General David Petraeus: Saudi Arabia is ‘gradually running out of money’

CNBC Exclusive: CNBC Transcript: General David Petraeus Speaks with CNBC‘s Hadley Gamble Today

General David Petraeus

Image source: CNBC Video Screenshot

WHEN: Today, Thursday, November 14, 2019

WHERE: ADIPEC conference in Abu Dhabi

The following is the unofficial transcript of a CNBC EXCLUSIVE interview with General David Petraeus and CNBC’s Hadley Gamble today, Thursday, November 14th from the ADIPEC conference in Abu Dhabi. The following is a link to video of the interview on CNBC.com:

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Hadley: That's right. I'm joined now by General David Petraeus. He is, of course, the chair of KKR Global Initiative, a four star U.S. general and the former director of the CIA. General, It's wonderful to be with you. Thanks so much for joining us today. I want to kick off by asking you about what we've seen from the White House in the last 24 hours. President Trump meeting with President Erdogan, giving him essentially 15 minutes of free air time to speak to an international audience.

Well, at the same time, there are such serious questions about the U.S. relationship today with Turkey. And you and I both know that it's very difficult to reconcile Russian s 400 system with the F thirty fives. Is the Turkish sort of strategy here endangering Americans and even Europe?

General David Petraeus: Well, obviously, there's a sensitive time in the relationship, not just between Turkey and the United States, but Turkey with its NATO partners writ large. The introduction of a Russian air defense system that will preclude Turkey from receiving the F35 is obviously not welcome. And I'm sure that some of the discussions that they've had have been to try to find a path forward where something could be done so that that system does not operate in the same time that the F 35 if it is allowed to be sold to Turkey.

Now, having been halted, that that could go forward. I hope that's the case. Turkey is a very, very important country to NATO. It's very geo strategically important in its positioning and a variety of different ways.

It's played an important role as a base for our aircraft and other assets in the region. So, again, I hope that this can be resolved. And I hope also that the issue of where Turkey's buffer zone into Syria will be is also mapped out so that we can then determine where our forces will be located in support of the Syrian Kurds, who are going to continue to get the proceeds from the oil production that is in northeastern Syria.

Hadley: The President has got a lot of flak for his decision with regards to the Kurds in the last several weeks. And in terms of protecting even the oil as well. You've said that that was a good decision in the past, but -.

General David Petraeus: Well, I said it was a good decision to go back. Yes. Again, I agree very strongly with Senator McConnell at the time who judge that this was a grave strategic mistake. And I strongly agreed with that.

It was equal parts, abandoning the Kurds, handing a victory to Iran and Russia, who are not our friends, rendering the large population essentially homeless, possibly refugees, a degree of ethnic displacement, if not ethnic cleansing, and perhaps most importantly of all, taking our eye off the Islamic State. Keep in mind that our mission there is not just to eliminate the caliphate that the Islamic State established in Iraq and Syria, which has been done and is a significant achievement. It's to achieve the enduring defeat of the Islamic State.

And there are still some twenty twenty five thousand fighters in that region. And we need to keep an eye on them in the way that we have done this is with a very small, modest sized U.S. force that is advising, assisting and enabling our Syrian Kurd partners and some Syrian Arabs in northeastern Syria to do that as we do the same with the Iraqi security forces to the east.

Hadley: Just a couple of weeks away from the NATO summit in London, that also, of course, coincides with the state visit as well. The president the question, of course, is how would you advise the NATO allies at this point? Because what we've seen from Turkey over the last several years is deeply concerning in terms of their foreign policy.

General David Petraeus: It is deeply concerning. And we have to be very forthright with our Turkish allies about that. I think that perhaps some hand look like they're well, a firm hand that has now been established that you will not have the F 35 if the Russian air defense system is operating in your country. And again, I suspect that deep down, Turkey is really wondering about the wisdom of that particular decision.

They will say perhaps that we didn't make the Patriot available enough. That's very arguable. But at this point, what you have to do is have a degree of strategic patience. It's vitally important, I think, for the alliance to keep Turkey as a member, not to allow a in an issue that is tactical almost in a sense with strategic consequences. But sure, surely should not be that which forces us to remove Turkey from the alliance or something along those lines.

We've got to work this out. It's going to take patient. It's going to take a lot of diplomacy behind the scenes, strategic dialog and so forth. And that is what I hope can be pursued. And again, also working out where is it that Turkey will be located within Syria, noting that they have had legitimate security concerns about the Kurds in Syria who do have a relationship with the Turkish Kurd Terrorist group P.K.K.

Hadley: You've talked a lot about the challenges facing this region. I want to ask you about some of the business opportunities as well. The Aramco IPO have sent a lot of speculation about just why the Saudis are pushing forward with this when it's pretty clear at this point that they're not going to get the 2 trillion dollar valuation that MBS was hoping for a few years ago when he announced the Vision 2030. How closely tied do you believe is the success of the Aramco IPO to his legitimacy as a leader?

