L. V. SHKVARYA

Doctor of Economics

I. A. AYDRUS

Candidate of Economic Sciences

GCC Keywords:, areas of application of Arab capital, Russian-Arab investments

The Arab countries of the Persian Gulf are a strategically important region. With large hydrocarbon reserves (about 60% of the world's proven oil reserves and 30% of natural gas1), these States are united in the Cooperation Council for the Arab States of the Persian Gulf (GCC)* , have a direct impact on global hydrocarbon markets, as well as on the state of international financial markets.

Foreign assets of companies, wealth funds and individuals of the GCC countries reached $1.9 trillion in pre-crisis 2007, and these assets have been steadily increasing since 2002.2 The investment activity of this group of states continued in 2008-2009, and in the post-crisis period, the investment potential of the Gulf countries is expected to continue to grow. Thus, the McKinsey Global Institute estimates that it will reach $9 trillion by 2020, of which 30 to 60% (depending on oil prices and the size of domestic capital demand) is expected to be invested outside the region3.

Russia remains aloof from the distribution of large Arab investments. At the same time, it seems that in the context of the global economic crisis and the search for ways out of it, as well as the gradual transformation of the model of capital export by Arab states, there is an objective opportunity to expand mutually beneficial investment cooperation between Russia and the Arab states of the Persian Gulf.

The article attempts to analyze the peculiarities of the formation and export of capital by the countries of this region in modern conditions.

CAPITAL OVERSUPPLY: SOURCES

The availability of natural energy resources, their extraction, processing and export, combined with such a factor as rising prices on the world market, underlie the capital saturation of the economies of the Arab countries of the Persian Gulf.

The States of the region are differently endowed with natural resources. The Kingdom of Saudi Arabia (KSA) accounts for 23% of the world's proven oil reserves, while Kuwait accounts for 9%.

The dynamics of crude oil production in 2007-2009 is presented in Table 1.

In 2009 Saudi Arabia has put into development one of the largest new fields - Khurais. It produces 1.2 million barrels of Arab Light oil every day. The internal needs of the kingdom allow oil production to develop.

However, OPEC countries ' oil production, including

Table 1

Crude oil production by Saudi Arabia, the United Arab Emirates, Qatar and Kuwait in 2007-2009 gt (thousand barrels) per day)

Source: compiled by OPEC Monthly Oil Market Report, January 2010.

* The GCC, established in 1981, includes the Kingdom of Saudi Arabia( KSA), the United Arab Emirates (UAE), Kuwait, Oman, Qatar and Bahrain.

Drawing. GCC natural gas reserves (2009)

Source: BP Statistical Review. Global Research.

In the last two years, it has been declining due to the global financial crisis. If in 2008 the OPEC countries produced 31,206 thousand barrels of oil per day (hereinafter b/d), then in 2009 this figure decreased to 28,722 thousand barrels. ⁴

The export of refined petroleum products remains important for the investment process. The largest exporter in the region is Saudi Arabia (1138.8 thousand b/d), followed by Kuwait (739.1) and Qatar (73.9). Over the past 10 years, the volume of export of petroleum products abroad has increased most significantly in the UAE (almost 4 times) and in Kuwait (1.3 times).

The GCC countries are also the largest owners (see figure), producers and exporters of natural gas, primarily Qatar.

OPEC estimates that Qatar has 14% of the world's gas reserves, Saudi Arabia-4%, and the United Arab Emirates-3.5% ^.5

Between 1987 and 2007, natural gas sales increased 10.7 times in Qatar, 2.8 times in Saudi Arabia, and 2.7 times in the United Arab Emirates. In 2008, Qatar exported 56.781 million ^m3, or 74% of the country's gas production, while the UAE exported 7567 million m3, or 15%. Qatar plans to increase its export potential to 220 billion by 2012. ^m3 of gas ⁶.

