Official U.S. Warms to Asian, Middle Eastern Government-Linked Funds

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THE SUB-PRIME mortgage debacle has forced U.S. political leaders to revise their attitudes toward what are known as sovereign wealth funds, with likely consequences for its future relationship with cash-rich Middle Eastern and Asian states.

Washington generally has been very wary of any foreign government gaining a potential position of political influence within U.S. borders (with the notable exception of Israel's, whose politicians come and go and interact with sympathetic groups with ease). This wariness has extended to investment by institutions that are controlled or entirely owned by foreign governments.

Not only political leaders, but also many American citizens, worry that such sovereign wealth funds could be used as instruments for acquiring influence over U.S. policymaking, gaining control over national assets, and subordinating the legitimate commercial role of companies in which they gain a stake to their owner state's political interests.

American perspectives on sovereign wealth funds also have been shaped by the status historically given to private enterprise. U.S. overseas investment has been undertaken by private companies, either setting up entities in other countries or buying into existing firms. These are considered to be legitimate business practices which do not not impinge on politics-this despite the fact that U.S. corporations have repeatedly involved themselves in politics when it has suited them, such as when Firestone used its clout in Liberia's economy in 1947 to persuade its government to reverse its stated position of opposition to the partition of Palestine.

Most of the world's other countries do not share this perspective, however, in part because they have more of a history of the state taking a direct hand in the economy. Among the more extreme examples in the modern world are countries that are or were under a formal system of state management, particularly China; and the major oil-exporting countries, which have managed much of the wealth generated by oil sales through state-controlled enterprises. A complication in the latter case has been the interlocking relationship in Gulf Arab countries between traditional ruling families and the state: the distinction between the two can be unclear at times.

Such countries argue that their government-linked funds are legitimate enterprises that do not engage in politics, which they say they keep separate from business. In the past U.S. administrations were reluctant to accept these assurances, but this position has been eroded under the Bush administration, whose tax cuts and military spending have created a growing dependence upon foreign countries continuing to do business and save money in U.S. dollars. Prominent among those countries are the abovementioned China, first and foremost, and the Arab oil-exporting states of the Gulf.

The sub-prime mortgage woes of the past year created a need for more foreign capital and less choosiness about its ownership. In October 2007, China's Citic Securities and Bear Stearns, the fifth largest U.S. securities firm, agreed to invest $1 billion in each other as part of an alliance to further their business in Asia. In November, the Abu Dhabi Investment Authority, the largest sovereign wealth fund in the world, with estimated assets of $650 billion, agreed to buy a $7.5 billion stake in Citigroup. In December, China Investment Corp bought a $5 billion stake in the second largest U.S. securities firm, Morgan Stanley.

It all seems a far cry from what happened when Dubai-based DP World announced its wish to acquire P&O Steam Navigation Co in 2006. Congress insisted on examining the proposed deal because of the danger it was said to pose to U.S. security. Visions of Arab terrorists swarming ashore as the country's defenses were undermined in the six ports covered by the deal were enough to scupper it.

The record of institutions and companies linked to the ruling families and states of the Gulf countries shows that they have consistently put business before politics in making investments in the U. …