The dismissal of Saudi Arabia's top military chiefs and defence officials by King Salman will create uncertainty for contractors, but opportunities too.
Saudi Arabia's King Salman dismissed the military's chief of staff, General Abdul Rahman bin Saleh al-Bunyan, the heads of ground forces and air defences and other senior commanders and defence officials in a series of late-night royal decrees on Monday, 27 February.
No reason was given but the purge is likely a response to the lack of progress by Saudi forces combatting Houthi insurgents in neighbouring Yemen.
Officers loyal to Crown Prince Mohammed bin Salman, the country's effective head of government, are likely to be promoted to fill key positions.
The conflict against Houthi rebels in Yemen is nearing the end of its third year, during which insurgents have staged missile attacks on Saudi cities and airports.
Bin Salman, who is also first deputy prime minister and defence minister, is likely responsible for recent shake-ups in Saudi Arabia. Last November, numerous wealthy, politically connected figures including members of the house of al-Saud, the country's royal family were detained at Riyadh's Ritz-Carlton hotel over claims of corruption and misuse of power.
The purge of leading military commanders and defence officials has urgent commercial implications for defence contractors operating in Saudi Arabia. Business relations had already been thrown into a state of flux following last November's targeting of prominent Saudi figures and the latest events could herald renewed uncertainty.
This could delay procurement, impacting defence contractors revenue as the end of the financial year approaches, orders and share prices, and have a knock-on effect on pension funds tracked against defence companies.
Risks and opportunities
Most foreign contractors in the kingdom use local Arab consultants, agents or fixers to win and retain business. These middlemen rely on personal networks to navigate Saudi Arabias opaque public-sector procurement process. The purge of military figures could disrupt the networks of patronage that allow these intermediaries to function.
Managers should contact their local agents as soon as possible to clarify the extent to which their contacts risk being ousted. But they should recognise that information flow could be distorted or restricted, either by the Saudi government or by their in-country partners, who have a strong incentive to downplay any loss of influence.
While some companies face risks if their local agents suddenly lose influence, the purge also provides defence contractors with a lucrative opportunity to exploit the disruption faced by market incumbents.
When re-establishing procurement ties, ethical and legal obligations surrounding the due diligence of business partners should not be overlooked, as this would put companies at grave risk of penalties from Western extraterritorial anti-corruption legislation. Companies could also be investigated by Saudi regulators under anti-corruption laws, particularly as the current anti-corruption drive gives wide political cover for officials to take action against businesses.
This will affect operational budgets, as companies will have to undertake new compliance and due diligence reports on such individuals.