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

リンク: RGE - With a lag, the financial world notices how rich the oil exporters have become ….

Brad Setser | Dec 20, 2006
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?

Comments

After his disasterous performance in Beijing, hopefully "Helicopter" Ben Bernanke won't be travelling to Saudi Arabia or Kuwait to insult the guest nation hosts. One should avoid making enemies with the entire world :-)

Written by Dave Chiang on 2006-12-20 22:25:05
Dave: Well Helicopter Ben would never go to Arabia to exert "pressure" since it is one of our puppet regimes, to be coddled and indulged. It doesn't threaten to displace us strategically in the Middle East as does China in the Far East. China is viewed as a potential enemy to be nipped in the bud if possible. Since it isn't possible, Washington is in a tizzy about it. But the US is gradually finding out some of the limitations to its power. There will be more that it will be discovering in the future.

Written by Guest on 2006-12-21 05:19:42

Why is it so important to maintain the supremacy of US dollar hegemony in world markets, recycling petrodollars to earn profits from the oil industry, and the sale of military products to the Arab Gulf oil regimes. The unwritten agreement that the US has with the rulers of the oil states is that the oil will be priced in only US dollars, and in return the US will provide military protection for their survival. It is imperative for the strength of the US dollar that oil is priced only in US currency.

When oil is sold in US dollars, countries around the world need to maintain a certain level of US currency in the reserves of their central bank to finance their oil purchases. OPEC is a cartel created by the US specifically for this purpose. At the end of 2000, the Bank for International Settlements estimates world dollar reserves of $1.45 trillion, or 76% of the total world reserves of $1.09 trillion. If oil was priced in other currencies, most countries would have little need to stockpile dollars, and thus all the currency the US government has printed over the years would be of value only in the US. This would flood the country with dollars and cause huge inflation. In addition, current and future trade and current account deficits would no longer be financed by the foreigners who purchase American Treasury bills and other US-dominated debt instruments. In other words, the US would no longer be an economic superpower.

The Federal Reserve's greatest nightmare is that OPEC will switch from a dollar standard to a euro standard. Iraq actually made this switch under the previous regime. A major reason the Bush administration wants a puppet government in Iraq or more importantly, the reason why the corporate-military-industrial network wants a puppet government in Iraq is so that it will permanently revert back to a US dollar standard. Immediately after the Bush Administration invasion of that nation, the Iraqi Ministry of Energy announced a switch back from Euros to only US Dollars for the purchase of oil.

Written by Dave Chiang on 2006-12-21 06:19:46
Brad and Dave--The dollar hegemony is neither solely nor primarily based on the fact that oil prices are quoted in the dollar. It is based on more complex combination of military, economic, and technological factors.

At the same time, I freely admit that oil is strategically so important, that the US foreign policy is excessively influenced by oil consideration. Unless the US becomes serious on energy saving and alternative energy development, it will continue to be dependent on oil from middle east.

Written by HK on 2006-12-21 06:46:02

China central banker says Thailand is lesson on yuan appreciation
http://www.forbes.com/business/feeds/afx/2006/12/21/afx3273967.html

BEIJING (XFN-ASIA) - Thailand's recent financial turmoil holds lessons for China and shows that controls over the pace of currency appreciation are needed, a central bank researcher said.

Tang Xu, head of the research department at the People's Bank of China, suggested that the steep losses on the Bangkok stock market were due to a willingness by Thai authorities to let the baht rise too fast.

In a panel discussion late yesterday, Tang Xu suggested that the pace of baht appreciation was the culprit.

Written by Dave Chiang on 2006-12-21 08:31:31
I don't think I have ever argued that the fact that oil is priced in dollars is all that important (I suspect it matters, but not in the way that is normally argued/ the way DC argues -- it matters simply b/c if you are paid in $, you have to sell $ to maintain porfolio balance, and at times that may be hard for a big player).

I do think the fact that the oil states peg their currencies to the dollar, by contrast, matters.