Qatar (second in the world after Indonesia in terms of export of liquefied natural gas (LNG) in 2008, is negotiating contracts for its supply to Europe, competing with Russia) and Saudi Arabia are the largest suppliers of liquefied natural gas - butane and propane - to the world market. In particular, in 2008, Saudi LNG shipments around the world totaled 10 million tons. t, further growth in LNG production and supply volumes is expected ⁷. Oman and the UAE are also actively supplying LNG to the global market.

All the countries studied are characterized by significant revenues from the export of hydrocarbons, the share of which in the total volume of trade exceeds 90%. Thus, according to OPEC, in 2009, all OPEC countries ' oil export revenues totaled $559 billion and are expected to reach $675 billion in 2010.8 All this indicates an influx of solid financial resources to the region's countries.

Diversification of the economy and creation of a favorable investment climate allow the countries of the region to create additional sources of financial resources for domestic markets. The most striking example is the UAE, where the share of oil exports is only 47.6% - the lowest figure among the countries in this group.

Among the oil monarchies, the UAE has the most diversified economic structure. According to IMF experts, 70% of the UAE's GDP is not related to the extraction and processing of energy resources.⁹ In about 30 years, the UAE has invested $6.8 trillion in industrial development. As a result, about 1,000 new businesses were created, which attracted more than $20 billion. foreign direct investment. The leading industries today are chemicals and petrochemicals, as well as aluminum production. For example, Dubai Aluminum is the main supplier of aluminum to the GCC ¹⁰ countries.

Thus, initially, the source of Arab capital was the export of significant volumes of hydrocarbons in conditions of favorable conditions for exporting countries on the world market during the period of "oil shocks". The influx of significant "petrodollars" from the Arab countries of the Persian Gulf was turned into investments abroad. Arab investments looking for their application abroad are considered by experts to be of increasing importance.

However, Arab oil-exporting countries face the challenge of managing their excess capital competently and efficiently. It is worth noting that resource management in the last 7-8 years has a number of differences from the period of the 1970s.

FEATURES INVESTMENT FLOWS

Conditionally there are three stages in the export of capital Arab-

* OPEC includes 11 countries, including Saudi Arabia, the United Arab Emirates, Qatar and Kuwait.

countries. Each of them has its own peculiarities in the forms and geography of export and was determined by both domestic and international processes. As a general characteristic, it can be noted that the volume of capital exported by Arab investors tends to grow.

The first stage - the 1970s-1980s-was characterized by the export of financial resources by the Governments of Arab countries mainly to Latin America in the form of loan capital on an intergovernmental (official) basis, i.e. it was provided on terms of urgency, payment and repayment to the Governments of Latin American states. This process was largely stimulated by qualitative changes in the global monetary and financial system. The nature of these changes was as follows.

First, in 1971, the Bretton Woods monetary system, with its gold devaluation standard and fixed exchange rates, collapsed, and the Jamaican system was formed. The latter called for the removal of strict restrictions that prevented capital outflows and allowed low interest rates to be maintained to provide governments and the economy with cheap borrowing resources. The markets for banking services, government debt and corporate securities developed.

Second, there was a sharp expansion of the international capital market under the influence of increased international liquidity and mobility of international resources due to "oil shocks". In the 1970s and 1980s, international private credit began to be used to directly or indirectly finance current account deficits.

As a result, the volume of the international credit market has sharply increased, including due to the changing nature of the use of international credit. Its ultimate destination was not only the sphere of international exchange, but also the sphere of production. This required larger and longer-term loans, as well as the development of a whole range of accompanying credit and financial services, and blurred the boundaries of previously closed national financial spaces, stimulated the export of capital across national borders and the development of global financial markets.¹¹

On the other hand, the development of Latin American countries in the post-war period was accompanied by an intensive invasion of foreign capital into their economies, and above all by investments from the United States, Great Britain, Spain, France, and Japan. Arab oil exporting countries have also become active investors in Latin American countries. This was caused by the desire of the governments of Latin American countries to develop their own industry, create a favorable investment climate and purposefully attract foreign loans. However, investments proved to be ineffective for Arab investors, and in 1982 some Latin American countries declared themselves bankrupt, unable to service their external debt any longer.¹²

The second stage is conventionally dated 1990-2001. During this period, the main recipient countries of Arab-now non - governmental (private) - capital in the form of bank deposits, other or portfolio investments were the industrialized countries, primarily the United States and the EU.