General David Petraeus: Well, it's a number of different elements that will determine, if you will, the success of Vision 2030, which is very much his brainchild. He is the driving force behind this as the crown prince doing this for his father, the king. It's a fact that Saudi Arabia is gradually running out of money. I mean, they will be the first to acknowledge that the sovereign wealth fund has been reduced. It's somewhere below 500 billion dollars.

Now, the deficits each year, depending on the price of Brent crude, can be anywhere from 40 to 60 billion, also depending on some of their activities in countries in the region. But the bottom line is, again, they need the money. They need that outside investment that is crucial to delivering Vision 2030, which cannot be realized without outside investment. This is just one component of a number of different initiatives that they're pursuing to try to attract that outside investment.

Hadley: You've said in the past that you believe that the security of this region is very much underpinned by the security and stability of Saudi Arabia. There are a lot of people that would subscribe to that view. Joe Biden recently said, quote, that he sees very little social redeeming value in Mohammed bin Salman. Do you agree with that statement?

General David Petraeus: Well, what I would put forward is that it is in everyone's interest and I mean, the entire world, not just the countries of the region that the GCC countries, it's in everyone's interest to see Saudi Arabia succeed, to see it moderate a number of the practices. And there is that's another component to Vision 2030. We've seen this in a variety of different places and different issues. Certainly there have been some setbacks and some missteps. Some of them truly grievous. The horrific murder of Khashoggi being foremost among those.

But at the end of the day, we all want Saudi Arabia to succeed. For that to happen, the vision is 100 some element of that to be on board with that. And I don't think there is a member of Congress that wants to see Saudi Arabia fail. I think what they want to see are other changes in.

Hadley: Leadership changes?

General David Petraeus: Some of them certainly are seeking that. And again, what we what our focus should be on is, is the country moving in the direction that most observers believe is necessary for Saudi Arabia to be a success in the long run and to contribute to the region and the world in a way that is positive rather than destructive.

Hadley: You understand this region like few Americans, understand this region. Would you advise KKR to put money into Saudi Arabia?

Petraeus: We have looked at deals there in the past. I'm not aware of ones that we're looking for right now. I did pull out of Davos in the desert last year. This year there was a board meeting as well. We have put money in the region, as I think you know, we put two billion dollars into Abu Dhabi National Oil Company together with BlackRock, that also provided two billion dollars. That's the first direct investment by KKR in this region.

Hadley: The UAE but not money into Saudi.

General David Petraeus: We trust this government. We know Henry Kravis and I and others know the crown prince very well. We know Dr. Sultan, the CEO of ADNOK, very well. We have a lot of confidence. It was a complex deal, but that's what we do. And we think that this is a great partnership and we hope that it will lead to more.

We are looking elsewhere in the region, but as we do that, we evaluate not just the financial aspects of a deal, but also the geopolitical and security risks, the macro economic situation and the environmental, social and governance issues. And you have to have confidence in the rule of law. And what Saudi Arabia has to do is regain confidence of all the investors of the world so that it can attract the kind of outside investment that is necessary for Vision 2030 success.

Hadley: Still a lot more to talk about with General Petraeus Willem, but I'm going to hand it back over to you. General in terms of regaining that confidence. How would you advise the conference to do that?

General David Petraeus: Well, actions speak louder than words. We have seen some actions that have certainly given very serious pause. I mentioned the horrific murder of Khashoggi, but there's also been the Ritz affair. There have been other seemingly impulsive actions that have raised questions, I think, in the minds of investors.

And I know that from having talked to those who have examined investments in the kingdom. So, again, what there has to be is this a sustained period of actions that instills confidence in investors, that makes investors think and accept that lessons have been learned. That's what's necessary going forward. It's it's you can't have any more setbacks, any more grievous errors.

Hadley: In terms of what happens today in Iraq. We've seen weeks of protests over 300 people have died. Thousands have been injured. How did that make you feel as someone who spent such a significant portion of your career trying to effect a better life for that country?

General David Petraeus: Well, it makes me very sad, frankly. Again, look, I spent four years of my life in that country as a two star, three star, four star commander. I worked very hard for Iraq and for the Iraqi people through the surge. We gave them yet another opportunity to move forward and help rebuild the infrastructure in the energy arena. Physical roads, bridges, schools, clinics, everything to try to provide a better quality of life for the Iraqi people.

