Rich oil nations on a shopping spree, step up investment abroad

Rich oil nations on a shopping spree, step up investment abroad

Washington: Flush with petrodollars, oil-producing countries have embarked on a global shopping spree.

With a bold outlay of $7.5 billion (Rs29,775 crore), the Abu Dhabi Investment Authority is about to become one of the largest shareholders in Citigroup Inc. The bank had already experienced the petrodollar’s clout this month when another major shareholder, Prince Walid bin Talal of Saudi Arabia, cleared the way for the ouster of its chief executive, Charles O. Prince III.

Meanwhile, the Dubai stock exchange is negotiating for 20% of a newly merged company, which includes Nasdaq Stock Market Inc. and the operator of stock markets in the Nordic ­region.

Qatar, like Dubai a sheikdom in the Persian Gulf, might compete for the same deal. Dubai, which has little oil but is part of the region’s energy economy, in late October also bought part of Och-Ziff Capital Management Group Llc., a major hedge fund in New York.

Abu Dhabi this month bought a stake in Advanced Micro Devices Inc., the chip maker, and in September bought into the Carlyle Group, a private equity giant.

Experts estimate that oil-rich nations have a $4 trillion cache of petrodollar investments around the globe. With oil prices likely to stay in the stratosphere, that number could increase rapidly.

“If you look at Gulf countries, they have a total common economy that is about the size of the Netherlands," said Edward Morse, chief energy economist of Lehman Brothers Holdings Inc. “These are tiny countries, but they have to place collectively more than $5 billion a week from their oil revenues. It’s not an easy thing to do."

The explosion in investment has set up some of its own cross currents. While the recent decline in the value of the dollar is making investment in the US cheaper, many investors are holding back out of fear that the dollar will decline further, diminishing the worth of their dollar holdings.

Many oil investors are also worried about a potential political reaction in the US similar to the furor of last year when Dubai tried to acquire a company that operates US ports. European leaders worry that Russia is using its oil revenues to snatch up pipelines and other energy infrastructure in their region.

Opportunity trail

Such concerns appear to be driving investments to other parts of the world, many analysts say. “The investments are diversifying outside the US, although the US still has the bulk of it," said Diana Farrell, director of the McKinsey Global Institute, a research arm of McKinsey & Co. consulting firm, which calculated in October that petrodollar investments reached $3.4 trillion to $3.8 trillion at the end of 2006.

“Europe is a prime target," Farrell added, “but at least 25% of foreign investments from the Persian Gulf are in Asia, the West Asia and North ­Africa."

Although oil-producing countries have been looking at investments in the West since the 1970s, their strategies back then were largely confined to safe assets with a low return, such as US treasury debt.

By 2001, with the collapse in oil prices, many of the oil exporters had depleted their dollar reserves, economists say. But the boom in oil prices in the last five years, culminating in oil hovering near $100 a barrel, has changed all that. It has convinced oil producers to set up or expand “sovereign wealth funds" as vehicles to invest in the West, in their own economies and emerging markets in a far more aggressive way than in the past.

Other petrodollar investments are made through government-owned corporations, private corporations and private individuals such as Prince Walid, who owns large shares not only of Citigroup but also of News Corp., Procter & Gamble Co., Hewlett-Packard Development Co. Lp., PepsiCo Inc., Time Warner Inc., and Walt Disney Co.

The oil-rich nations also are investing more in real estate, private equity funds and hedge funds, analysts said, and increasingly they are investing the money on their own, bypassing the major financial institutions of the US and Europe.

“The oil-producing countries simply cannot absorb the amount of wealth they are generating," said J. Robinson West, chairman of PFC Energy. “We are seeing a transfer of wealth of historic dimensions. It is not just Qatar and Abu Dhabi. Investment funds are being set up in places such as Kazakhstan and Equatorial Guinea."

Precise figures of the global picture in petrodollars are not easy to come by, in part because the big investors in the Persian Gulf and elsewhere are not obliged to disclose their portfolios or activities.‘

Challenges, opportunities

Some investment deals have fallen through, to the embarrassment of all sides. This year Qatar sought to do a leveraged buyout of a retailer in Britain, the J Sainsbury Plc. supermarket chain.

After starting the bid in July, Qatar faced concerns from unions, the Sainsbury family and others over whether the Qataris wanted Britain’s third largest grocery chain just for the underlying real estate and whether the company could survive the amount of debt being incurred.

The deal fell through three weeks ago, when Qatar said that the global credit crunch made the borrowing costs too high.

Like the credit crunch of recent months, the decline in the dollar has introduced new uncertainties into predicting petrodollar investment patterns.

C. Fred Bergsten, director of the Peterson Institute of International Economics—a think tank on international economic policy, said that while some countries in the Gulf were trying to diversify their investments away from the dollar and into euros and pounds sterling, the Saudis were trying to quell that trend out of fear that the dollar will decline further and diminishing the value of their assets.

A measure of discord over the dollar became apparent at the Organization of the Petroleum Exporting Countries meeting in Riyadh this month. Iran and Venezuela, the two biggest political foes of the US among the oil producers, complained that oil was being sold in a currency whose value was eroding by the day.