In any case, does any one have better estimates for the portfolio composition of the $500b the oil states added to their foreign assets in 06? Is $100b equities/ $400b debt (securities/ bank deposits) about right? Is a $400b in reserves/ oil funds and $100b in "private" accounts split about right? Does any one have a view on the overall currency split -- with norway at under 50% $ and Russia at 50% (but reducing its $ allocation to putting less than 50% of new reserves into $), about $170b of the $500b is underweight dollars v. the global average. Say they bought $70b of $ and $100b of euros/ pounds and similar things.

Getting a 60/40 overall split therefore implies that the $330b of the oil surplus in the gulf/ north africa/ africa/ vennie has to be going overwhelmingly into $.

60% of $500b is $300b. So $230b of the $330 that isn't in the Russian central bank/ norwegian fund needs to be going into $. Is that plausible? Does anyone have an informed view?

Written by bsetser on 2006-12-21 10:41:19
"When oil is sold in US dollars, countries around the world need to maintain a certain level of US currency in the reserves of their central bank to finance their oil purchases."

No. Oil exporters and traders will take any hard currency. The reserves are held in dollars because dollars are attractive as a reserve asset for a variety of reasons. It is entirely possible to have oil priced in Euros and keep reserves in dollars or vice versa. It is a red herring to think that because oil is quoted in dollars that this somehow supports the dollar.

See my post "If Oil Were Priced in Euros" in the archive on Dec 12 at Angry Bear:

http://angrybear.blogspot.com/archives/2006_12_01_angrybear_archive.html

Written by Steve Kyle on 2006-12-21 10:44:46

There is an economics-textbook myth that foreign-exchange rates are determined by supply and demand based on market fundamentals. Economics tends to dismiss socio-political factors that shape market fundamentals that affect supply and demand. The current international finance architecture is based on the US dollar as the dominant reserve currency, which now accounts for 68 percent of global currency reserves, up from 51 percent a decade ago. US dollar hegemony, is created by the geopolitically constructed peculiarity that critical commodities, most notably oil, are denominated in dollars. Everyone accepts dollars because dollars can buy oil. The recycling of petro-dollars is the price the US has extracted from oil-producing countries for US tolerance of the oil-exporting cartel since 1973.

World trade is now a game in which the US produces dollars and the rest of the world produces things that dollars can buy. The world's interlinked economies no longer trade to capture a comparative advantage; they compete in exports to capture needed dollars to service dollar-denominated foreign debts and to accumulate dollar reserves to sustain the exchange value of their domestic currencies. To prevent speculative and manipulative attacks on their currencies, the world's central banks must acquire and hold dollar reserves in corresponding amounts to their currencies in circulation. The higher the market pressure to devalue a particular currency, the more dollar reserves its central bank must hold. By definition, dollar reserves must be invested in US assets, creating a capital-accounts surplus for the US economy. This arrangement, which Federal Reserve Board chairman Alan Greenspan proudly calls "US financial hegemony" in congressional testimony, has kept the US economy booming in the face of recurrent financial crises in the rest of the world.

Written by Dave Chiang on 2006-12-21 11:16:07
Brad
You seem to be making a very strong case for the "Yes, honey there IS a Savings Glut" argument, with all the implications for continuing asset price inflation. With accumulators of manufactured liquidty in general, and for SAMA & Russia in particular, there is truth to the old saw, "use it or lose it". Of course there is a 'fallacy of composition' here with the rub being: everyone can't "invest" all their petrodollars and trade surplusses into infrastructure and equities without creating even greater allocative distortions and potential dislocations than the housing "boom".

But it raises perplexing questions for asset pricing models as to what's "the right price" for assets under conditions of great uncertainty and pent-up inflation potential in BOTH wage & goods prices and especially asset prices. And yet the VIX hovers just above single-digits. Go figure...

Written by Cassandra on 2006-12-21 11:37:42
steve's comment (and post) are important -- I want to take it up at another point in time. I basically agree, but wonder to what extent the say Saudis are "stuck" holding dollars when the dollar is under pressure since:

a) they get paid in $
b) they are a big player who can move markets
c) they peg to the $
d) if they sell (even just to balance their portfolio) during times of stress, they can put more pressure on the $.

