A demonstrator holds a picture of Saudi journalist Jamal Khashoggi during a protest at the Saudi Arabians consulate in Istanbul, Turkey. Picture: REUTERS/OSMAN ORSAL
A demonstrator holds a picture of Saudi journalist Jamal Khashoggi during a protest at the Saudi Arabians consulate in Istanbul, Turkey. Picture: REUTERS/OSMAN ORSAL

Saudi Arabia warned on Sunday it would retaliate against any sanctions imposed on the oil-rich kingdom over the disappearance of journalist Jamal Khashoggi, as the Riyadh stock market plunged on growing investor jitters.

From tech tycoons to media giants, a host of Western companies are distancing themselves from the Gulf state, imperilling Crown Prince Mohammed bin Salman’s much-hyped economic reform drive.

US President Donald Trump threatened ally Saudi Arabia on Saturday with "severe punishment" if Khashoggi, who has been critical of Prince Mohammed, was killed inside its Istanbul mission.

Riyadh, however, vowed to hit back against any action against it. "The kingdom affirms its total rejection of any threats or attempts to undermine it, whether through threats to impose economic sanctions or the use of political pressure," an official source said, quoted by state news agency SPA.

Riyadh would "respond to any action with a bigger one", he said, pointing out that the oil giant "plays an effective and vital role in the world economy".

As investors took fright, Saudi stocks tumbled by about 7% at one point on Sunday, wiping out their gains for 2018.

Business barons including British billionaire Richard Branson and Uber CEO Dara Khosrowshahi, as well as media powerhouses like Bloomberg and CNN, have pulled out of next week’s Future Investment Initiative in Riyadh, dubbed "Davos in the desert".

Khashoggi, a Washington Post contributor, vanished after entering the consulate on October 2 to obtain official documents for his upcoming marriage. Turkish officials have said they believe Khashoggi was killed inside the mission and claims have been leaked to media that he was tortured and even dismembered.

Hit squad

Saudi Arabia insists Khashoggi left the building safely and dismissed accusations that authorities had ordered his murder by a hit squad as "lies and baseless allegations".

The kingdom’s Tadawul all-share index (TASI) lost more than 500 points, diving 7% in the first two hours when trading resumed after the weekend, in panic selling reminiscent of the days after the global financial crisis in 2008. It later clawed back some losses to close down 3.5% at 7,266.59 points.

The index had already dropped 3% on Thursday, following a rout on world stock markets fuelled by worries about higher interest rates and Trump’s attacks on the US Federal Reserve.

Mohammed Zidan, market strategist at Thinkmarket in Dubai, said the drop in Saudi stocks was the result of panic selling because of several political and economic factors.

"There has been a kind of uncertainty surrounding the situation of the disappearance of Khashoggi which has caused the market to fall," Zidan said.

"The withdrawal of top participants from the Riyadh investment conference has also negatively impacted traders’ sentiment," he said.

The pullouts have cast a pall on the annual summit at which Prince Mohammed wowed investors in 2017 with talking robots and blueprints for a futuristic mega city.

The withdrawal of Uber’s Khosrowshahi from the event is particularly symbolic, as the kingdom’s vast Public Investment Fund has invested $3.5bn in the ride-hailing app.

Branson, who dropped two directorships linked to Saudi tourism projects around the Red Sea, said claims about Khashoggi’s disappearance would "change the ability of any of us in the West to do business with the Saudi government".

Global multinational corporations "see potential in a developing market like Saudi Arabia, but for many the reputational risk of being associated with the Future Investment Initiative outweighs the potential gains from the Saudi economy," said Michael Stephens, a Middle East expert at the Royal United Services Institute.

Washington lobbying firm Harbour group, which represented the Saudi government, has also terminated its $80,000 a month contract.

"We (have) ended the relationship," Richard Mintz, managing director of the firm, said.

The Saudi leadership faces "an acute public relations crisis" over Khashoggi’s disappearance, said consultancy group Eurasia. "The leadership will have to manage a more serious threat to its economic liberalisation strategy. At this point, Saudi Arabia will find it incredibly challenging to contain the emerging crisis," it said.