Sports-starved American fans tuned into European soccer this summer for live sports action. But for Newcastle United, a storied English club, the big drama took place off the field, as the Saudi Public Investment Fund looked to take an 80 percent ownership stake — then backed off, with the consortium behind the bid citing the “prolonged process” and new uncertainty the investment would be commercially viable.
Members of Parliament across party lines challenged the sale, alleging it would help whitewash the Saudi regime’s human rights abuses at home, as well as its role in Yemen’s civil war. But this stalled acquisition is only the most visible wedge of a larger issue: the political impact of the massive sovereign wealth fund (SWF) holdings in a number of oil-producing authoritarian regimes.
Sovereign wealth funds prepare for lower future oil revenue
So what are these funds, and how do they operate? The Saudi SWF in this case is designed to diversify the kingdom’s investments and provide income long after demand for its massive oil reserves has dwindled. But this also has the potential to entrench authoritarian rule — sustaining tight control over the population long after the country’s oil riches are gone.
The collapse of oil prices this year suggested a potential political crisis for regimes dependent on oil sales. Oil prices have rebounded somewhat since crashing to $12 a barrel in April. But the coronavirus pandemic appears to be hastening the arrival of peak oil demand: At some point, global demand for oil will begin to decline as energy and transportation systems the world over begin decarbonizing in earnest.
This year’s low oil prices will hurt these countries the most
Oil-rich countries largely failed to diversify their economies and exports during the 21st-century commodity boom, which means they face the uncertainty of a future where oil reserves are worth far less. The International Energy Agency, for instance, warns oil and gas-producing economies may “lose” up to $7 trillion by 2040.
What will this mean for oil-rich regimes?
My research, and that of other political scientists, suggests since the end of the Cold War, oil wealth has had starkly negative effects for democracy. Oil-rich regimes have staved off pressures to democratize by investing heavily in patronage — concrete benefits in exchange for the support of influential elites — as well as by providing large subsidies to their populations for food, energy and other necessities.
That is why these regimes are often called “rentier states” — the government derives virtually all its revenue from rent paid by foreign concerns or governments. To maintain its bases of support, the regime uses what political scientist Benjamin Smith calls “rent leverage”: distributing these rents through patronage networks, investment in public goods and repressive capacity.
Declining oil rents, in theory, will leave the government less to spend on repression or accommodating the public’s needs, and create greater reliance on the non-resource economy. Ultimately, these changes may weaken authoritarian rule, and open up space for civil society.
The TMC newsletter has moved! Sign up here to keep receiving our smart analysis.
SWFs may act as a buffer
SWFs are state-owned or state-controlled enterprises that invest in a diversified bundle of real and financial assets — some 60 or more SWFs exist worldwide, from government pension funds to oil or resource-specific funds. Among the wealthiest are those run by oil-rich governments.
In many cases, governments maintain close control of these funds, which typically operate with little transparency. Here’s the economic logic: By investing proceeds of natural resource sales in a diversified basket of non-resource assets — like a U.K. soccer club — governments can turn current resource rents into a source of permanent income that can last in perpetuity. Economies that got rich exporting oil can hope to stay rich by diversifying, or at least buy more time to restructure their economies to prosper in a decarbonized future.
Some of these funds are truly massive. The Norwegian Oil Fund has over $1 trillion in assets under management, which amounts to about $200,000 for every Norwegian, and two times the country’s GDP. The Abu Dhabi Investment Authority has an estimated $828 billion or so in assets, or roughly $570,000 per citizen of the emirate. By comparison, the Saudi investment fund is relatively undercapitalized, with just an estimated $12,000 per Saudi citizen under management.
The political effects of SWFs
SWFs help solve a variety of problems, like ensuring intergenerational equity, so the oil “belongs” as much to the Saudis or Norwegians of 2220 as it does to those in 2020. These funds also smooth consumption and avoid boom and bust cycles in the real economy and government spending, by preventing inflation due to windfall spending and local asset bubbles due to investment in local fixed assets like real estate. In theory, SWFs ensure a steady source of government revenue once oil demand and prices begin to taper off due to the eventual transition to decarbonized energy systems.
But they also offer broad opportunities to entrench authoritarian rule. Because oil extraction employs comparatively small, and often imported, labor forces in many countries, the rents are easy for the government to capture. But protesters can always target the oil and the extraction infrastructure itself — or sabotage facilities to generate concessions to societal interests.
In the case of SWFs, even this meager source of leverage does not exist: The Abu Dhabi oil sector employs directly some 15,600 people; the SWF employs just 1,700. Moreover, SWF assets are mostly traded in markets where societal interests have nearly no source of leverage. Thus, SWFs provide rulers with resources that are untethered from the local economy and available directly (and exclusively) to rulers.
Saudi Arabia launched an oil price war. That’s risky.
If oil riches allowed these regimes to resist pressures to democratize, investment income probably would do the same. For governments with truly mega-wealthy SWFs, shrewd investments may further entrench patronage politics and strengthen authoritarian regimes.
SWFs have been on a global shopping spree
The attempted Newcastle United purchase isn’t unique. Buoyed by large surpluses built up over a nearly two-decade commodity boom and concerned about their economic and political futures, countries have used SWFs to buy up everything from commercial real estate to toll roads, farmland and health-care companies.
Covid-19 and the resulting global recession may rev up SWF purchases even further, given the likelihood that more assets may become distressed. These purchases will have long-term effects for global markets, but also affect geopolitics by boosting the political influence of the regimes that control them.
Professors: Don’t miss TMC’s expanding list of classroom topic guides.
Cullen Hendrix, professor and director of Sustainability Initiatives at the Korbel School of International Studies, University of Denver and Nonresident Senior Fellow at the Peterson Institute for International Economics, is a political scientist with research interests in the environment, political violence and the security implications of climate change.