Elephants in the Room
Nations Are Wielding Their Sovereign Wealth Funds as Tools of Power
Interconnective tissue binds Russia, Arab state-owned investment funds, and Middle Eastern countries undergoing rapid transformations.
A year ago, in Seychelles, an Indian Ocean archipelago, the leader of the United Arab Emirates arranged a secret meeting between Erik Prince — founder of the security firm Blackwater, Trump supporter, and brother of Education Secretary Betsy DeVos — and Kirill Dmitriev, head of the Russian Direct Investment Fund (RDIF), which is Russia’s sovereign wealth fund. As reported by the Washington Post and inferred by members of the House Intelligence Committee, the purpose of the meeting was to set up backchannel communications between then President-elect Donald Trump and Moscow.
While much has been written on the relevance of this meeting to the investigation into the Trump campaign’s collusion with Russia, there is another, more consequential aspect to it that deserves attention: the use of sovereign wealth funds as a tool of national power. The changing regional power dynamics between Russia and the Arab world has injected geopolitics into the strategic decision-making of the Gulf Cooperation Council (GCC) members’ sovereign wealth funds in a way that should concern policymakers and international investors.
According to the Sovereign Wealth Fund Institute, the funds of Saudi Arabia, the United Arab Emirates, Qatar, and Kuwait have a combined $2.8 trillion in assets under management. These governments are using their national wealth as a strategic tool of power projection as never before and blurring the line between economic and political decision-making. The Arab Spring, the potency of extremist movements, and the attendant conflicts in Syria, Iraq, Yemen, and Libya have given new saliency to the perennial concerns of regime stability and have compelled Arab rulers to take enhanced measures to protect themselves. Concerns about America’s regional staying power, Russia’s expansive military and diplomatic role in regional affairs, and Iranian influence have transformed the GCC into a new front in great power competition, which regional leaders must take into account.
Added to this mix is a new generation of leaders: Millennials now rule Qatar and Saudi Arabia. The UAE has been governed by an exceptionally forward-looking and interventionist leadership for over ten years. These leaders are not content to let others fight their battles for them. They are both adept at and inclined to use all elements of national power — economic, political, and military — in integrated and aggressive ways to protect their interests.
In the case of Russia, the Gulf states are using sovereign investments as leverage to advance their respective equities with regard to Iran, Syria, Yemen, and Libya; as a hedge against great power competition in the region; and as a political tool in the context of their intra-GCC rivalries.
In 2011, Russia established the RDIF, with seed capital of $10 billion. Since then, Gulf sovereign wealth funds have set aside at least $20 billion for investment in Russia. These placements include $10 billion by Saudi Arabia’s Public Investment Fund, $5 billion from Abu Dhabi’s department of finance, $2 billion by the Qatar Investment Authority, and $1 billion by the UAE’S Mubadala. In addition to its $2 billion commitment to RDIF, the Qatar Investment Authority has taken a 9.75 percent stake valued at $6.83 billion in Rosneft, an oil company controlled by the Russian government; a 24.9 percent stake in St. Petersburg’s Pulkovo Airport; and a $500 million stake in VTB, a Russian bank currently under international sanctions.
Even if allowances are made for sectorial and geographic diversification, the level of allocations to these markets is out of proportion to their size and viability.
Money and politics make a combustible mix: If you don’t get the formula right, it can blow up in your face. The geopolitical complexities of today’s Middle East can create significant issues of financial risk and legal liability for policymakers, corporate leadership, and the investment community. The UAE’s experience with Malaysia’s 1Malaysia Development Berhad (1MDB) and Abu Dhabi’s International Petroleum Investment Company (IPIC) is a case in point. In April 2017, 1MDB agreed to pay IPIC $1.2 billion to settle a complaint that it reneged on the terms of a bailout IPIC provided in 2015. In July 2017, investigators at the U.S. Department of Justice alleged that former officials from both IPIC and 1MDB had benefited from fraudulent financial transactions related to the investment.
Each sovereign wealth fund is different and needs to be understood in the context of the particular transaction being entered into. Comprehensive and accurate information about a fund and how it operates is a must. Some sovereign wealth funds have been formed with potentially conflicting incentives, not only to make profitable investments, but also to further political and social objectives. Others can be used for political purposes even though that is not their mandate, which can cause a fundamental divergence between the interests of the sovereign wealth funds and those of other purely economic investors.
In this climate, policymakers and investors would do well to understand better the interconnective tissue that binds Russia, Arab sovereign wealth funds, and Middle Eastern states undergoing rapid transformations.
Correction, Jan. 16, 2018: A previous version of this article incorrectly referred to VTB as RDIF’s parent. Rather, RDIF was spun off from VEB, or Vnesheconombank, in 2011.