the region’s largest market is already undergoing major development, Saudi Arabia is unnecessary.

The oil-rich kingdom – the region’s largest market, 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 liberalizing economic and social reforms.

Invest Saudi, the kingdom’s investment promotion arm, previously launched the “Program HQ,” which provides special tax benefits and other incentives to multinational companies. Consultants from top US consultancies were flown in from Dubai weekly to develop a strategy on how the conservative metropolis of Riyadh could compete with and replace Dubai as the region’s main business hub.

Google Cloud, Alibaba, and Western Union are some of the latest big names to have established interests in the kingdom. And at Saudi Arabia’s annual Future Investment Initiative in January, 24 global companies announced plans to move their regional headquarters to Riyadh, including PepsiCo, French oil services company Schlumberger and Canadian chain Tim Horton.

The Saudi government is investing $ 220 billion in projects that aim to place Riyadh in the top 10 urban economies in the world, offering competitive tax-free salaries to workers willing to relocate there.

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

“The lifestyle in Saudi Arabia is not comparable,” said a Dubai-based venture capitalist, speaking anonymously due to her company’s financial interests in the kingdom. “You don’t have the same freedoms that you have here – here I can go to a public beach and hang out … Dubai is a global city, Riyadh is far from it. It lacks the diversity that Dubai has. That’s a big city. Deal for me. “

Indeed, one of Dubai’s draws for foreigners is the majority of the expat population – 90% in the UAE as a whole. The success of Dubai’s global openness model is also manifested in numbers: According to the UN trade database, the UAE received 300% more foreign direct investment than Saudi Arabia in 2019, despite its economy being about half its size.

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

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

“A country that actively silences women? No thanks,” said an American expatriate who worked in Abu Dhabi. Riyadh has come under fire by rights groups and foreign governments for the 2018 murder of Saudi journalist Jamal Khashoggi and for the imprisonment of, among others, several female activists.

The government of Saudi Arabia “will do everything it can to convince companies to relocate,” said Mike Stephens, a golf expert and researcher at the Foreign Policy Research Institute. He called the headquarters “a dramatic and daring move by the Saudis that is quite risky”.

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

“Now with Vision 2030 and the radical changes the nation is going through, it will begin to catch up on quality of life … once the veil is lifted on the lifestyle restrictions, expats will pour in.”

Shane Shin, one of the founders of Abu Dhabi-based venture capital firm Shurooq Partners, is opening a second headquarters in Riyadh where he will double his workforce. “The pace and momentum with which Saudi is moving is just astonishing,” he told CNBC.

The Saudi government “has also made it significantly easier to set up an office 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 and the larger market, the openness, actually makes it much better to open an office than in Dubai,” he said. “So, unfortunately, Dubai’s competitive advantage is rapidly diminishing.”

The announcement has left investors and analysts with more questions than answers. What will be a regional headquarters? Could a company have two regional headquarters, or just build a smaller office in Riyadh labeled “HQ” while keeping most of the workforce in Dubai? Are there any exceptions or loopholes? And what does “region” include: just the Gulf states, or further afield to Egypt, North Africa and Turkey?

Importantly, this happened after consultations with Saudi Arabia’s neighbors – and what could be the consequences of an attempt to crowd out the business centers of its allies in the Gulf?

The “Saudi-first” contracting approach, which may increase competition with the UAE, “will likely end with a fair number of exceptions” to make it viable for businesses, Stratfor’s Bohl said. That’s “especially in strategic sectors such as finance, construction or entertainment.”

Regardless, the Saudi move is likely to have significant regional repercussions and accelerate a modernization race between Saudi Arabia and the UAE as both compete to attract foreign companies.

Regional investors, meanwhile, are awaiting clarification as to what “headquarters” is by the kingdom’s definition and for more details to help them plan their next move.

Some think the kingdom is simply putting the waters to the test, having grown used to sudden and dramatic Royal Court rulings in recent years.

“Their strategy is wrong – the strategy must be based on economics,” said a Dubai banker, speaking anonymously due to employer restrictions. “But for now I think they’re just trying to test the market.”