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The petrodollars poser
Richard Orange, The Business
Who do you turn to when you’ve got more money to invest than you know what to do with?

From the glittering wave-shaped tower that houses the Abu Dhabi Investment Authority (Adia), investment director Jean-Paul Villain faces the kind of dilemma which other fund managers would die for: there is so much money pouring into his coffers that he doesn’t really know what to do with it.

With close to $700bn (E560bn, £380bn) under management, Adia is probably the world’s largest investment fund. The price of oil is down 25% since its peak during last summer and is now hovering just below $60 a barrel. Even so, Abu Dhabi is earning more than $3bn a month and almost all of these petrodollars are entrusted to Villain, arguably one of the most powerful French citizens on earth.

Finding profitable places to invest that kind of sum takes unceasing inventiveness. While the Chinese and Japanese, who also hold vast dollar reserves, are content to pile up US Treasury bills, Adia has been luring the world’s most talented investment professionals to its headquarters on the Abu Dhabi seafront for at least a decade now.

Other investment funds of the oil-rich Gulf Cooperation Council (GCC) are just as keen for maximum returns – and almost as wealthy. The Kuwait Investment Authority (KIA), the Saudi Arabian Monetary Authority, the Qatar Investment Authority (QIA), and Dubai International Capital are all flush with cash, thanks to their countries’ combined current account surplus of $587bn between 2005 and 2007.

For London’s financiers, this is great news. The City has become the world’s central petrodollar recycling plant, where oil dollars are invested, lent or traded and pumped back into the global economy. Petrodollars have emerged as one of the key drivers of the international equity markets, as well as the a main source of liquidity and financing for hedge funds, private equity, currency traders and governments.

...Antipathy to America in the Middle East has helped London. Mohsin Khan, director of the Middle East at the International Monetary Fund (IMF), says: “They won’t shift away from the US and the UK because there are no other markets in the world with the liquidity to handle that amount of cash flow.”

But London has emerged as a staging post for Middle East investment into the US and for Arab buyers seeking to camouflage their identities. Gulf government agencies have always invested heavily in US treasury and agency bonds. But last year this investment more than halved to $40bn, whereas London institutions invested an extra $60bn.
(3 Jan 2007)
Good round up of what the petrodollars are buying up in the UK -AF

US single biggest recipient of petrodollars -study
Reuters
The United States was the single biggest recipient of investments from oil exporters between 2003-2006, according to a Federal Reserve Bank of New York study released on Wednesday.

With oil revenues, or so-called petrodollars, expected to have reached about $968 billion in 2006 from around $300 billion in 2002, NY Fed analysts Matthew Higgins, Thomas Klitgaard, and Robert Lerman said investments by oil exporters in U.S. assets likely totaled about $314 billion between 2003-2006.

The $314 billion invested in the United States represented less than one-fourth of the more than $1.3 trillion oil exporters invested globally over the three-year period, the largest investment so far.

The figures suggested that oil exporters' windfall "whether directly or indirectly" has increasingly financed the large and growing U.S. current account deficit, the analysts said.
(3 Jan 2007)

Petrodollar power poses a bigger threat than China
Steve Burrell, The Age
A high-powered US delegation, led by Treasury Secretary Henry Paulson, and including Federal Reserve chairman Ben Bernanke, was in Beijing last week to pressure China to reduce its $US200 billion ($A256 billion) annual current account surplus and accelerate the freeing-up of the yuan.

But it is like there are two elephants in the room and we only choose to see one. As a number of analysts, including ANZ chief economist Saul Eslake, are now pointing out, while all eyes are on China, another big and potentially more destabilising force in the global economy is emerging, what The Economist magazine dubbed "Petrodollar Power".

This is the capital market flip side of the oil price surge that has pumped up the trade revenues and foreign asset holdings of Middle East oil powers and other producers such as Russia.

This new pool of petrodollars has added to the large amount of money sloshing around the global financial system that is helping propel sharemarkets and property prices. It is also pumping liquidity into hedge funds and the private equity behind takeovers sweeping the Australian corporate landscape.

...The Economist, citing the IMF figures, says the cumulative surpluses of the oil exporters will be about $US1.7 trillion in the five years to next year, dwarfing China's $US700 billion.
(19 Dec 2006)

Russia opts for some roulette with mighty petrodollar fund
Julian Evans, The Australian
THE Russian Government is considering hiring a foreign manager for a proposed oil-and-gas fund that it hopes will eventually account for 60 per cent of its GDP, or about $US500 at present estimates, a source at the Ministry of Finance has told The Times.

It would be one of the biggest funds in the world. The Government has stowed $US83 billion in petrodollars in its Stabilisation Fund, which the central bank manages and is invested entirely in AAA-rated US Treasury bills.

However, the ministry wants to take more risks with its money. It is proposing that the Government set up two new funds, including a reserve fund, accounting for 7 per cent to 10 per cent of GDP, which, a ministry source said would probably be managed by the central bank. However, it would be allowed to invest in all investment-grade assets. The fund would be used to manage oil price shocks.

The second fund would be a savings fund and, eventually, it would account for 60 per cent of GDP, according to sources.
(16 Dec 2006)
Emphasis added. -AF