U.S. Watches Nervously as Oil-Rich Nations Invest

Sovereign Wealth i i

hide captionGovernments made rich by high oil prices have amassed huge funds of cash ready to be invested in the U.S. and around the world. These investment funds, on their own, would represent some of the largest economies in the world.

Lindsay Mangum, NPR
Sovereign Wealth

Governments made rich by high oil prices have amassed huge funds of cash ready to be invested in the U.S. and around the world. These investment funds, on their own, would represent some of the largest economies in the world.

Lindsay Mangum, NPR

Earlier this week, the government of Abu Dhabi bought the single-largest ownership share of the massive U.S. bank Citigroup. Not long ago, the Chinese government bought a large stake in the Blackstone Group, a major U.S. private-equity investor.

Some in Washington and on Wall Street are worried about the sudden prominence of investment funds owned and controlled by foreign governments.

The numbers are staggering. The government of Singapore has nearly half a trillion dollars that it is ready to spend on investments. Abu Dhabi has possibly more than $800 billion.

How big are these numbers?

"Half a trillion dollars is the amount of money that the U.S. has to spend to import all the oil that it needs during an entire year, with oil at $100 [per gallon]," explains Brad Setser of the Council on Foreign Relations.

Abu Dhabi could use its investment fund to buy all the oil that the U.S. uses in a year, and it would still have more than $300 billion left to play around with.

Because oil prices have been so high, most oil-exporting countries have amassed huge surpluses of cash. Some, like Venezuela, are mostly spending that money. Others are keeping it safe in their central banks. But some, like Abu Dhabi, Kuwait and Russia, are putting their oil profits in something called a sovereign wealth fund, an investment vehicle used to buy attractive-looking assets around the world.

"The rise of sovereign wealth funds represents a shift in power from the U.S. to a group of countries that aren't transparent, aren't democracies and aren't necessarily U.S. allies," Setser says.

When asked if somebody with a trillion dollars could put the U.S. into a recession, Setser said yes.

And that's the fear. These governments might use their huge investments to wreak havoc on the U.S. economy or on the world economy. Setser says it wouldn't be terribly hard to do. They could, for example, slowly buy up a lot of U.S. dollars or U.S. treasury bills and then sell them all in one day.

The Fed would have no choice but to raise interest rates to defend the dollar, Setser says, even though that would make a weak economy even weaker.

But Preston Keat of the Eurasia Group says that's not a realistic scenario.

"It's a context of mutual dependence," Keat says. "Blowing somebody else up does you at least as much financial damage."

Abu Dhabi and Russia and the rest have these investment funds for one basic reason," Keat says. "What these countries want to do is make money."

In a sense, Keat says, they're acting like any other bank or investment fund: They're looking for better returns. They want more money so they can maintain their power base. So, even if these foreign governments decided that for political reasons, they'd like to damage the United States, they have enormous economic incentives to make sure the U.S. and other Western economies hum along at a healthy clip.

"If they're invested in the New York or London or Tokyo exchanges in a bunch of companies," Keat says, "they obviously want those companies to do well."

Keat says you can hear some in Washington spelling out doomsday scenarios in which foreigners use their money to destroy our way of life. That almost certainly won't happen, he says.

But there are concerns. Keat says that China, for example, is using its wealth to ingratiate itself with some really lousy governments in Africa. Other countries have been known to use investments as a way of learning technological secrets.

But, he says, no matter what, we have to accept that emerging economies will continue to grow in wealth and importance.

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