I think is a topic suitable for a full post, but haven't yet managed to write it ...

and i really do want informed comments on my estimates for the aggregate portfolio of the roughly $500b of foreign assets the oil exporters bought this year.

Written by bsetser on 2006-12-21 11:41:18

In reality, the entire Middle East is a powderkeg ready to blow. The handwriting is on the wall. The new Middle East order will be under Fundamentalist Shite control and domination. Not exactly what Bush and his Neo-cons expected before the Iraqi war. The Shites are uniting across the entire Middle East region, behind the new dominant power in Iran. There are a total of 140 million Shite people in the Middle East: Iran's Shiites along with Shiites in Pakistan and Afghanistan, the Shite majority in Iraq, the Shite-friendly government in Syria, Shite population in eastern Saudi Arabia, Hezbollah and the large Shite movement in Lebanon. Saudi Arabia's 5,000 royal family princes are corrupt and live decadent lives. The royal family's close association with the US has destroyed their credibility with the population. Unless the Bush Administration intends to murder all the Shites in a Nuclear Holocaust bloodbath, the Shites will sooner or later take control of the Middle East from Anglo-American hegemony. The Chinese are adroitly hedging their bets with close economic and political ties with Shite Iran to secure future energy supplies.

Written by Dave Chiang on 2006-12-21 12:37:21

Peple forget the link between the $$$ & oil, that as all oil is sold in $$$ THIS & THIS ALONE, is what enables the $$$ to retain its status as global reserve currency, used for 2/3 of global trade.

THIS allows the USA to simply PRINT $$$ to pass of the costs of its institutionalised hyperinflation (note the $8.5Trillion budget deficit, the $60Trillion accumalated other liabilities - Brookings Institute & most of all the $370Trillion derivatives mountain).

THIS position is backed up by a military costing more than the rest of the world's put together, as said military is paid for by said PRINTING of the USA $$$, passed onto the rest of the world.

Therefore when the USA empire tanks, so finally, does the $$$ (the caution of many, refusing to write off the $$$, seems to be otherwise based on, well what is so special about a $370Trillion derivatives pyramid, why did a $100Trillion not crash it? why can it not go up to $1000Trillion or $10,000Trillion? Or far far beyond?).

Ask the likes of Bill Gates, Warren Buffet or Dick Cheney. & countless other top plutocrats quitely pulling out of the $$$.

Though there really is no place to go. Once the $$$ crashes, that is the end of the entire global financial system in its present form. As the $$$ crash brings down the entire financial system.

Written by Adam Ghaznavi on 2006-12-21 13:09:04
DC -- there are still lots of very rich sunnis in the gulf (corrupt sure, but rich) and a potential sunni army on the other side of the red sea (egypt) ... so it isn't obvious to me that the shi'a will take over everything. the best oil fields are still on the arab side of the gulf and still under sunni control. Saudi + Kuwait + UAE = 15mbd; Iraq + Iran (shia land) = 6 mbd, and a lot more of that oil is used domestically ...

Written by bsetser on 2006-12-21 13:25:48

Hi Brad,

Think about this. Shites dominate the new Iraqi government. Shite militias control the oil fields in southern Iraq. Iran has an alliance with the Shite majority in Iraq; it's now combining two of the largest oil deposits in the world. Nearly 20% of Saudi Arabia is also Shite. But the land they occupy happens to include virtually all of Saudi Arabia's biggest and most important oil fields. It's only just a matter of time before the Shite movement in Iraq reaches the Shite communities across the major Middle Eastern countries to the south. The total Shite population in the Middle East exceeds 140 million people; increasing the US Army by 70,000 as the Bush Adminstration proposes won't achieve anything. A 70 million soldier increase in US military personnel would be more appropriate. I highly recommend the US negotiate an acceptable political solution in the Middle East with Iran.

