An Intriguing Joint Venture

Ashby Monk

It’s been a busy few weeks here at OSWFP headquarters: a new baby, a looming move to San Francisco, a book to finish, papers to (re)write, and…last but not least…lots of blog posts to compose. With all that going on, you’ll forgive me if I let the occasional story slip through the cracks…such as this one from last week about two prominent Arab investors (the Qatar Investment Authority and Saudi Arabian Olayan Group) agreeing to partner up with a prominent Israeli investor (IDB Holdings) in a new emerging market credit fund. The threesome will be joining Credit Suisse in the venture, and all four will be contributing $250 million to make this a $1 billion fund.

Why is this so intriguing? I’ll let the folks at GulfNews explain this one:

“Qatar and Saudi Arabia are still technically part of the Arab League’s boycott against Israel, launched in 1951, in support of Palestinian rights after the 1948 establishment of Israel.”

Now, obviously, the boycott is not legally binding, which means that the countries can do what they want. Still, it seems to me that this could become a relatively big deal if certain domestic constituencies in Qatar or Saudi Arabia decided to publicize the deal and spin it in a negative light (which, to date, they have not). And, it seems, the QIA agrees, which is why it went into denial mode when asked about the joint venture:

“A spokesman for the QIA said that he had “no idea” about the fund and referred questions to Credit Suisse.”

The same would also be true in Saudi Arabia. Here is what the Gulf Blog had to say:

“If certain actors in the Kingdom decide to pick this story and highlight it, this venture will fall flat quickly. While the erudite, well-traveled Saudi businessmen will have no problem in such a deal (an Israeli’s money is as good as anyone else’s) the accompanying press coverage may be highly unwelcome.”

Now, there is a long history of Arab countries dealing with the Israelis in private and then denying it in public. However, this is still a pretty big deal. As Irit Avissar suggested in Globes:

“At a time when Israel is not exactly popular around the world, particularly the Arab world, the agreement by two large investment companies from the Gulf states to cooperate with an Israeli group is no trivial matter. It can even be assumed that they will come under fire for it… Make no mistake. The investment giants of Qatar and Saudi Arabia don’t really need IDB’s $250 million to launch the fund. Therefore, their decision to involve an Israeli company can be seen as a kind of economic-diplomatic declaration of their readiness to cooperate with Israel.”

I’m not sure I’d go that far, but as the Haaretz noted, this does at least reflect “…the readiness of Arab finance sector players to work with Israeli capital.”

Indeed it does. And it also manages to provide a rather unique case study of the benefits of limited transparency. In this case, being secretive seems to allow the Arab investors to focus on making investment decisions based on risk-return criteria rather than social or religious criteria. Perhaps in situations where local norms get in the way of profit, non-transparency is a preferred alternative to lower returns? The problem with this approach, however, is that if and when these transactions come to light, the very legitimacy of the funds in the eyes of the domestic populace may be threatened. In a democratic country like Norway, this is taken very seriously. Perhaps in the less democratic Middle East, it’s not a problem?

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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