from Follow the Money

With a lag, the financial world notices how rich the oil exporters have become …

December 20, 2006

Blog Post
Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

More on:

Financial Markets

The Economist did a big feature on petrodollars.   Breaking views and a host of financial columnists have hinted that Hank Paulson should have paid a visit to Riyahd as well as Beijing.  The BIS attracted a bit of attention with an article indicating the dollar share of some oil exporters bank deposits was heading down.  And a fairly recent FT Lex column revealed one of the financial world’s worst kept secrets:  a bunch of London hedge fund managers (and equity fund managers) would like to get their hands on a larger fraction of the world’s petrodollars.

2% of $500 billion (or some small share of it) is kind of interesting.   No matter if some hedge funds aren’t delivering the kind of performance needed to justify their fees.  There are plenty of ways of betting on the dollar that don’t involve giving Goldman’s Global Alpha fund 2% of your money and 20% of the (not always present) upside. 

I have spent a lot of time trying to track down data on petrodollars recently.   I am well aware of the gaps in the data – gaps that make it hard to know exactly what the big oil funds are doing.     We don’t know a lot of things.  But I think we still know a few things.  And while Lex got some things right, I also suspect Lex may have missed a few nuances. 

That is telling: if the leading financial column in the leading financial paper of the financial world’s capital for petrodollar recycling isn't picking up on these nuances, it is probably fair to say that knowledge about petrodollars now significantly lags interest in petrodollars  … 

Lex argued that Russia’s oil stabilization funds' dollars are overwhelmingly in Treasuries.   The London Times reports something similar. 

The Government has stowed $83 billion in petrodollars in its Stabilisation Fund, which the central bank manages and is invested entirely in AAA-rated US Treasury bills.”

The FT and the London Times are presumably working off the same source.  They don't, however, entirely agree.  The FT reports – I think correctly – that the stabilization fund isn't all in Treasuries but rather is split between high-quality euro and pound bonds and high-quality US Treasuries.

But I was still a bit surprised that both reported that Russia has lots of Treasury bills. 

That may be true, but it isn’t the story that emerges from the US data.   Russia doesn’t appear at all on the most recent list of major foreign holders of US Treasuries.  

The last Treasury survey of foreign portfolio investment in the US did note that, as of the June 2005, $61.956b of Russia’s $61.966b of short-term debt was in Agencies, and $12.878 of its $14.416b of long-term debt was in Agencies.   I think it is a bizarre Cold war holdover: Russia doesn’t tend to like financing the US Treasury directly. 

It of course is possible Russia has shifted from short-term Agencies to short-term Treasuries since the last survey.   But if it did so, it did so in ways that didn’t appear in the US data.  The available data suggests that Russia has dramatically increased its deposits (these could be custodial holdings) in the international banking system while running down its US custodial holdings. 

OK, Agencies are pretty close substitutes for Treasuries.  In a broad sense, Lex got that part of the story right:  Russia’s oil fund holds a diverse set of currencies, but it portfolio is otherwise very conservative, with no equities and very few longer-term bonds.   

That may change. The Russians are dividing the oil stabilization fund into two.  

More importantly,  plenty of oil funds that already do have substantial equity holdings.

Norway’s government fund is also diversified, currency wise.   And it is split between bonds and equities.    The Norwegians are ultra-transparent.  They not only tell you’re their basic portfolio composition, but they tell you the outside managers they use!  As of September, 40% of the Government fund’s 1712.3b krone (@$263b of assets) were in equities.   

The Abu Dhabi Investment Authority is not as transparent.   But most people think a large share of its exceptionally large (at least if rumors are to be believed portfolio) is in equities.     Probably around 50%.   And most people also think ADIA has more than twice as much money as Norway’s government fund.

KIA (Kuwait’s investment authority) and QIA (Qatar’s investment authority) both have equity portfolios.  If nothing else, they own a bit of ICBC.   I don’t have a good sense of the equity market share of their portfolio, but it is likely to be substantial. 

Who doesn’t hold equities, apart from Russia?

Libya.  Its money is clearly on deposit in the international banking system.   

And the Saudis.  At least the Saudi’s central bank. 

I suspect SAMA holds more dollars and a bit more long-term debt than the Russians – it has been increasing its securities holdings while holding its bank deposits constant.  SAMA also probably makes greater use of external fund managers than the Russian central bank.  But given that it is structured as a central bank not an investment, and given that about its foreign assets come from the government’s foreign currency deposits, I doubt it has much equity market exposure. 

Then again, SAMA isn’t the only entity in Saudi Arabia that has petrodollars.   Most of the Saudi surplus shows up on SAMA’s balance sheet, but certainly not all.    Other folks in Saudi Arabia are adding to their foreign assets.   And at least some folks in Saudi are rumored to have built up substantial fortunes in the last oil boom.  Those fortunes presumably are also at least partially in equity markets.  Or in private equity …

In aggregate, though, the oil exporters invest a higher fraction of their surplus in equities than say China.   Norway exports about 3mbd of oil a day, and it deposited about $50b in its government pension fund.   Kuwait, Qatar and Abu Dhabi collectively exported at least two times as much oil and gas as Norway, so it seems reasonable to think they added about as much to their oil investment funds even if they rely on oil revenue to fund current spending far more than Norway does.   

If $100b was put into Norway’s GPF, ADIA, KIA and QIA in 2006 and 50% of that influx was invested in equities, oil exporters provided a $50b inflow into the world’s stock markets.  That is conservative – it ignores a host of “private outflows” that likely flowed at least partially into equities.  

That said, the foreign assets of Russia’s central bank and SAMA will increase by about $200b this year – far more than the increase in the foreign assets of the smaller oil exporters.   And all that increase is going into short-term debt (Agencies if not Treasuries), bank deposits and government bonds.  

And there a lot of smaller oil exporters with bulging central bank balance sheets as well.  Think of Libya, Algeria and Nigeria.  I don’t think they are buying equities.   

And even if Norway, Abu Dhabi, Kuwait and Qatar invested $50b in the world’s equity markets, they also invested at least $50b in the world’s bond markets.

All said, I would bet that $400b of the oil exporters $500b plus surplus has flowed into bank accounts or debt.  The broad story Lex told was right, even I would quibble with some of the details. 

 

That is a big reason why folks are talking of a shortage of fixed income assets.   And a big reason why it is easy for private equity funds to gear up and buy public companies.

And it is pretty clear that the external managers now employed by say the Kazahk oil fund -- and no doubt many others -- are more than happy to try their hand managing some of the oil world’s big bucks. 

Russia, Saudi Arabia … are you listening?

More on:

Financial Markets

Close