Regards,

Written by Dave Chiang on 2006-12-21 13:53:03
In the comments to my post on pricing oil in Euros somebody brought up what amounts to the same points you do in your comment above - Yes, the oil exporters have accumulated a lot of dollars because they received a lot of dollars. My observation is that we are mistaking the causality if we say they have those dollars because oil is priced in dollars. The basic causal fact is that if dollars are the reserve currency then that accounts BOTH for the fact that they receive lots of dollars AND for the fact that they hold the dollars. Also for the fact that it is dollars they use to intervene in forex markets. I also would have said that it is also the reason oil is priced in dollars but a contrary opinion was that oil is priced in dollars because once upon a time the US was the swing producer. I am agnostic on that point at themoment but need to look at more history to convince myself of its accuracy.

The argument that being big makes it difficult to unload dollars makes sense to me, but what is important from now on is whether the exporters WANT to unload them but are nervous about it as opposed to WANTING to hold them because the dollar has all the attributes that make for a good reserve currency. We may be witnessing a move from one of these situations to the other - Never before has a reserve currency country behaved as we are doing now. The Brits lost their reserve currency status after WW1 when they tried to deflate their way back to the imperial parity for the pound - the opposite of what we are currently doing. I am not sure what weight to put on the UK factors vs. US ones for the switch but I think it would make for an interesting comparison to the current era. This is getting too long. Maybe it should become a post.

Written by Steve Kyle on 2006-12-21 14:01:13
On the Sunni Shia divide - Too many people view Shiites as a monolithic bunch. But historically there isnt a lot of love lost between Arabs and Persians, whether they are all Shiites or not. A smart US foreign policy would exploit this fact rather than assuming it takes American GI's to accomplish everything we want to happen in the Middle East or elsewhere.

Two more years.

Written by Steve Kyle on 2006-12-21 14:06:02
during the cold war 'the allies' - (a concept left over from the second world war) - stuck together for protection against global communism under american hegemony. the dollar seems to have acquired its status from american military and industrial might. america exercised leadership, to the benefit of itself and its friends.

contributors to the setser blog have tried to define dollar hegemony and failed - as far as i am concerned. dave chiang posts and reposts chunks of material which ignore the arguments offered in between. those who say hegemony is very important and those who say it is unimportant equally fail to impress.

so is "dollar hegemony" something similar to the might of soviet communism ? you wake up one morning and find that it has somehow melted away ? is it like the last chapter of "alice in wonderland." -

for myself i am beginning to disbelieve in dollar hegemony except as some kind of hypnotic delusion - a reserve currency that everyone believes will lose value against all others ? now how would that work ?

putting a man on mars - breast implants - victory in iraq - the colgate ring of confidence - spreading democracy with cluster bombs - al qaeda's underground headquarters - the abominable snowman - the war on drugs - the trickle down effect - the new world order - the enron business model - the end of the rainbow - santa claus . . . . .

is it one of those kind of things that when christmas comes round again you don't tell mum and dad but you know in your heart of hearts that you no longer believe in it ? it exists as long as you believe . . .then one day -

• pooff ! . . . gone ?

Written by gillies on 2006-12-21 14:27:20
Indeed, the biggest insult for a Persian is to be called an arab. And even in Lebanon amongst the same ethnic groups, shia fight shia (Hezbollah v. Amal), and even when they're not, it's a tenuous peace.

Written by Cassandra on 2006-12-21 14:27:42
I think that the term "dollar hegemony" is too loaded to be particularly useful. I totally agree that the dollar's privileged place has a lot to do with the post WW2 political landscape but even more to do with the economic landscape - which was already shaping up before the war. We can have a giant army but if people dont have confidence in our assets they will start to unload them. There is a bit of a problem doing that at the moment since two thirds of world reserves are in dollars (and growing every day) but if the dollar stops being desired as a reserve asset then its days are numbered. I am not one who thinks this is inevitable, just that it is possible. And that either way we are helping the process along with the Bush Admin's policies.