The main source of funding for major projects during this period was the private sector in Arab countries. In addition to depositing excess resources in the accounts of Western banks, Arab owners of capital actively bought up real estate abroad and made other image acquisitions.

Prior to 2001, significant amounts of Arab investment were invested mainly in the economy of the United States, a strategic partner of the Arab States of the Persian Gulf. Saudi Arabia alone has invested about $750 billion in the US economy. However, after September 11, 2001, the United States created unfavorable conditions for the work of Arabian investors. The outflow of funds belonging to the largest of them significantly increased after the spread of information about the US intention to impose restrictions on the withdrawal of Arab resources from the American economy. Immediately after, a large influx of Arabian capital was recorded in France.¹³

Since then, more and more Arab investors are moving their financial resources to European, Asian and intraregional markets.

So, in 2001 - 2002, Saudi investors withdrew funds from the United States in excess of $200 billion, the United Arab Emirates withdrew about $ 3 billion, and Qatar - $ 2.7 billion, ¹⁴ and this process continues, although it is not irreversible.

These funds are reinvested in the least risky assets in Europe, which attracts more than 20% of Arab foreign investment. Most of the resources were directed to the UK, where accumulated Arab investment is estimated to amount to about F7bn. ¹⁵

However, according to not only Arab, but also Western experts, the investment of public funds of Asia and the Middle East in the largest Western banks at the present time may be a mistake, even though they are invested

for a long time and do not assume an early return.

Therefore, at the present stage (2002 - present), Arab investors are looking for opportunities to diversify the geography of investments. Their financial resources are increasingly being invested in real estate in developing countries.

Intra-regional investments of the GCC countries and their investments in other Arab States are growing. Thus, in 2005, inter-Arab investment grew by 55%, reaching $6 billion, and the consolidated assets of the financial markets of the Arab region were estimated at $1 trillion. These figures were presented by the head of the Arab Business Association, Hamadi al-Tabaa, at the XI Arab Business Forum held in ^January 200616.

Intra-Arab investment is expected to grow further, and by 2020 it could reach $4.2 trillion. This trend suggests that a growing share of the vast oil wealth will be invested in domestic financial markets, stimulating the development of ^the region17.

The GCC countries, which have become a source of solid financial resources, continue to implement inter-Arab projects regardless of the current crisis phenomena, including with the participation of Arab national welfare funds. So, in the next 10 years, more than $55 billion. They will be invested in projects related to the construction of roads and airports. Another $25 billion is planned to be spent on the construction of the regional railway ¹⁸.

At the same time, the Gulf states are striving to strengthen and develop trade, economic and investment relations with the rapidly growing Asian economies (China, India), strengthen cooperation with Latin American countries, and increase cooperation with Eurasian states, including the CIS. Despite the crisis, the Gulf States are actively investing in African countries, especially in the West and North, in particular, in Morocco and Egypt. Tunisia is attracting the most interest, and companies from the UAE are starting to build a new city in Tunisia. The total investment in the project, implemented by the development company Soma Dubai, will amount to $25 billion. A major project is also planned to build a bridge across the Red Sea (from Yemen to Djibouti)¹⁹.

INVESTMENT DIVERSIFICATION

Changes are taking place not only in the geography of export of financial resources by the Gulf countries, but also in the areas of application, in the forms, etc. The need for diversification increases significantly in the context of the global financial crisis and instability of Western economies.

