Saudi Aramco IPO More About Geopolitics Than Finance
Observers have focused on the financial value of Saudi Aramco—~$1.5 trillion at the low end of the spectrum and as much as $20 trillion at its high end.
While these are awe-inspiring valuations, the IPO’s strategic value—in terms of the Saudi economy and its conflict with Iran and Russia—equals, perhaps even exceeds the IPO’s financial value to Saudi Arabia and its government.
Strategic Objective: The Saudi Economy
As important as the cash this initial share sale in Saudi Aramco (hereafter referring both to Saudi Aramco itself and its downstream subsidiaries) could generate will be the market response to the offer—the price foreign and domestic investors are willing to pay. With this information, the Saudi government will gain a sense of Saudi Aramco’s market value and therefore how much revenue in incremental sales of share in Saudi Aramco could contribute to the Saudi government coffers (adjusted, of course, for expectations for future crude prices).
This information will also signal how much the government could have for priority investments over the next decade or so (after covering operating budget expenditures). In turn, this it will help the Saudi government estimate how much private capital it could attract—assuming various private fund/public fund leverage ratios.
Why is estimating the potential volume of private capital important? Internationally, Saudi Arabia, along with its Gulf Arab allies, is engaged in an existential struggle with Iran (and its ally Russia).
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