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Saudi Arabia’s Silent Interference with Aramco IPO

The world’s most profitable company, Aramco, is scheduled to release its IPO in December, but many American banks question the $2 trillion valuation of the company and are not willing to offer what Aramco expects. Without foreign investment, mainly from America, the international money managers lowered the valuation to $1.7 trillion. This drastic change comes as a disappointment to Crown Prince Mohammed bin Salman who is leading this IPO in his attempt to wean the Saudi economy off its dependence on oil sales. This leaves domestic investors to pick up what the American’s dropped, but does nothing to improve the country’s dependence on oil revenue.

The Original Goal of the Aramco IPO

The Crown Prince made it his goal to modernize the state-owned company to function more like a corporation rather than a state-run institution when he announced the IPO plan in 2016 with his “Vision 2030.” His goal was to sell 5% of Aramco to foreign investors to raise $100 billion to diversify the Saudi economy. The IPO will give state citizens a share of the revenue that is mostly used to fund the government.

Foreign investment would have brought more money into Saudi’s economy, but the tumultuous relationship between the Saudi government and the American government makes this difficult.

The Risks and Reality of the Aramco IPO

Earlier this year, the suspicious death of Jamal Khashoggi who was a Saudi-American journalist for The Washington Post, sparked controversy between the two governments since Khashoggi was a known critic of the Crown Prince. America’s pride in its democracy and free speech rights made it hard to overlook the reality of Khashoggi’s death.

Aside from this tragedy and other human rights violations, foreign investors could not see the value of the IPO with the state being the majority stakeholder in the company. This means that investors would have little to no input into the company and would demand a risk premium for it – lowering the value of Aramco even further.

The Fate of the Aramco IPO

Due to this international tension, the Saudi government has lessened their valuation of the company. But without major global investors, the company must fall back on domestic investors. With plentiful domestic investors looking for favor from the Crown Prince, this won’t be a challenge. However, local investment won’t indicate how much the company is actually worth to the global economy.

Going on, Saudi Arabia’s Aramco had to face reality and lowered their base value to $1.2-1.5 trillion, almost half of what they expected to earn from the IPO. The volatile oil industry and high geo-political tension will make the official IPO an event worthy of global business news and financial news. It raises questions about what next steps Saudi will take to really modernize their economy.

Though modernization is the goal and Saudi Arabia wants to engage with the business world, Saudi’s unwillingness to actually modernize and relinquish government control has shut them out of the global market. The Crown Prince’s “Vision 2030” will just have to wait for another opportunity to join the global economy.