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The Gulf’s Financial Tidal Wave

I write from Riyadh, near the center of Saudi Arabia, having driven across the Saudi desert following meetings and a …

I write from Riyadh, near the center of Saudi Arabia, having driven across the Saudi desert following meetings and a wonderful lunch at the headquarters of Saudi Aramco, the largest oil company in the world. I drove to Dhahran, which is in eastern Saudi Arabia, from the island of Bahrain, crossing the aquamarine waters of the Persian Gulf on the 25- kilometer King Fahd Causeway. I am traveling the Gulf-Abu Dhabi and Dubai in the United Arab Emirates (UAE), Kuwait and later Qatar in addition to Bahrain and Saudi Arabia-discussing corporate strategy with the major energy companies and large investment groups. The focus is on their interest in making investments and doing business in China.

Gulf countries now hold more than $1.5 trillion in foreign assets. Fed by insatiable oil demand combined counter intuitively with record oil prices, their accounts are forecasted to swell to $2 trillion in 2009. What happens when the world’s largest pool of investable capital links with the world’s largest population and fastest-growing large economy? Nothing less than a tectonic shift in global power. All economic players, especially American and European companies, will need to adapt to the nexus of the Gulf and China.

While I cannot reveal confidential conversations, I can offer my observations. If you are in business, you should pay attention.

Gulf State Perspectives

The Gulf Cooperation Council (GCC) is the regional trade bloc comprising Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE. Catalyzed by Saudi Arabia in 1981 for mutual protection during the Iran-Iraq war, the GCC’s mission is economic and social coordination.

Saudi Arabia dominates; its size, over 829,900 square miles, is like that of Texas, California, Montana, Oregon, Michigan and New York combined. It is 3,280 times larger than Bahrain (which is about one-sixth the size of Rhode Island). The UAE is about the size of South Carolina, and Kuwait is smaller than New Jersey; however, much of the region is uninhabitable desert. It is startling to see what Dubai, one of the seven emirates in the UAE and smaller than Connecticut, has accomplished with its ports, hubs, spectacular buildings and ocean developments, even while it has largely exhausted its oil.

The Saudi population tops 27 million; the UAE’s, 4.5 million; Kuwait‘s, a little over 3 million; Bahrain‘s, barely 700,000. Gulf countries control almost one-half of all the proven oil reserves of the entire world-an accident of geological history with profound geopolitical significance. The Gulf’s vast and accreting liquid wealth is now the most concentrated and centralized in world history. Saudi Arabia‘s GDP is about $350 billion; UAE’s, $168 billion; Kuwait‘s, about $100 billion; Qatar‘s, over $50 billion; Bahrain‘s, $16 billion.

GDPs per capita, uneven among the states (with Qatar the leader), are among the highest in the world, the arithmetic result of massive oil revenues divided by modest local populations. Oil reserves and revenues are wildly asymmetrical. Abu Dhabi, largest of the seven UAE emirates and barely larger than West Virginia, controls about 95 percent of the country’s oil, which is almost 10 percent that of the world.

Gulf State Characteristics

While traveling, I spoke with senior executives and ordinary people. Here are highlights of what I learned:

  • Dramatic though uneven transformation of desert towns into hypermodern cities is happening so rapidly that it can seem both miraculous and superficial.
  • Strong Muslim beliefs, sensibilities and sensitivities pervade society (e.g., in the holy month of Ra ma dan, people are required to fast during daylight hours, and it is socially inappropriate to eat in public).
  • There is deep respect for tradition and profound loyalty to one’s family or clan.
  • The gracious, unexcelled hosting of Arab societies is exemplified. (Arabic food is one of the world’s great cuisines.)
  • Conspicuous consumption is flaunted in certain areas; luxury brands predominate.
  • Financial thinking is increasingly long term, with the major oil states setting aside and investing revenues for future generations.
  • A conviction that world economics is shifting to Asia, especially to China.
  • Creativity and innovation infuses urban design (e.g., in Dubai, the arresting mega-projects, including the Burj Al Arab Hotel, artificial islands and the world’s tallest building; in Abu Dhabi, Zaha Hadid’s breathtaking Performing Arts Center).
  • Large numbers of immigrants, primarily from South Asia, are creating a stratified society. (This is not uniform: In Dubai, immigrants do virtually all the blue-collar jobs; where as in Bahrain, more locals do this work.)
  • Strong rivalries exist, both intercountry (e.g., Bahrain vs. Dubai as financial centers) and intracountry (e.g., Abu Dhabi vs. Dubai in the UAE).
  • Each country now has its own airline, with Emirates Airline (Dubai) and Etihad Airways (Abu Dhabi) located within the same country (UAE).
  • Bahrain and Dubai are freer socially; Islamic law is less restrictive; each has hundreds of financial institutions.

Leading Companies

State-owned Saudi Aramco has expanded internationally in the U.S., China, Japan, Singapore, South Korea, Malaysia, the Philippines and Europe and controls over 25 percent of the world’s proven oil reserves. State-owned Kuwait Petroleum, which controls 10 percent of the world’s oil, is focusing on Asia to grow its global business.

