A Confession of Sorts from Saudi Arabia

Saudi Arabia has threatened the United States with grave consequences if lawmakers were to pass a bill revoking part of a 1976 law that gives foreign nations some immunity from lawsuits in American courts “in cases where nations are found culpable for terrorist attacks that kill Americans on United States soil.”

The Saudi threat amounts to a de-facto confession that Saudi officials or princes had ties to Al Qaeda at the time of the September 11, 2001 attacks. Why else would they panic and issue ultimatums? Even if it was not senior officials and just some energetic royals, they might have good reason to worry. US courts could be persuaded that senior princes are part of the Saudi monarchical state—there is surely legal precedent from the nineteenth century.

After Saddam’s invasion of Kuwait in 1990, bin Laden met with King Fahd and offered to raise a mujahideen army to defend Saudi Arabia. The monarch rebuffed his offer and instead accepted a deployment of US forces (Operation Desert Shield). It was at this point that bin Laden turned on the Al Saud, against whom he raged for two years before being exiled to Sudan. But there is some evidence to show that Saudi intelligence continued to maintain contacts with Al Qaeda during the mid-1990s. The question is: Did this relationship last into 2001 and beyond?

A priori, it seems unlikely that there was active support for Al Qaeda at the official level and in the upper echelon of the Saudi royalty circa 2001. But then, why the panic?

On the related, broader question of support in Saudi moneyed circles for Al Qaeda, and more generally, salafist jihadism, there is no doubt whatsoever. It is very well-understood that the bulk of the money powering global jihadism originates in the gulf monarchies, in particular, the Kingdom of Saudi Arabia.

Global jihadism does not grow in a vaccum. It is intrinsically tied to salafism. Indeed, global jihadism is synonymous with salafist jihadism. And it is here that one finds the real challenge posed by Saudi Arabia. For the Kingdom is the principal propagator of salafi ideology worldwide.

The Saudi state has invested its vast oil wealth, and utilized its pivotal position as the host of the annual Muslim pilgrimage, to promote a vicious ideology that combines Sunni supremacism with puritanical fanaticism. The ideology demands a return to the version of Islam practiced under the first four caliphs. That is, it demands a return to the practice of the Jihad-State at Medina, before the caliphate moved to Damascus (and presumably got corrupted).

The innovation of the salafist jihadists is merely to point out the essential incompatibility between the Saudi state ideology and its de-facto alliances with the near, Zionist enemy and the far, Crusader enemy; and therefore to demand armed revolt instead of obedience to the Al Saud. This is an argument that the Al Saud are quite possibly rigged to lose. Indeed, if there is a state that is not already engulfed in a civil war that is at risk of being overrun by ISIS, it is Saudi Arabia. No one is more at risk; not even Pakistan.

As for the Saudi threat to sell their hoard of US Treasuries. First of all, Saudi Arabia does not have $750 billion as the paper of record alleges, it has slightly less than $600 billion in reserves. Second, if the Saudis were to dump all $600 billion in Tbills, it would not make much of an impression: It would amount to less than 1 per cent of total dollar credit outstanding (about $60 trillion). Even as a share of daily funding in the wholesale market (about $4 trillion onshore and an even larger amount offshore), it would be a drop in the bucket. At best, it would make for an interesting day in global money markets.

Third and lastly—and this one is the kicker—it would be outright beneficial to the global financial system which has had a structural shortage of Tbills for years! Indeed, it would bring down the premium now being paid for Tbills in Europe. Figure 1 shows euro/dollar cross-currency basis swap spreads which capture the liquidity premium. (When they fall below zero it implies that there is a shortage of Tbills.)

Figure 1: Euro/USD cross-currency basis swap spreads (Source: ECB).

The bigger issue at stake here is the future of the US-Saudi relationship. It is time to go back to basics: It is in the US interest to protect the Kingdom from external aggression. But it is not in the US interest to go along with the Al Saud’s regional adventures (re Yemen). And it is certainly not in the US interest to watch the Saudis propagate their vicious ideology worldwide. The United States needs to stand firm on these issues. To that end, Congress should pass the 9/11 bill and the Obama administration should shelve its ill-thought opposition to the same.

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