Written by Steve Kyle on 2006-12-21 14:33:43

Various Shite factions may have disputes with each other, but on a whole, they are a large and very religiously driven group of Muslims willing to fight to the death for their Islamic beliefs. In the Middle East, the 140 million Shia Muslims make up more than half the population of the entire region. A violent revolutionary Islamic order is headed for the Middle East to expel the existing Anglo-American hegemony of the region's energy resources and governments.

Written by Dave Chiang on 2006-12-21 14:41:43
The dollar's status as a reserve currency also got a bit of a boost from the "emergence" of emerging economies and the collapse of the soviet union. initially most pegged in one way or another and most pegged to the $ -- and even in eastern europe, the $ was the medium of exchange/ store of value. it still is in turkey -- and remains important in russia. the result was a surge in $ reserve holdings -- one that was large for the time tho small relative to BW2. my senese is that eastern europe is in the process of euroizing, russia is heading that way and for reasons i don't understand the dollar remains dominant in turkey (tho the use of the lira is growing, domestic non-lira deposits are overwhelmingly in euros). So part of the $'s status comes from the post world war 2 settlement, but part of it comes from the post cold war settlement. let's see if it lasts the post gulf war settlement.

Steve -- I think you hit the key question:

"The argument that being big makes it difficult to unload dollars makes sense to me, but what is important from now on is whether the exporters WANT to unload them but are nervous about it as opposed to WANTING to hold them because the dollar has all the attributes that make for a good reserve currency."

My answer: lots of countries want to unload dollars and still peg to the $ (if nothing else as a RMB proxy) and haven't been able to choose between those two objectives, so they end up accumulating more $. that is why Thailand is so interesting. it suggests to me that countries are looking for a set of new options!

Steve -- do you have any good sense of the currency composition of angola or nigeria's reserves? my guess would be mostly $, but i have absolutely no real knowledge ...

Written by bsetser on 2006-12-21 15:35:12
Dave Chiang:

Why is it so important to maintain dollar hegemony...

Once we shift perspectives and see the U.S. as a declining rather than advancing hegemon, the answer may be more clear.

Here's a recent article by Immanuel Wallerstein, THE CURVE OF AMERICAN POWER
http://www.google.com/search?q=cache:4Goy9b-cTRgJ:newleftreview.org/ %3Fgetpdf%3DNLR27405+'the+curve+of+american+power',+wallerst ein&hl=en&gl=us&ct=clnk&cd=2&client=safari

Regards

Written by Juan on 2006-12-21 15:54:02
Here's a question:

Are the larger number of smaller CBs who hold dollar reserves or who've accumulated dollars (whether by choice or default) more likely to be act mimetically in the event of steeper dollar decline? Just as professional fund managers, on average, cannot shake their behavioral baggage, are the worlds smaller CBs likely to prove any more prescient or adept? (That's ignoring the question as to whether they should act mimetically if and when -D-day arrives.)

Written by Cassandra on 2006-12-21 15:54:42
Dangers in denominating Nigeria’s foreign reserve in dollars
[Poor article from dodgy source, but shows the sentiment]

"The value of the dollar is at present sliding, and there are growing concerns that if steps are not taken now to check the slide, it could effectively wipe out the value of the country’s foreign reserve along with American dollar. The fear of losing an entire nations reserve has now prompted most central banks across the globe to begin switching to the euro, and according to economists, the logical next step would be for all fuel-exporting countries to start quoting oil prices in euro too. And if they quote in euro, invariably they most also maintain a euro based foreign reserve."

And from this link:

"Meanwhile, the Central Bank has said it would continue to retain substantial portion of the nation’s external reserves in the United States dollar despite the downward pressure on the currency in the international market. Deputy Governor, Economic Policy, CBN, Dr. Obadiah Mailafia told financial journalists in Kaduna that the dollar is still the number one reserve currency in the world, stressing that most nations’ crude are derived in dollars. Specifically, Mailafia who stood in for the CBN Governor, Prof. Charles Soludo at a workshop organized by the apex bank for finance correspondents and Business Editors said CBN’s outlook on external reserve currency holding portfolio was to hold on to the dollar and manage it for the long run, adding that penalties are usually paid for moving money from one currency to another."

