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Tuesday, 11 October 2011

Sovereign Wealth and Ruler Loot

The mobility of capital, depending on one’s position, is a virtue or a vice. Since the onset of the Arab Spring, a lot of money has been moving in, out, and around the Middle East. In the classic liberal world, the mobility of money is governed by the market. In the real world however, politics has a say. Some of these politics have been about fear as Saudi and Emirati rulers have reportedly opened their checkbooks to assuage pressures on favored rulers and foment trouble for others. These moves did not come as much of a surprise. But somewhat more unexpected and commented upon by the media have been the responses of Western authorities essentially treating Libya’s sovereign wealth in the same manner as Mubarak’s and Ben Ali’s loot. Here is what is known from media reports.

First out of the gate, even ahead of post-revolutionary Tunisian and Egyptian requests, Swiss officials froze Ben Ali’s and Mubarak’s assets including those of close allies and family members. Clearly, the Swiss were weary of being the poster child for offshore laundering. The European Union and the United Nations eventually followed suit, but Washington has yet to respond publically to Cairo’s requests. However in the case of Libya, the US Treasury went further, utilizing a Soviet-sounding Ford Administration law, the International Emergency Economic Powers Act, to freeze not only Qaddafi family assets but also billions of the Libyan Investment Authority (LIA). This extraordinary, first-ever seizure of a sovereign wealth fund (SWF) has implications not just for the sanctity of capital mobility but for the political health of the Gulf ruling families. After all, the bulk of their investments are held in the United States.

Because most of today’s SWFs operate like national security agencies, estimates of the location and size of their investments vary. However, the consensus is that Arab SWFs amount to around 1.5 trillion dollars or about half of all global SWF funds today. Oil exporters are the fourth largest holders of US Treasury Securities behind China, Japan, and the United Kingdom. It took some time to get to that level and like other firsts in the Gulf it started with Kuwait. In the 1950s, Kuwait established the first modern SWF in a small London office known as the Kuwait Investment Office (KIO), which later folded into the Kuwait Investment Authority (KIA) in 1982. Saudi Arabia, the United Arab Emirates, and Oman followed in these early years with their own funds. Yet all were exclusively staffed with outside management expertise and were generally low profile domestic actors who invested small percentages of annual oil profits into Western government bonds. This last decade witnessed a flurry of new Arab SWFs established by Qatar, Algeria, Bahrain, and Libya. Meanwhile, the big three funds—Saudi Arabia, Kuwait, and the UAE --grew to become the world’s largest, even spinning off subsidiary SWF--like vehicles such as Abu Dhabi’s Mubadala.