The Middle East's heightened risk

24 January 2020
Business in the Middle East is taking place against a backdrop of elevated geopolitical risk in which events can have sweeping economic impacts

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Paying the risk premium

Saudi Aramco’s share price fell to SR34.2 on 8 January, down by about 2.7 per cent from the SR35.15 share price of 2 January, the day before the assassination of Iranian general Qasem Soleimani in Baghdad in a US drone strike.

The 8 January price marked the lowest the oil giant’s shares had been since its market debut on 11 December.

There are several factors behind the volatility in the Aramco share price. But the most pertinent is the heightening of regional geopolitical tensions since Soleimani’s killing.

Following the strike, fears of war in the region and long-term disruption to Middle East oil supplies caused global oil prices to surge 3 to 4 per cent. Share prices of international oil companies such as BP, Shell and ExxonMobil also jumped.

The fact that shares in Aramco, the world’s biggest oil producer, fell when concerns about disruption to oil supplies should have seen them rise confirms that geopolitical issues are an ongoing and significant factor in the way investors look at not just Saudi Aramco, but all Saudi firms.

Indeed, that is the way the markets look at all companies with major exposure to the Middle East.

Stock markets fell across the region following the assassination of Soleimani, with Saudi Arabia’s main stock market index, the Tadawul All Shares Index (Tasi), falling 2.4 per cent when it opened on 5 January.

As with the Aramco initial public offering, which saw international investors unwilling to accept Saudi’s valuation of Aramco, this is deeply frustrating for Riyadh. But it shows that, even despite the considerable might of Saudi Arabia behind it, governments in the region are powerless to control the investment risks that come from the geopolitics of the region.

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