Saudi Arabia threatens mutual economic destruction

US President Barack Obama will be carrying more baggage than usual when he travels to the Saudi capital this week. The trip was planned as an opportunity for the United States to reassure its Gulf allies and tighten coordination on a number of regional issues. Instead, Obama will spend much of his time trying to allay anxieties over a bill under consideration in the US Congress. The bill aims to expose Saudi connections to the 9/11 attacks and would deny government immunity in legal cases where suspects are found culpable for attacks that kill Americans on US soil.

Because the bill involves the highly charged issue that is the 9/11 attacks, it is an appealing rallying point for US presidential candidates, including Republican Sen. Ted Cruz and both Democratic candidates. But the Obama administration has tried to take a more dispassionate stance, bearing two main objectives in mind: avoiding a precedent that could open the US government up to lawsuits abroad and maintaining a decent relationship with the Saudis at this tumultuous time in the Middle East. Deflecting domestic pressure will be no easy feat, but Obama will not risk alienating Riyadh. After all, he needs Saudi support to contain the Islamic State and to act as a Sunni counterbalance to the United States’ fledgling relationship with Iran.

Saudi Arabia threatened to sell off $750 billion in US assets if the bill passes. Although the threat — delivered to the White House personally by the Saudi foreign affairs minister — has received a lot of attention already, it merits closer examination. Except for a few high-level officials in Washington and Riyadh, no one can say for certain how much Saudi Arabia has tied up in US Treasurys. We do know, however, that the US Treasury Department bundles Riyadh’s holdings along with those of other major oil exporters, including Kuwait, Qatar and United Arab Emirates. Taken together, these tallied up to $281 billion at the end of February. Since much of Kuwait, Qatar and the United Arab Emirates’ wealth lies in external investment funds and various equities worldwide, we can assume that Saudi Arabia accounts for a large portion of that sum. Even so, $281 billion pales in comparison with the amount China ($1.25 trillion) or Japan ($1.13 trillion) holds in Treasurys.

Saudi Arabia would, in theory, deal a heavy blow to US securities if it were to sell off a substantial number of its US assets all at once. But the country would be hurting itself even more. Because a big sell-off would drive down the price for the assets from the start, Saudi Arabia would then lose more money with each successive sale. Even if Saudi Arabia wanted to dump all its assets at once, it would still need to find enough buyers willing to purchase them all at once to avoid a big financial loss.

Saudi Arabia could frame the sell-off as a pre-emptive measure to prevent the United States from seizing its assets over allegations related to 9/11 — something the United States would be unlikely to do anyway. In seizing a large percentage of Saudi Treasurys for political reasons, the United States would spread political danger to other assets held by other countries and would risk creating the kind of flight that could undermine the primacy of the US dollar. The United States would not engage in that kind of economic self-harm.

Therefore, what the Saudis are threatening appears to be a nuclear option, promising mutually assured destruction for Saudi Arabia and the United States as well as the global economy. And as it stands, the Saudi kingdom is under far too much financial stress at home to push the button: The outlook for oil prices is bleak, and recovery remains a distant possibility. In the meantime, Saudi Arabia will need to carefully enact economic reforms to increase confidence in its economy. These reforms include privatization efforts and measures to attract foreign investors. Riyadh also hopes to invite foreign funds into Saudi Arabia’s stock market and is offering part of Saudi Arabian Oil Co. for initial public investment. For the various programs to be effective, however, the Saudi economy must become more open and transparent: Interference and politically motivated business deals must be phased out in favor of a more focused and technocratic approach.

Naturally, if Riyadh were to dump its assets, it would undermine its own efforts to inspire confidence in its economy. Riyadh is already encountering significant social and political resistance to its planned reforms while foreign investors are still sizing them up. In the unlikely event that the United States were to seize or freeze a small amount of Saudi Arabia's assets, Riyadh would survive. The country faces a far greater threat if it fails to implement much-needed domestic economic reforms.