Uncle Sam and the merchant of Arabia

ND Batra
The Statesman, 5 December

With the rise of crude oil to $90-100 a barrel, the camel is overloaded with the greenback. And there is no better place for the Arab merchant to unload his petrodollars than to lend it Americans who juggle their daily lives between credit cards and debit cards, home equity loans and foreclosures. But it is not only the Joe Six-pack who is in trouble. His lenders too are sleepless.

Like other American financial institutions, Citigroup, the global financial giant, has been reeling under billions of dollars mortgage-and-subprime related losses. The Citigroup board, instead of responding to merger overtures from other financial institutions, went in search of Arab petrodollars and obtained $7.5 billion cash flow from the Abu Dhabi Investment Authority, the government’s sovereign wealth fund, for a 4.9 per cent equity stake plus 11 per cent annual interest rate, making it one of the biggest investors in the bank.

In this age of globalisation, you might say, so what? Not everyone seems to be happy about the Citigroup deal with the Arab merchant. In an editorial titled “Citi of Arabia”, The Wall Street Journal wrote: “We hate to spoil the party, but it strikes us as unfortunate, if not a tragedy, that America’s largest bank had to go hat in hand to the Arab sheikhs because of bad management and blundering US monetary policy.” Many transnational corporations and international businesses try to develop an early awareness system, which picks up weak signals that might become a raging storm later. An early awareness system helps prepare a company to nip the evil in the bud. But American financial institutions did not foresee any sign of trouble.

Nobody understood what havoc subprime lending might create.
Nor does anybody fully understand how the global wealth is shifting to other regions. Irwin Stelzer, director of economic policy studies at the Hudson Institute wrote in Times Online: “The world has changed. Wealth has moved into new hands. Morgan Stanley estimates that the world’s sovereign wealth funds hold some $2.5 trillion in assets, more than the global hedge-fund industry.

And they are adding about $500 billion to their assets every year. One Goldman Sachs banker told me that until recently he had never been to West Asia; now he makes several trips each month.” The widespread hostility against globalisation is unfortunately prevalent in the USA. In the Internet age, there is a tremendous mobility of factors from foreign direct investment to job outsourcing to state-controlled sovereign wealth funds equity investment. In this sense the world, instead of becoming flat as The New York Times columnist Tom Friedman believes, is rather developing peaks and valleys, dungeons and dragons. The fear of “MacDonaldisation” is being replaced by the fear of secretive Arab and Chinese sovereign wealth funds and state-controlled companies nibbling at American assets, which are becoming cheaper to acquire, thanks to the fall of the dollar.

The Arabs own 10 per cent of Citigroup and their voice will eventually be heard in the boardroom. Recently, Dubai and Abu Dhabi made significant investments in Advanced Micro Devices, a leading semiconductor company that handles many defence contracts. Globalisation is a dynamic process of creating interdependencies in economics, international trade and culture, and is likely to create instabilities. It is much more than bilateralism because a country has to be opened to the flow of influences from all around.

Transnational corporations stride the world like a colossus. Their business depends upon their reputation, which makes them extremely vulnerable not only to the government of the host country but also to the news over which the government has no control, especially in a democratic society.

In authoritarian countries, where the news media is controlled by the government, transnational corporations have a much easier time doing business. That is one of the most important reasons transnational corporations find it easy to do business in China.

They have to deal with one authority, that of the central government. They don’t have to deal with environmental degradation, oil spills and uprooting of people without compensation to build new buildings. The news media plays no part and international NGOs have no say. And for the same reason, when a state-controlled Chinese company or an Arab sovereign wealth fund buys American assets, Americans become paranoid because of the lack of transparency.

The government’s impact upon economic activities is limited because in the global village there are so many actors, and the government cannot control all of them. Government has limited control over the mobility of capital. Key instruments of monetary and fiscal policy, exchange rates and import barriers are not totally under government control.
Globalisation creates comparative choices and highlights inefficiencies both in the government and corporations. But just as governments are constrained by forces beyond their control, so are transnational corporations.

Microsoft had to face anti-trust regulations both in the USA and the European Union. Similar controls might have to be applied to secretive sovereign wealth funds if they seek to buy assets in the USA and other open societies. A case in point is the Bank of Credit and Commerce International (BCCI), which explains why Americans are worried about the merchant of Arabia. In 1991, BCCI was found by regulators in the USA and the UK to have been involved in arms dealing, money laundering, bribery, support of terrorism, tax evasion, smuggling, illegal immigration and the sale of nuclear technologies. The Emir of Abu Dhabi, Sheikh Zayed bin Sultan Al Nahyan, the father of the present ruler, controlled the bank, which was closed after the investigation.
In this environment, corporate diplomacy is imperative. International corporations and sovereign wealth funds must become culturally attractive to host country publics. Unless sovereign wealth funds from West Asia and state-controlled global companies from the Middle Kingdom become transparent and publicly accountable, they must be watched and scrutinised.