And this one:

"Many Nigerians are questioning the rationale for accumulating high levels of reserves in the midst of poverty, unemployment and inadequate infrastructure. There is also some concern over the possible impact the dwindling fortunes of the US dollar could have on Nigeria’s external reserves that are predominantly denominated in that currency."

Written by FTX on 2006-12-21 17:14:03
There may be a great deal of Shia/Sunni tension, but one has to recognize that Shiite Iran has been the big, and often only, supporter of Palestinian Arabs and has targeted Israel for "removal" or whatever, even though Israel has not actually done any direct damage to Iran. So at times a common religion trumps sects, I would argue.

Written by Guest on 2006-12-21 17:16:22
A lot of things you mention in the Sunni-Shia argument are not correct. Surely there are not 140 million shias in the ME. Also they number only 12-15% of the 1.3billion Moslem population.

Shias and Sunnis along with christians have lived in peace for 1400 yrs with little conflict in the middle east. It is only in the interest of the west to cause a civil war between the two.

Historically in the middle east and Moslem world, whoever controls the holy sites of Mecca, Medina and Jerusalem controls the middle east. It is this control, which decides who holds what in the middle east and Shias never had or will be able to bring these places under their control. Also another very important and historical city in the middle east has been with sunnis throughout the history.

Not to forget that the only Moslem Nuclear power is Sunni Pakistan with a strong military which is very close to Saudi Arabia.

A lot of Shias are more close to sunnis than other sects of Shias.

There is no sunni-shia struggle and if one becomes reality, this will involve the Moslems from all over the world as anything that involves the city of Mecca and Medina will inflame the Moslem world in seconds.

The Anglo American Hegemony in the ME will come to an end at the hands of the people there irrespective of Sunni’s and Shia’s as they both suffer from the policies and their corrupt puppets. Moslems aren’t against business or relationship with western countries but on terms that benefits the common man on both side. It is only a matter of time before these dictators fall from East Asia to Central Asia and Middle east to Africa.

There are open calls from people in Pentagon for ethnic divide and cleansing in the middle east to redraw the map that will suit American Hegemony. They call it 5000yr old dirty trick.

Written by Omer on 2006-12-21 17:41:54
BTW, as in Nigeria there are some signs that the politicos are beginning to eye the foreign reserve honey pot for inward 'investment':

Foreign exchange hoard for core sector funding — story’s back

"NEW DELHI: Finance minister P Chidambaram on Wednesday announced the setting up of a committee, headed by IDFC chairman Deepak Parekh, to look into long-term funding for infrastructure. He also revived the two-year-old proposal for utilising the country’s large foreign exchange reserves, currently at over $175 billion, for investment in roads, ports, airports, railways and power utilities."

Written by FTX on 2006-12-21 17:42:01
I meant Dave's - comments

Written by Omer on 2006-12-21 17:43:13
Hi Cassandra,

In my opinion, the 'dollar question' can't be divorced from (a) the question of political economic hegemony, of empire, and (b) that most governments manage their currencies in order to obtain real economy/world market advantage. All national currencies are brought into relation with each other as they are defined against a world money, in this case the dollar...which has that status as a function of weakening but still extant global hegemony.
Governments and fund managers operate on different criteria.

Written by Guest on 2006-12-21 17:43:31
That Russia does not appear to hold Treasuries directly shouldn't be a surprise. Just about any nation that suspects it may be at political risk vis-a-vis the United States will prefer to hold Treasuries anonymously through Euroclear or Clearstream or banks holding in the global depositories. Under Treasury regulations and US securities laws revised in the late 1990s, Treasuries held in overseas depositories are deemed to have legal situs in the country of the depository - and so are beyond the reach of OFAC seizure by a seizure-prone US administration. The largest holders of US securities abroad are rumoured to be the Chinese, but I would guess the Russians aren't far behind. Treasuries remain the preferred liquid asset class, but the risks of holding them directly in the United States make many hold them indirectly abroad.