Saudi Basic Industries Corp. (SABIC), owned 70 percent by the Saudi government, is the largest listed company in the Middle East and the largest petrochemical company in the world by market cap. SABIC recently acquired GE Plastics, a subsidiary of General Electric, for $11.6 billion. Headquartered in Pittsfield, Mass., the business was renamed SABIC Innovative Plastics. The little-known Abu Dhabi Investment Authority, known as ADIA, is responsible for investing Abu Dhabi‘s surplus funds. Said to control over $650 billion in assets, ADIA is the second largest institutional investor in the world behind the Central Bank of Japan. The recently formed Abu Dhabi Investment Council, chaired by Sheikh Khalifa bin Zayed Al Nahyan, UAE president and ruler of Abu Dhabi, is investing incremental oil revenues locally (e.g., banks) and abroad (i.e., private equity) to build a diversified portfolio.

The Kuwait Investment Authority, with over $200 billion, has two parts: The General Reserve Fund receives all revenues, and the Future Generations Fund was established to support Kuwaitis when oil reserves decline. Each year, 10 percent of state revenues are transferred to the Future Generations Fund, which includes a 1.7 percent stake in BP (the British oil group), 6.9 percent of German carmaker Daimler AG, (Mercedes-Benz), and a $750 million stake in the IPO of Industrial and Commercial Bank of China (China’s largest bank).

Kingdom Holding, Saudi Prince Alwaleed bin Talal bin Alsaud’s investment company, takes major positions in large multinationals. It owns 5 percent of Apple Computer, News Corp. and Time Warner, and it is the largest shareholder of Citigroup. In addition, Kingdom Holding takes control positions, particularly of trophy properties, including 100 percent of the Four Seasons Hotel in Lon don, 50 percent of the Four Seasons George V in Paris, and 49 percent of the Plaza Hotel in New York.

Bahrain is the home of two innovative investment groups: Investcorp, which has done deals with a combinedvalue of $38 billion, and Arcapita, with branches in London, Atlanta and Singapore as well as Bahrain, which has completed 60 transactions with a combined value of over $19 billion. Their business model is to secure transactions with their own balance sheets-quick decision-making exploits opportunistic situations-and then to syndicate the equity to their 1,000+ clients in the Gulf region.

In 2006, Arcapita surprised the financial world with its $4.2 billion acquisition of Viridian Group, the Northern Ireland-based electricity utility. Atif A. Abdulmalik, CEO of Arcapita and a U.S.-trained CPA, is effervescent and confident as his plans for international investments now shift toward Asia.

Istithmar (Arabic for “investment”), established in 2003 to manage the funds of Sheikh Mohammed bin Rashid Al Maktoum, ruler of Dubai, focuses on private equity, real estate and other alternative investments. The company purchased the Queen Eliza beth 2 ocean liner and turned it into a luxury floating hotel in Dubai. Its re cent 100 percent acquisition of Barney’s New York for almost $1 billion was not expected. How could a UAE-based investment company manage a New York-based luxury retailer of de – signer brands? I discovered strategic vision here be cause Dubai is positioning itself as a world center of designer brands.

Significance for Business

Consider the global economic impact of the Gulf:

  • Financial markets will be increasingly affected by these huge funds, including the pricing of mergers and acquisitions.
  • Business markets in the Gulf are becoming a world center for luxury brands and services. (The most common car in Dubai seems to be a Porsche Cayenne.)
  • Situated between Europe and Asia, Gulf cities are becoming hubs for travel, logistics and distribution.
  • Gulf companies or investors may become your partner (e.g., Kuwait‘s investment in Daimler AG) or your owner (e.g., Istithmar’s acquisition of Barney’s New York and SABIC’s of GE Plastics). I do not alert you to this financial tidal wave as some kind of warning. Nothing will stop it; the rise of the Gulf is a reality. I’m just letting you know so you can adapt.

Robert Lawrence Kuhn, an international investment banker and corporate strategist, is senior adviser to Citigroup. He is co-editor-in-chief of China’s Banking and Financial Markets: The Internal Report of the Chinese Government and author of The Man Who Changed China: The Life and Legacy of Jiang Zemin.

Read more Dr. Kuhn’s articles describing and explaining investment banking

About robert lawrence kuhn

Dr. Robert Lawrence Kuhn is an international corporate strategist, investment banker and expert on China. Since 1989, he has worked with China’s senior leaders and advised the Chinese government on matters of economic policy, industrial policy, mergers and acquisitions, science and technology, media and culture, Sino-U.S. relations, and a variety of international business matters. Dr. Kuhn advises leading multinational companies, CEOs and C-Suite executives, regarding formulating and implementing China strategies in a variety of sectors, including science and technology, energy and resources, industrial, media and entertainment, healthcare / medical / pharmaceuticals, consumer products, and financial services. He works with major Chinese companies on structuring their capital markets financing and M&A activities.