Oil-Rich Sheikhs Run for Cover [View All]

The ruler of Abu Dhabi in the 1960s, Sheikh Shakbut, used to keep the wealth of his oil-rich emirate in a wooden chest because he didn't believe in banks. As global markets endure another pounding following the collapse of Lehman Brothers, Shakbut's descendants are coming round to the same view.

The Gulf funds have lost their appetite for shares in distressed Western banks, and as oil prices plummet, there's growing pressure to sell down foreign investments to refocus on the huge cost of protecting and diversifying the region's oil-dependent economies. This can only spell more bad news for international markets.

One of the most recent big bank investments by a Middle East oil fund was the Kuwait Investment Authority's purchase early this year of a stake in Merrill Lynch, just sold for a song to Bank of America. Gulf funds are major holders of stock in Citigroup, Credit Suisse, HSBC, Standard Chartered and Barclays, all investments showing big paper losses. The Abu Dhabi Investment Authority had about two-thirds of its $900 billion hoard locked into U.S. assets at the start of the year.

Gulf states have $2.3 trillion worth of infrastructure projects either underway or in development, according to Middle East Economic Digest, much of which still has to be financed. If oil prices fall further below $100 a barrel, states will be hard-pressed to find that funding without tapping their cash reserves.

And with the risk the credit crisis may yet hit local financial institutions hard, domestic calls on the funds' resources could increase. At the very least, there's pressure to boost local stock markets in which foreign investors have lost confidence. Share prices on the Dubai Financial Market have fallen 32% so far this year. The region's hereditary rulers know investing more at home will be both politically shrewd and economically necessary if oil revenues slide.

From: WSJ