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Featured Commentary

Sovereign Wealth Funds: 21st Century “New Deals”

By Michael B. Likosky, principal, Social Risks, LLC; reader in international economic law, School for Oriental and African Studies. Michael Shtender-Auerbach, managing director and CEO, Social Risks, LLC. Original Commentary for Middle East Bulletin

posted on 03/28/08

Many Americans understand government budgets through the lens of home economics. Anxiety over the logic of personal debts is projected onto national balance sheets. Public debates over Sovereign Wealth Funds (SWFs) are no exception. As when banks repossess houses, Americans fear that large percentages of U.S. national debt held by Chinese, Middle Eastern, and Russian funds will mean foreign control over our national policies. This fear is similar to the anxiety caused by Saudi Arabian investments in the broadcasting sector in the 1980s. Instead of simply eliciting fear, SWFs should be tools that provide an opportunity to shore up U.S. and European economic interests and build twenty-first century “New Deals” in the Middle East and beyond.

The buoyancy of the fully-industrialized economies may depend upon the willingness of SWFs to recycle U.S. and European sovereign debt and to share in petrodollar-financed opportunities. Our firm has developed a number of products for the U.S. investment bank community as they begin to assess their social risk in relation to business with SWFs. In private consultations with many investment banks over the last year, the over-arching concern that many bankers have expressed is an anxiety about being closed out of economic opportunities in developing countries because of the comparative liquidity of the SWFs. One banker recently told us how it is impossible to compete with Chinese and Indian institutions which can simply write no-strings-attached checks out of their bank accounts for massive projects.

Integrating Western financial institutions with the SWFs may solve an important economic problem. SWF capital infusions into these institutions would allow a convergence of economic interests and most likely increasingly integrated investment portfolios. Such a convergence would lead to an opening up of economic opportunities for Western institutions. U.S. and European banks and companies could potentially capitalize on massive social and environmental development programs in the Middle East, China, and Africa which are financed by the sovereign wealth funds. As a banker at a leading Japanese firm told us, his country’s banks are increasingly seeking out exactly these sorts of economic opportunities through strategic integration into Chinese financial institutions.

Increasingly, well-trodden, bombastic debates over conditions placed on loans or debt relief by International Monetary Fund and Washington Consensus lending programs are taking a new twist. Rather than deride these conditionalities, Middle East governments and the SWFs see them as a central feature of their own national economic development programs. Thus, oil profits are being reinvested into national development plans which bear strong resemblance to the once foreign-imposed conditionalities.

Moreover, SWFs are driving utopian development schemes in the Middle East. In doing so, they are partnering with U.S. and European firms. Media companies like Warner Brothers, educational institutions like New York University and Cornell Medical Center, and high-tech firms like Microsoft have embarked on petrodollar financed national development efforts in Qatar, Saudi Arabia, and Abu Dhabi. With the financial bailouts of the U.S. and European banks by SWFs, it only seems more likely that the United States will take part in these grand society schemes. If all goes well, these petrodollar plans will create twenty-first century "New Deals."

While international financial institutions and Western governments hash out how to regulate, control, and increase transparency of SWFs, focus must not only be on taxation rates and ascertaining the motives of these funds. Although concerns are undoubtedly important, it is equally important for the U.S. and European economies to take advantage of liquidity and to channel these scarce financial resources into the sort of large-scale, ambitious, and economically promising plans being pursued in the Middle East.

Fully-industrialized countries should also benefit from recycled petrodollars and debt, an example of which we see in Dubai Ports’ massive investment in South Carolinian infrastructure and industry, creating jobs and hopefully jumpstarting a long-ignored moribund regional economy. All are hopeful that this partnership will succeed.

The concerns over how SWFs may influence U.S. national security and governance are indeed overblown. The global economy has increasingly become dependent on the vast wealth controlled by sovereign funds—wealth that in no small part is due to the rising cost of oil directly related to U.S. military adventurism in the Middle East. Rather than bridle and cry foul, U.S. investors and companies should continue to work with SWFs to drive a resurgence of Middle Eastern economies through our own peculiar ability to grow new economies and also, in turn, together do the same at home.