Two options for wealth funds: which will they pick?

Remember when the biggest controversy in Gulf dealings with the West was the role of sovereign wealth funds?

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Remember when the biggest controversy in Gulf dealings with the West was the role of sovereign wealth funds? In the wake of the financial crisis, it now seems quaint to consider that just last summer western banks could afford to be picky about who was giving them money. The moneybags from the Gulf, awash with revenue from oil at nearly $150 a barrel, were seen as sinister forces for political interference, or worse as shadowy front-organisations for extremists. That view is now "so August", as they say in New York.

Hard up American and European banks will accept investment from virtually anybody. (One tongue-in-cheek suggestion recently was that a consortium of Somali pirates had taken advice on an equity investment in Citigroup, before turning down the proposal on grounds of risk.) But surprise, surprise, the SWFs have begun to doubt that clapped-out western capitalism is an appropriate use of their suddenly-scarcer petrodollars, and are thinking again.

The issue recently received an injection of intellectual muscle in the form of a paper from the Carnegie Endowment for International Peace. Under the editorship of Sven Behrendt and Bassma Kodmani, the impressive list of contributors discusses the central conundrum of SWFs in the post-crisis world: "The custodians of Arab sovereign wealth have found themselves in a precarious situation, having to respond, first, to an external audience when it appeared their influence in the world of finance had substantially increased; and, later, to a domestic audience when it appeared they might have overplayed their hands."

It is a complex issue, with all sorts of economic, financial and socio-political implications, but boils down to two propositions: Arabs should take advantage of the current distress in the west to buy valuable assets at bargain basement prices, as witnessed by Abu Dhabi's recent investment in Daimler; or Gulf governments should focus on their own short-comings, committing to invest in infrastructure, energy and utilities in the Gulf, thereby positioning it as region to lead the post-crisis world. I feel the tide is running in favour of the latter view, but whichever, the paper is essential reading for Gulf policy-makers.

I wrote recently about the complicated geo-political game being played out around the oil-rich Caspian region, where the western oil giants are trying to get access to precious new reserves in the face of opposition from the Russians, who regard the region as their own post-Soviet backyard.

In the space of a week, events have moved at a quickening pace, especially in Azerbaijan, which is key to the energy ambitions of the West. The balance of power in the region has been tipped significantly by the announcement that Turkey and Armenia are committing themselves to resolve the century-old hostility between them. If Ankara and Yerevan do reach a deal, it would re-open the trade border between them that was closed in 1993 when Armenia seized the Nagorno-Karabakh region belonging to Turkey's ethnic brother, Azerbaijan. (Pay attention at the back - this is important.)

The Azeris would not like that, unless the Karabakh situation is resolved to their satisfaction. Indeed, they would be so unhappy that Baku might instead do an exclusive energy deal with the Russians, putting in doubt the huge western investment in Caspian oil (led by BP) and jeopardising the prospects for a multi-billion euro Brussels-sponsored plan to transport gas to Europe without going through Russian territory. (No nodding off there - look at the map.)

Russian motives are opaque. On a benign view, they want to help bring peace to the Caucasus; on a more realistic interpretation, they might want to isolate and destroy their main enemy in the region, Georgia. The risk to western energy supplies, and the significant BP investment there, continues to grow.