At the current stage, there are significant volumes of export of Arab FDI with their placement in the service sector (financial sector, trade, tourism, telecommunications) in both developed and developing countries, including the Arab region. As an illustration of the latter, we can cite the project to create an Arab Tourism Bank with a capital of $2 billion, which will finance tourism projects in the Mashhad and Maghreb regions.²⁰

MBI International, which is controlled by Saudi Sheikh Mohammed bin Isa Al-Jaber and owns 60 hotels in European tourist resorts, has announced its intention to acquire part of the Concorde Group business, which owns 12 luxury hotels in France. Saudi newspapers estimate the value of the deal at $2 billion. International Hotel Investment PLC (the Government of Dubai) in February 2008 purchased the Thames-side Metropole Hotel and several adjacent buildings for $225m21.

Significant investments in construction and real estate abroad, and we can note the growing interest of Arabs in these segments of investment. For example, Investate (headquartered in Bahrain) plans to build a $750 million residential complex on the banks of the Thames in London, Qatari Diar Real Estate Investment Co., owned by the Qatari government, in January 2008 purchased the London Chelsea Barracks from the British Ministry of Defense for the construction of residential buildings for $2 billion.²². The Oman Reserve Fund negotiated the construction of residential blocks in Minsk ²³.

Residents of the Persian Gulf countries are also actively buying real estate in Arab countries, especially in Lebanon (in 2009, investments exceeded $5 billion).²⁴. Such investments are strategic and are aimed at the long-term perspective, up to 50 years. Arab investors have already become the world's largest property owners. Buying land and real estate abroad has become as popular an investment as the financial sector, construction and trade.

Arab investors ' investments in the industrial sector of foreign countries, including developing Asian countries, are noticeable. This trend is illustrated by transactions such as the purchase by the Saudi company Aramco of a ²⁵% stake in an oil refinery in the Chinese province of Fujian25.

As a motive for outward FDI from the GCC countries, we note the desire to expand control over distribution channels related to oil production and refining. For example, it is for this purpose that state-owned oil companies

Saudi Arabia and Kuwait have entered into partnership agreements with Sinopec, a Chinese firm, for two separate refining and petrochemical plants in China.

The motives for improving investment efficiency relate mainly to oil refining, and the acquisition of strategic assets can be linked to cross-border mergers and acquisitions in extractive and other industries. For example, companies may invest to acquire strategic assets in the form of know-how or technology from other companies, or from specialized technology providers, or to accelerate the process of acquiring global status by gaining access to the resources, opportunities, and markets of the firms they acquire.

A significant part of the foreign assets of the GCC countries is accounted for by portfolio investments. Arab investors are risk averse and therefore tend to invest their financial resources in more stable assets, even if they are less profitable. At the same time, a characteristic feature of Arab portfolio foreign investments can be called a high degree of their diversification in both industry and regional aspects.

The international euro currency market* attracts Arabs with its flexible rules, the absence of taxation and restrictions on the movement of capital, the ability to preserve the secrecy of deposits, as well as the relative simplicity of investing and managing market assets.

A characteristic feature of this type of investment is not the action of Arab entrepreneurs, but their inaction, since they do not acquire foreign currency by converting national banknotes. They receive money in foreign currency by selling oil and petroleum products on world markets. By keeping their finances intact, they are essentially lending to developed countries.

This form of capital export, such asprovision of loans, credits and financial benefits for the establishment of joint ventures with foreign capital, is becoming increasingly widespread.

We emphasize that for the first time such a form of capital export appeared at the very beginning of the "oil boom" and was aimed at crediting the import of Arabian oil by developed countries. Borrowers include, first of all, those countries that experienced the largest balance of payments deficits and whose currencies were relatively more susceptible to inflationary depreciation. Over time, this method of exporting capital grew in popularity. Currently, the share of loans and industrial credits in the total volume of capital exported abroad in the GCC countries varies from 10 to ²⁵%, depending on the country26.

It should be noted that such a form of capital export as advance payment for imported goods and services has a lot in common with the provision of state loans. This also includes underestimating the value of exports and overstating the value of imports. These trade mechanisms are not capital exports in the direct sense, but, at their core, they are a hidden form of concessional lending to foreign economies.

