DUBAI (Reuters) - Saudi Crown Prince Mohammed bin Salman may have been spared direct punishment after a U.S. intelligence report implicated him in the killing of dissident journalist Jamal Khashoggi, but he has not emerged unscathed. The declassified report, based on CIA intelligence, concludes that the prince approved an operation to “capture or kill” Khashoggi, who was murdered in the Saudi consulate in Istanbul in 2018. President Joe Biden’s decision to publish a report that his predecessor Donald Trump had set aside brings with it a broad refocusing of Washington’s stance on dealing with the kingdom, on its human rights record, and on its lucrative arms purchases. By pointing the finger so publicly at Prince Mohammed, the kingdom’s ruler in practice but not in name, Washington has also made it harder for its Western allies to deal with him directly. But while it may want to cut the 35-year-old crown prince down to size, Washington knows it can ill afford to break entirely with its oldest Arab ally and the main counterweight to Iran in the region. “What we’ve done ... is not to rupture the relationship but to recalibrate it to be more in line with our interests and our values,” Secretary of State Antony Blinken told reporters. Elisabeth Kendall, senior research fellow in Arabic & Islamic studies at the University of Oxford, said the report was “supremely embarrassing for Saudi Arabia” and “places other world leaders in the awkward position of having to decide if, when and how to continue dealing with the crown prince”. HUMAN RIGHTS IN FOCUS Prince Mohammed has denied any involvement in Khashoggi’s killing, for which eight people were jailed in Saudi Arabia last year, but has said he bears ultimate responsibility because it happened on his watch. The U.S. administration imposed sanctions on 76 Saudis, including close collaborators of the prince, sparing the crown prince himself. But Biden has indicated he will look more widely at human rights in Saudi Arabia, where the prince has crushed dissent and sidelined or even imprisoned rivals, including close relatives, in his drive to consolidate power. Biden said on Friday he had made it clear, in a call with King Salman, that killings of political opponents were not acceptable and that human rights abuses must be tackled. Already, two Saudi political activists with U.S. citizenship have been freed on bail pending trials. Prominent women’s rights activist Loujain al-Hathloul was also freed after nearly three years in prison, where her relatives said she had been tortured, something the authorities denied. A source familiar with Riyadh’s thinking said both moves were “part of leverage for a new relationship with the Biden administration”. The call to King Salman was evidence of Biden’s stated intention to revert to standard protocol by communicating with the ruler, not his heir. “It is just symbolic enough to show that Trump put Prince Mohammed in a position that he doesn’t deserve, not one that fits him, and it is time to put him back where he belongs,” said a Western diplomat in Riyadh. ARMS FOR OIL Biden may well go beyond the symbolic, as his administration has signalled that it may cancel arms sales to one of its biggest buyers if they pose human rights concerns, and limit future deals to “defensive” weapons only. Washington has also lifted Trump’s ban on dealing with the Iranian-backed Houthi movement that ousted a Saudi-supported government in Yemen and is now at war with Saudi forces and their allies. The war has left millions destitute and near starvation, and Washington wants it to end. Yet Biden must still tread carefully. King Salman is 85 and infirm, and his son may be in charge of the world’s top oil exporter - and an important ally against their common enemy, Iran - for decades. Neil Quilliam, associate fellow at the Chatham House think tank, said the report constituted “a strong rap on the knuckles” - but that, even with ties on a more formal footing, Washington would remain the kingdom’s main defence and security provider. The alliance dates back to 1945, when President Franklin D. Roosevelt met Saudi King Abdul Aziz Ibn Saud on a U.S. Navy cruiser and promised military protection in exchange for access to Saudi oil reserves. One Western diplomat in the Gulf said simply: “Joint interests will not be at risk.”