Written by Guest on 2006-12-21 18:14:49
Brad

About reserves in Nigeria and Angola - In Nigeria I dont know at all. In Angola its not public knowledge so far as I know but it is always dollars they use for intervention, always dollars that people use instead of local currency during episodes of inflation and the recent Chinese loans were apparently made in dollars. Spreads for changing money are also tighter for dollars at the exchange houses or at least they were the last time I checked. So I would be surprised if it isnt mostly dollars.
On the other hand, the last time I was there I rented a car and when I paid with my credit card they charged in euros.

Written by steve kyle on 2006-12-21 18:20:02

China, US strategic competition for Oil supplies on Central Asia Silk Road
http://www.chicagotribune.com/news/nationworld/chi-0612190174dec19,1,2838679.story?

China's quest for resources is rubbing up against U.S. interests. In the UN, China is protecting energy allies Sudan and Iran against U.S.-led efforts to censure them. To secure its energy supplies, Beijing is expanding its military, venturing farther into the Pacific Ocean and spurring the U.S. to build up its forces in response.

"You have two powers competing over the same sandbox," said Gal Luft, a China expert with the Institute for the Analysis of Global Security in Washington. "As a country of China's size grows, there will be a moment when the moment of reckoning comes."

China also has nurtured an unlikely new powerhouse, the Shanghai Cooperation Organization, a once-obscure diplomatic grouping that has emerged as an alternative to the financial and political institutions of the West. Critics dust off Cold War-era labels to warn of a "new Warsaw Pact." But the reality is something different: a more perfect union for the age of oil.

Washington believes that China's thrust into Kazakhstan threatens America's foothold. "Today all these interests are under attack, and the U.S. policy in Central Asia is embattled and under siege," Stephen Blank, a Central Asia expert in the Strategic Studies Institute of the Army War College, said in testimony to a U.S. House committee in July.

Written by Dave Chiang on 2006-12-21 18:37:22
Guest -- why hold Agencies but not Treasuries directly? That is what surprises me. Russia's holdings of agencies presumably could be seized by OFAC (Office of Foreign Asset control -- a part of the Treasury). One thing is clear: Russia has increasingly been holding whatever it holds (Treasuries or Agencies indirectly); the fall in its recorded onshore dollar holdings in 06 is too big to just be a product of diversification.

S. Kyle -- thx. At some point, I would bet China starts lending to Angola (on very favorable terms) in RMB ....

Written by bsetser on 2006-12-21 19:24:05
Yeah, what LondonYank guest said. To dope out Mideast capital flows, you got to put yourself in their position. Looking at the US investment environment you would see, enshrined in law, regulation and precedent, this astonishing array of ways to take your money:

PL95-223 authorizes control or prohibition of financial transactions and assets when a national emergency is declared by the President;

31 CFR 575 blocks Iraq Government assets subject to US jurisdiction, and assets of Iraqi, er, front organizations in third countries;

31 CFR 595 blocks all property subject to US jurisdiction in which there is any interest of 12 Mideast terrorist organizations or designated persons or property in which there is any interest owned or controlled by or to act for or on the behalf of any designated person or anybody who's friends with somebody with a suspiciously long head

and so on, a bag of tricks that would be the envy of any third-world Soviet client state. The details of all this expropriation machinery does not tell you where they will invest, only where they won't. To gauge how real or feared asset freezes distort capital flows, it would help to look at the effect of prior sanctions using a gravity model -- the idea being that bigger, closer countries interact more, unless they can't. Slavi Slavov can tell you about that; to read about it you'll have to wait a little, but it seems like a promising way to look at things. We're trying to build this totalitarian panopticon and it's scaring off the money owned by all the people who are flush now. Where will it end up? I'm going there.

Written by psh on 2006-12-21 21:09:44