In total, according to UNCTAD, the export of foreign direct investment from the region's countries increased for five consecutive years, reaching $90.3 billion in 2009, compared to 11.3 billion in 2003. The GCC countries accounted for 94% of this amount.²⁷

However, when analyzing the volume of external investments of Arab oil exporting countries, it is difficult to determine the volume of investments of individuals, who often place their capital anonymously. In addition, it is very difficult to determine the exact scale of capital exports from West Asian countries, primarily from the GCC, both due to the lack of unified statistical tools and the "opacity" of their international capital transactions**.

GCC INVESTMENTS IN RUSSIA: OPPORTUNITIES AND PROSPECTS

The GCC countries see investment cooperation with Russia as a lucrative opportunity to reduce their economic dependence on the West. At the same time, Russia is considered by the Arabs as both a donor and a recipient. There are a number of examples of interaction that began relatively recently-already in the XXI century.

Kuwaiti developer Sovereign Hospitality Holdings (owned by Mohammed Abdulmohsen Al-Kharafi & Sons, a company specializing in construction, aviation, IT, and agriculture) owns 21 hotels in different countries, and plans to invest $1.5 billion in the construction of hotels in Russia. Dubai holding Dubai World acquired OGK-1, which was owned by RAO UES, and guaranteed $100 million. ²⁸. In 2008, Uralsib Bank attracted a syndicated loan in the amount of

* Euromarket segment, part of the international loan capital market. It was established in Europe in the late 1950s and continues to function today. There are the following eurocurrency markets: the Eurodollar market, the euro, pound, Swiss franc market, etc.

** The data provided by OPEC and the Arab Monetary Fund differ from the statistics of international organizations. Our research relies on data from UNCTAD and the IMF.

Table 2

Pros and cons of investing in the Russian economy (from the Arab point of view)

$313 million. Along with global banks Credit Suisse, Bayern LB, INGBank N. V., the syndicate included a financial company from the United Arab Emirates-Emirates NBD PJSC and the National Bank of Oman ²⁹.

Despite a number of constraining factors, Russia generally looks attractive for Arab investment (Table 2).

A deterrent factor is largely the lack of development of the legal framework for investment cooperation between Russia and the GCC countries.

The process of forming the legal framework for bilateral economic cooperation between the two countries began in the second half of the 1990s, but it became noticeably more active in the new millennium. The legal framework includes various agreements in the economic sphere between the Russian Federation and each of the States of the Arabian Peninsula.

This activity actually took place in two stages. At the first stage - the 1990s-Russia carried out trade and economic cooperation with the Gulf countries, often based on agreements signed by the USSR. For example, the basis for developing partnership relations with Kuwait to date is the Trade Agreement signed in 1985, which provides for mutual most-favored-nation treatment, as well as the Agreement (1998) on the settlement of the debt of the former USSR. The Air Service Agreement has also been in force since 1978.

During this period, broad - based agreements were concluded on trade, economic, technical, and cultural cooperation. For example, the General Agreement on Trade, Economic, Investment, Scientific, Technical, Cultural, Sports and Youth Cooperation between the governments of the Russian Federation and the KSA (November 1994). The inclusion of various aspects of cooperation in one agreement did not actually imply a deep study of the areas of cooperation in any of them. This state of the contractual framework also reflected the real state of economic interaction.

In the 2000s, more elaborate documents appeared on bilateral cooperation in certain areas. An example of this approach is the Double Taxation Treaty between Russia and Oman (2001), as well as the Agreement on the Promotion and Mutual Protection of Investments signed between Russia and Qatar (February 2007).

As can be seen from the data presented in Table 3, to date, the legal framework between Russia and each of the Gulf States has not received the necessary development. At the same time, at the highest level, both sides declare the need to deepen economic cooperation, which contradicts the current situation in this area.