And I share the frustration that is being voiced on the streets that the second largest OPEC oil producer can't provide energy for its citizens 24 hours a day, that the land of the two rivers cannot provide adequate drinking water. That, again, many other basic services that one would expect are not to be found consistently throughout Iraq. And this is tragic and inexcusable. This country should be in much better shape than it is. And that's what you're seeing on the streets. I very much mourn for those who have been killed in the violence. I think that the security forces have been much too heavy handed. And keep in mind that these deaths generally create more outrage and create more protest and more demonstrations.

So, again, my hope is that the government takes this very, very seriously. I know the president Barham Salih very, very well. I know the prime minister Dr. Adil Abdul Madhi very well. I know the speaker. These are impressive individuals. And I hope that they can come to grips with the issues, recognize the seriousness of the moment, and promote the kind of reforms that can finally produce governance that actually provides the basic services that the people of Iraq deserve.

Hadley: Do see a way forward there in terms of getting Iran out of Iraq, because they seem pretty entrenched.

General David Petraeus: There is a very substantial Iranian influence and it's not surprising, I guess. However disappointing it may be that the head of the Quds Force, the Revolutionary Guards Corps, Quds Force General, Qasem Soleimani apparently is on scene in Baghdad brokering some of the negotiations. I mean, this should be about Iraq and Iraqis, not about what Iran wants. In fact, the people on the streets have been saying "Iran out".

Hadley: Does the international community have a role in this?

General David Petraeu: The international community does have a role, certainly. We have seen, for example, the special representative, the secretary general of the U.N., she just met with these senior religious figure in Iraq with Grand Ayatollah Sistani, made, I thought, quite a forthright statement after that particular meeting. Certainly the U.S. has been active behind the scenes. I think we have to be careful not to either appear or actually be too engaged in this, if you will, while certainly, again, promoting certain activities, the reforms, the other activities that are so necessary, again, to improve the lot in life of the Iraqi citizen, a country that by the resources that it has.

And again, it's not just oil and natural gas, it's also water, which no other oil producing country in the Gulf has. It's also tremendous farmland. It's the most sulfur in the world. Iraq is so blessed and yet because of the poor. Quality of the governance because of corruption, bureaucracy, inefficiency, poor management. The country is not realizing the quality of life at all. That they should be enjoying.

Hadley: And finally. When you take a step back and you look at this to the lens of an investor. The region has so many hotspots, including the protests in Lebanon, the inability to form a government there, at least the inability to form an effective government there. What's happening in Iraq today? A lot of worries, frankly, in this part of the world about the situation that's ongoing in Yemen as well and certainly what's happening in Syria from investor's lens. How dangerous do you consider what's happening across this region today?

General David Petraeus: Well, it's very worrisome. And again, as we look at investments and we have looked at investments throughout this region over the six and a half years that have been at KKR, which, by the way, is well over three times longer than any job I ever held in the military or at the CIA. As we look at these investments, we're not just looking at the potential financial opportunity. We're also evaluating risk and trying to mitigate the risks that exist, whether they're geopolitical, security, macro, economic, environmental, social governance, technology, innovation can actually cause risks for certain investments.

And that's what KKR does. We think maybe best in the world or certainly among the best in the world to make the whole brain come together, to bring it together, to make it work for the potential investment. And once we make the investment, we stay with it. We have management teams that are with it.

We provide the continued expertise that I've discussed and I'm privileged to be part of as the chairman of the KKR Global Institute and we haven't ruled out investing at all. Again, we're looking for more investment, so we're pure it out of peak for a reason. And we are in other countries along the Gulf for a reason. But we are not going to gamble with people's pension funds and college endowments and so forth that we are privileged to manage on their behalf.

Hadley: What's the risk if these governments can't manage to get it together? When we talk about what's happening in Lebanon, when we talk about having Iraq.

General David Petraeus: Well, I don't think you would talk about the region in aggregate other than to just say that it's a very complex time that there are numerous challenges. We haven't talked too much about the threats that Iran is pursuing in different countries, trying to Lebanon ize Iraq and Syria in the way that it has Lebanon sized Lebanon with muscle on the street in the form of militias power in the parliament. And it all of this to solidify the Shiite crescent. But there also, again, still Islamist extremists. There are rivalries within the JCC that we hope could be resolved. Then there are the demonstrations and the frustrations with the inadequate governance and some ongoing civil wars. So, yes, this is a very, very complex region.

And the challenges are perhaps the greatest that we've seen in many, many decades, if not longer. That doesn't mean you can't find investments. And again, KKR looks for complexity. It looks for challenge, because that's where the the tools that make us unique can all be brought to bear. And we can provide not just capital, but all of the other elements of the expertise that we have.

Hadley: General, thank you so much for joining CNBC.

General David Petraeus: Privilege to be with you, Hadley. Thank you.



About the Author

Jacob Wolinsky
Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Prior to ValueWalk, Jacob was VP of Business Development at SumZero. Prior to SumZero, Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver