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US Treasury Makes Two Important Decisions
By Dr. Nimrod Raphaeli
03/24/2008

Officials from the US Treasury and the governments of Abu Dhabi and Singapore.

The US Treasury Department took two important decisions last week that could have significant impact on the economies at both ends of the Persian Gulf.

The first decision dealt with sovereign wealth funds (SWFs). These funds represent government-owned investment vehicles, funded by foreign exchange assets and commodity export receipts (primarily oil and gas revenues) which invest internationally for financial objectives such as stabilization and intergenerational savings.

The foreign government-controlled funds-many based in the Middle East but also in Asia (e.g., Singapore, Malaysia, and Taiwan), Russia and China-have aroused U.S. Congressional concern because they control hundreds of billions of dollars and have recently poured billions into large stakes in Wall Street firms (Citigroup and Merrill Lynch come to mind) and other businesses and, in the worlds of Gulf News (UAE), fanned fears that the US was “losing control over its destiny.”

This concern arises from the funds’ mode of operation, their apparent lack of transparency and the absence of information on the size of their wealth, as government-owned SWFs have no shareholders to contend with and no taxes to pay.

Last week, the United States, Abu Dhabi and Singapore-two countries with large SWFs and a country, the US, receiving investment from SWFs-reached an agreement that defines the obligations of both the owners of SWFs and their investment targets.

Obligations of SWFs:

  • Investment decisions should be based solely on commercial grounds, rather than on the geopolitical goals of the controlling government.
  • Disclosure in areas such as purpose, investment objectives, institutional arrangements, and financial information.
  • Strong governance structures, internal controls, and operations and risk management systems.
  • Fair competition with the private sector.
  • Respect of the host-country’s regulatory system.

Against these requirements, countries receiving SWF investment should:

  • Not erect protectionist barriers to foreign direct investment.
  • Ensure a predictable investment framework.
  • Not discriminate amongst investors.

By choosing to negotiate with Abu Dhabi (the largest of the seven emirates of the United Arab Emirates) and Singapore the Unites States has selected two small countries that maintain amicable relations with it but, more importantly, are not likely to pose any threat to its security. It was indicated that Qatar, a major natural gas exporter in the region with rapidly growing assets, might join the agreement.

It is not clear whether this agreement will be adopted by the European countries, particularly France and Germany, which have evinced public alarm with regard to the activities of SWFs. For the Europeans, but also for the United States, it is the burgeoning SWFs of Russia and China that are of prime concern. It would be difficult to argue that powers like China and Russia are countries that do not tie their investments to their geopolitical objectives. How to deal with SWFs from China and Russia will provide the ultimate test for the viability of the agreement negotiated by the Treasury.

The second decision of the Treasury is of a punitive nature. It is a warning against dealing with Iran’s central bank (Bank Markazi). The warning also underscores the risks of doing business with 51 state-owned and seven privately-held Iranian banks-in effect the entire banking system of the Islamic Republic. The list includes banks located as far from Tehran as Hong Kong, Venezuela and the UK and of course those nearby in Bahrain, Qatar and Dubai.

This warning expands on the sanctions approved recently by the UN Security Council, which listed by name three Iranian banks accused of funneling money to terrorist organizations and of facilitating the purchase of equipment connected to Iran’s nuclear program.

These punitive measures-should they even be respected-will crimp rather cripple Iran’s ability to transact business across its borders. Iran has learned ways to circumvent sanctions, and whenever cash is abundantly available, as is the case of Iran with bulging oil revenues, there will be ready takers, collaborators and sanction busters.

For the Iranians, proficient in the ways of the bazaar, where trading is a circuitous and mysterious art, it will always be possible to find the pathway to buy whatever they need. A purchase from overseas will, perhaps, cost more but it will not be out of reach.

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