From Oslo to Doha, Riyadh to Moscow, governments that rode crude’s historic rise to unprecedented wealth are now being forced to start repatriating their rainy- day funds just to make ends meet.
The halving of oil to less than $50 a barrel has the potential to alter one of the most powerful economic and political forces of the past half century: the rise of the petrostate. These countries led a surge in state investments in the U.S. and Europe that now totals about $7.3 trillion globally, according to the Sovereign Wealth Fund Institute.
During the last boom, the oil countries flaunted their wealth abroad by buying stakes in iconic companies such as Barclays Plc as well as trophy assets including Manhattan hotels, European soccer clubs and London luxury homes, often in the face of opposition from the local public.
Such swagger is fading.
The biggest fund, Norway’s, this week said it expects to tap its $820 billion stockpile for the first time next year to balance its budget, following similar moves across the Persian Gulf and in Russia. If sustained, the withdrawals may be felt by investors the world over, according to Michael Maduell, president of the Las Vegas-based Sovereign Wealth Fund Institute.
“If the wealth funds of Norway and the Gulf countries begin to slowly pull out, it will have an impact on financial markets,” Maduell said by e-mail.
Looking ahead, TheCityUK, a lobby group for the financial services industry in London, expects sovereign-fund assets will increase by just 4 percent in 2015 to $7.4 trillion, well below the 12 percent average annual growth seen over the previous five years.
The amount of petrodollar investments in the five years through 2014 was on a similar scale to the Federal Reserve’s bond-buying program, known as quantitative easing, according to analysts at Barclays. As the flows have reversed, the world has lost about $400 billion in annual demand for financial assets, they said.
Nowhere is the decline more evident than in Saudi Arabia. The kingdom’s foreign holdings fell for the seventh month in a row in August to $654.5 billion, the lowest since February 2013, according to data from the Saudi Arabian Monetary Agency. The oil slump has spurred the biggest Arab economy to search for savings, contemplate project delays and sell bonds for the first time since 2007.
“Any continued weakness in the international oil price could prompt some oil-exporting countries to divert money from sovereign wealth funds to bolster their fiscal positions,” Anjalika Bardalai, deputy chief economist at TheCityUK, said by e-mail.
Other Gulf monarchies that have spent lavishly on public works to ensure the loyalty of their populations — United Arab Emirates, Kuwait and Qatar among them — have all announced initiatives to preserve cash as the price drop in crude saps growth.
Abu Dhabi, home to the $773 billion Abu Dhabi Investment Authority, is reassessing its largest state companies with an eye toward selling assets, four people with knowledge of the matter said. The government and its entities have been running down reserves and withdrawing deposits from banks to fund their spending.
Qatar Investment Authority, which owns stakes in companies including Glencore Plc and Volkswagen AG, this week sold a stake in French construction company Vinci SA valued at about $400 million, just two months after it sold two London office buildings worth more than 550 million pounds ($842 million).
The Qatari owners of Italy’s Valentino Fashion Group SpA are exploring options including an initial public offering of the maker of $3,000 handbags, people with knowledge of the matter said yesterday.
In Europe, Norway plans to spend 208 billion kroner ($25.4 billion) of its oil wealth next year, topping the 204 billion kroner it predicts it will receive from offshore oil and gas fields, according to the 2016 budget. That implies a net withdrawal from the fund of 3.7 billion kroner, after an inflow of 38 billion kroner this year.
Russia, which is being squeezed both by lower commodity prices and sanctions imposed by the U.S. and the European Union over the conflict in Ukraine, expects to spend as much as 4.7 trillion rubles ($75 billion) of the Reserve Fund, one of its two oil funds, this year and next to weather its first recession in six years. The two funds, which are invested mainly in U.S. and European government bonds, held the equivalent of $144 billion on Oct. 1, according to the Finance Ministry in Moscow.
Neighboring Kazakhstan, the second-largest oil producer in the former Soviet Union, plans to use about $4 billion of its $69 billion fund to support its economy this year.
To be sure, sovereign funds aren’t just retrenching. Norway’s, for example, in search of higher returns, opened an office in Tokyo this week as the government in Oslo considers increasing the fund’s cap on investments in stocks from the current 60 percent.
And Qatar’s fund has expressed interest in buying a minority stake in Glencore’s agriculture business, according to three people familiar with the matter. The Qatar Investment Authority said last week it opened an office in New York and plans to invest $35 billion in the U.S. over the next five years to diversify its holdings.
“The view now is that oil prices are going to remain low for longer, so oil-producing states are having to look at both how to maximize revenue and how to reduce spending,” Monica Malik, chief economist at Abu Dhabi Commercial Bank PJSC, said by phone. “This trend will continue into 2016.”