As President of the Russian Federation, Vladimir Putin noted that the development of relations with Arab countries is a significant vector of Russia's foreign policy, and repeatedly stressed the importance of strengthening direct contacts between the business communities of Russia and Arab countries.³⁰ According to Russian Foreign Minister Sergey Lavrov, "the course of developing comprehensive relations with Arab states remains one of the strategic vectors of Russia's foreign policy. An important element of this line is diplomatic support

Table 3

Legal framework for bilateral cooperation between Russia and the Gulf (as of 2009)

Notes:

* There is an agreement on military-technical cooperation (2006).

** Work on the Agreement (initialed in February 2001) was deemed inappropriate by the Russian Ministry of Finance due to the designation of Bahrain as an offshore zone.

*** Negotiations are underway or projects are being approved.

**** Introduced by Bahrain unilaterally for Russian citizens.

projects of our economic cooperation, the potential of which is very great " ³¹.

The Arab world is far from homogeneous, and a model of cooperation built with some Arab countries may not be effective with others.³² On the other hand, the promotion and mutual protection of investments on the basis of relevant agreements could stimulate the movement of capital and the development of mutually beneficial trade, economic, scientific and technical cooperation.

The solution of these and other issues will make it possible to attract investments of the other party to each of the contracting States on a mutually beneficial basis. Improving the investment climate, adopting a state program to implement Russia's strategic interests in the region, consistently developing the legal framework, as well as conducting information and PR campaigns will contribute to a qualitative breakthrough in Russian-Arab investment cooperation.

¹ OPEC. Annual Statistical Bulletin, 2009.

² UNCTAD. World Investment Report 2008: Transnational corporations and the infrastructure challenge.

³ Investing the Gulfs oil profits windfall // McKinsey Quarterly. May 2008 - http://www.mckinseyquarterly.com

⁴ OPEC. Monthly Oil Market Report, January 2010.

⁵ OPEC. Annual Statistical Bulletin...

⁶ Ibidem.

⁷http://www.neftevedomosti.ru

⁸ OPEC. Monthly Oil Market Report...

⁹ International Monetary Fund. World Economic Outlook Database, October 2009.

^{Shkvarya L. V.} 10 Problems of sub-regional inter-Arab economic integration in the context of globalization, Moscow, 2008.

^{Fedyakina L. N.} 11 Mezhdunarodnye finansy [International Finance], St. Petersburg, 2005.

¹² Ibid.

¹³ The US will lose $400 billion. Arab investments / / Financial News. 12.11.2002.

¹⁴ Ibid.

¹⁵ According to the Russian-Arab Business Council - http://www.russarabbc.ru/rusarab

¹⁶ The Peninsula (Qatar). 4.01.2009.

¹⁷ Khaleej Times (UAE). 13.07.2008.

¹⁸ Gulf states to pump $55bn into roads and airports projects // Qatar Daily Newspaper, 10.4.2010.

¹⁹ Ibidem.

²⁰ Arabian Business. July 1, 2008 - http://www.arabianbusiness.com

^{Muzychuk A.} 21 Saudi sheikhs buy French luxury hotels / / DPMoney, 28.10.2008.

²² Ibid.

²³ Arabian Business. July 1, 2008...

²⁴ Ibidem.

²⁵ Ibid.

²⁶ Ibid.

²⁷ UNCTAD. World Investment Report 2008...

²⁸ According to the Russian-Arab Business Council...

²⁹ URALSIB Bank signed an agreement to attract an international syndicated loan. 7.7.2008 / / Inf. Agency "Investment Banks Consulting" - http://ibk.ru/42579.html

³⁰ Russia and the Arab world: a two-way bridge // Diplomat, 2006, No. 7.

^{Lavrov S.} 31 Activization of Russian-Arab investment cooperation can bring effective returns / Information resource "Foreign Economic Activity" www.vneshmarket.ru

^{Aidrus I. L.} 32 Ekonomicheskoe vzaimodeystvie Rossii i arabskogo mira: faktory, problemy, perspektivy [Economic Interaction between Russia and the Arab World: Factors, Problems, Prospects].

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