LONDON, 14 January 2008 — Those who own and control capital, call the shots. This was the adage that formed the backbone, albeit very often with the comfort and security of gunboat diplomacy, of British, American and European imperialism in the halcyon days of the 19th and 20th centuries.
With the relentless march of globalization at the onset of the 21st century, we are led to believe that the world order, well at least as far as capital ownership is concerned, is changing, especially with the rise of sovereign wealth funds (SWFs) from the Gulf Cooperation Council (GCC) countries, China and Singapore.
According to estimates by Morgan Stanley, the total assets of nine SWFs owned by the UAE, Singapore, Saudi Arabia, Kuwait, China, Libya, Algeria and Qatar amount to a staggering $2.19681 trillion, of which $1,465 trillion is owned by the SWFs in four GCC countries; and $1.5576 trillion is owned by six Arab League countries including the above-mentioned four GCC states. According to Morgan Stanley estimates, the total assets of these SWFs are projected to rise to $12 trillion by 2015.
These figures of course do not include quasi-sovereign funds and private liquidity, which could easily add another $2 trillion to the total value of assets controlled by the above countries. In fact, in many respect it is the likes of Kingdom Holdings, run by Prince Waleed Bin Talal and companies those run by the Russian oligarchs such as Roman Abramovich and others; Indian tycoons such as the Tatas and Mittals, that have a headstart on their SWF counterparts. Kingdom Holdings, for instance, has owned a sizeable minority stake in Citigroup valued at nearly $20 billion.
Both the SWFs, the quasi-sovereign funds and private liquidity — normally risk-averse — have traditionally found a safe home for their spare cash in US and European treasury bonds. But these have been under-performing in terms of returns. In fact, the current US budget deficit is underwritten by China and Japan investments in US treasuries to the tune of hundreds of billions of dollars.
Some analysts in the West talk about a reversal in fortunes of countries and societies that only a few decades ago were considered to be poor and backward by the West. They talk about a reverse imperialism or even an inverse imperialism. Such notions are at best gross oversimplifications and at worst dangerous misconceptions.
It is remarkable that a mere collapse of the subprime US mortgage market, albeit dodgy investments but not surprising due to the inherent avaricious nature of capitalism, should lead to a credit crunch which is threatening to undermine the very Western banking system, which has for centuries been the mainstay of Western hegemony of the global order.
Is capitalism so fickle that Western fund managers should be fair-weather friends in efforts to save even their very own system? The G-7 central banks in early December 2007 decided to inject over $500 billion into the money markets to ensure that the global banking majors have access to funds, which only a few weeks ago they were bereft of. With the result, the London Interbank Offered Rate (LIBOR), the rate at which banks lend to each other, for instance, has been steadily falling. At 20 December 2007, 3-Month LIBOR fell to 6.144 percent from 6.206 percent.
But true to their own narrow interests, banking majors and fund managers are refusing even to invest in the $100 billion US Treasury Secretary’s Henry Paulson’s rescue fund to mitigate the impact of the subprime mortgage crisis on Wall Street and European banks. The Master-Enhanced Liquidity Conduit (M-LEC), the euphemism for the bailout fund, is in danger of being abandoned, because perceived shareholder interests and preservation seems to be overriding the bigger picture of national and international interests and stability.
Capitalism may be in a crisis, but it is far from being down and out. The danger for the likes of the GCC countries, China and even Singapore is that of complacency and harboring a false sense of power in helping to bail out the cream of Western capitalism — the Western financials.
For the Achillies heel of these countries is governance and politics. A truly free market is only compatible with a truly democratic system of governance, where it is not only the economic and financial markets that play an important role, but also the political, social and cultural dimensions.
China is a communist country masquerading as a pseudo-capitalist market. The GCC states are absolute monarchies with pseudo-capitalist markets. Even Singapore is an authoritarian one-party democracy with a highly managed market economy. In all of these countries the markets do not operate as classical markets but as interventionist conduits and tools; and where alternative management of the markets as a political choice, is nigh impossible.
Over the last two years GIC (the Singapore Government Investment arm) and a Saudi SWF have invested just under $10 billion in UBS; Temasek (another state-run Singapore investment company run by Ho Ching, the wife of the Singapore prime minister) owns about $8.5 billion in Standard Chartered Bank; the Abu Dhabi Investment Authority (ADIA) has a $7.5 billion stake in Citigroup; Dubai International Capital has a substantial stake in HSBC; Merril Lynch is in advanced talks with Temasek to inject $5 billion in the troubled bank; Istithmar (the investment arm of the UAE ruling families) has a $1 billion stake in Standard Chartered; China development Bank has a 3.1 percent stake in Barclays valued at $3.1 billion; Citic recently bought a 6 percent stake valued at $1 billion in Bear Stearns; China Investment Corporation has a $3 billion stake in Blackstone; Dubai Group and Qatar Investment Authority own stakes in the London Stock Exchange; and DIFC owns a stake in Deutsche Bank.
While many of these investments are minority ones, they seem to be politically tolerated for the moment because they are not considered to be strategic investments. Some of them have been approved only in name and are still awaiting final political go-ahead from regulators and governments. For instance, the $4 billion takeover of the Nordic stock market operator OMX, which operates bourses in Copenhagen, Helsinki, Stockholm, Reykjavik, Riga, Tallinn and Vilnius, by Borse Dubai in September 2007 is currently subject to a US national security review. “We are going to take a good look at it as to whether it has any national security implications involved in the transaction,” President George W. Bush said at the time the deal was finalised. US Sen. Charles E. Schumer, chairman of the Joint Economic Committee and a senior member of the Senate Banking Committee, reportedly expressed doubts about the deal, saying it “will raise serious questions that will need to be answered.”
Under the complex deal, Borse Dubai proceeds with its $4 billion takeover of OMX, only to sell all its shares in OMX to NASDAQ. In return, Borse Dubai receives a 20 percent stake in NASDAQ; and acquires NASDAQ’s 28 percent stake in the London Stock Exchange (LSE). NASDAQ has a further option of taking a 33 percent stake in the Dubai International Financial Exchange (DIFX), to be renamed NASDAQ DIFX.
The last time a Dubai entity bought a major British/European company with strategic infrastructure assets in the US, there was a groundswell of political opposition in the US, bordering on the chauvinistic, to GCC investment in perceived strategic assets such as ports and airports.
The deal in question was the $3.5 billion takeover by Dubai Ports of the UK’s shipping giant, P&O, who also managed several ports in the US. Dubai Ports was forced to divest from the US assets as a condition for the acquisition of P&O. Some Americans did not want Gulf Arabs to manage their ports supposedly because of security concerns.
The latest spate of bailouts such as UBS and Merrill Lynch has precipitated renewed concern in the US and Europe over the swamping of Western financial institutions by investment from the emerging countries.
Both the US and UK governments have stressed that there needs to be more transparency and disclosure about these funds; and notions of shareholder equality, which they say are alien to the non-democratic control of these funds.
While there may be merits in the intellectual argument, this sounds as yet another manifestation of back-door protectionism on the part of the West, whose own imperial control of global capital and resources in the last two centuries had more to do with might and hegemony than the niceties of democratic principles. There is of course the ultimate sanction — the so-called financial war against terrorism and security concerns. Never mind the provisions of the WTO nor bilateral agreements. Even an irrational and chauvinistic fear of the domination by non-Western capital of your financial institutions can be dressed up as “security and national interest.”
