Wall Street may be returning to Saudi Arabia, but it's not back to business as usual

Editor's Note: (Varsha Koduvayur is a senior research analyst at the Foundation for Defense of Democracies, where she focuses on the Gulf. The opinions expressed in this commentary are her own.)

The sight of BlackRock's Larry Fink, HSBC's John Flint and JPMorgan's Daniel Pinto in Riyadh would have been unthinkable six months ago. Top finance executives withdrew from Saudi Arabia's "Davos in the desert" investment conference last October amidst a global uproar over the murder of Saudi journalist Jamal Khashoggi. But last month, Fink, Flint and Pinto were on the stage at Riyadh's Financial Sector Conference, eager to explore new opportunities. Their appearance, coming just hours after Saudi Arabia announced it had executed 37 people, suggests that the pall of Khashoggi's murder has faded and that Riyadh is back in global businesses' good standing.

The reality is more complex. Businesses are returning to Saudi Arabia, but only tepidly. And their return says less about their confidence in Saudi Arabia than it does about their hunt for global yield.

Saudi Aramco's bond sale is a case in point. Demand for the oil company's debut offering topped $100 billion, allowing Aramco to raise $12.5 billion.

While Saudi officials could tout this demand as a sign of renewed confidence in the kingdom, Aramco's bond issue shows institutional investors' desperate hunt for yield. As interest rates remain low in developed markets, investors are turning to emerging markets to satisfy their appetite for higher yields — a big factor pushing them toward Aramco, which is the world's most profitable company with $111 billion in net income last year.

Banking and finance executives' eagerness to return to Riyadh underscores a similar dynamic. JPMorgan and HSBC, among others, arranged the Aramco bond, and both banks have also arranged Saudi Arabia's sovereign debt issues. With Gulf sovereign debt comprising nearly 25% of new emerging market debt issues over the past three years, the Gulf is a region bankers and investors are hesitant to overlook, barring exceptional circumstances. Moreover, Gulf states' appetites for sovereign debt shows no sign of paring back, and they will likely continue tapping international bond markets to plug budget deficits caused by low oil prices.

Banks may be returning to Riyadh, but foreign direct investment suggests that other businesses don't share the banks' enthusiasm. Investment plummeted to $1.4 billion in 2017 from $7.5 billion in 2016, as the political risks generated by Crown Prince Mohammed bin Salman's so-called anti-corruption roundup spooked investors.

Moreover, Saudi Arabia's deal-making with Western companies has slowed to a trickle. After Khashoggi's murder, several companies pulled out of their ventures with the Public Investment Fund, Saudi Arabia's sovereign wealth fund and Vision 2030's chief investment vehicle, including Richard Branson's Virgin Group. In addition, no major deals have been announced since Khashoggi's murder.

Reputational risks remain for businesses transacting with the kingdom, whose human rights record has arguably worsened since Khashoggi's death. In March, the kingdom began criminal trials for high-profile women's rights activists, including Loujain al-Hathloul, for allegedly making contact with foreign journalists, among other charges. Saudi Arabia has also widened its anti-dissent dragnet, arresting two US dual citizens earlier this year.

Despite the concerns of many firms, it's unclear whether Mohammed bin Salman realizes — or cares — how serious a blow the kingdom's image has taken. Western firms that do business with Saudi Arabia may face a Sisyphean challenge when trying to protect their reputations after every new outrage.

Under such conditions, Saudi Arabia is unlikely to get the buy-in it wants from the business community. Executives may return to conferences and investors may pursue yield. But until Saudi Arabia acquires the kind of deep, long-term partnerships, that Vision 2030 needs — which can boost Saudi nationals' employment and benefit Saudi society — it's not yet back to business as usual in Riyadh.