Squirreling Away $100 Billion

By Charles Alexander

Saudi Arabia's central bank practices prudence on a global scale

From Bedouin tent encampments to the traffic-choked streets of Riyadh and Jidda, Saudi Arabians by the hundreds of thousands turned introspective last week as religious sentiment swept their land. It was the start of Ramadan, the high holy month of Islamic fasting. But Ramadan or not, it was also pretty much business as usual in one imposing Riyadh office building. Inside the high-rise tower that houses the Saudi Arabian Monetary Agency (SAMA), computers kept humming and clerks kept counting as petrodollars continued to cascade into the desert kingdom's coffers at a rate of $320 million per day.

Guarding and investing much of the $117 billion or so that Saudi Arabia is now receiving yearly from oil exports is the responsibility of SAMA, and the money from oil knows no religion. In the past eight years, the kingdom's reserves of surplus petro earnings have swelled more than twenty fold, to at least $100 billion. As a result, SAMA, the country's central bank, has loomed as one of the most powerful and potentially threatening players in all of international finance. If it chose to do so, SAMA could buy scores of large American corporations and millions of acres of prime U.S. real estate. SAMA'S vast holdings of dollars, German marks and Japanese yen are a worrisome wild card in money markets from New York to Tokyo. Adding to SAMA'S menacing aura is its abiding secrecy. Western moneymen guard the identity of most Saudi investments lest they be blacklisted from SAMA's select roll of middlemen.

In fact, bankers familiar with SAMA'S investments state flatly that the agency has little if anything to hide; the world's richest investor is also its most conservative. While other OPEC nations like Kuwait have a fondness for foreign land deals and high-stakes stock market plays, SAMA restricts itself to buying less than 5% of a company's stock. Explains a London banker who deals closely with SAMA: "The Saudis have an absolute terror of American politicians standing on the floor of the Senate and accusing them of buying up America."

Instead of stocks and real estate, SAMA'S favorite investments are super-safe U.S. Treasury bills and notes, of which the bank now holds about $30 billion. Much of the rest of the agency's surplus is in short-term deposits at some 80 different blue-ribbon Western banks.

Still more is lent out in so-called private corporate placements. These loans --SAMA now has as much as $15 billion outstanding--are unpublicized transactions in which major Western corporations raise money by borrowing directly from SAMA. Among the private placements on SAMA's books: $650 million for AT&T, $300 million for IBM and $200 million for U.S. Steel.

The average interest rate on SAMA's unadventurous investments has been about 10%, and as a top SAMA official admits, their return has not kept pace with U.S. inflation. Yet the Saudi moneymen remain cautious, in part because they are relatively inexperienced. Since the Koran forbids the charging of interest, Western-style banking came late to the kingdom, and even today the Saudis use such phrases as "service fee" and "return on investment" as euphemisms for interest.

When SAMA was founded in 1952, its headquarters was a rabbit warren of small buildings near the old Jidda airport. Decision making rested largely with foreigners. The bank's first governor was an American, and as late as 1974, at the time of the first big surge in OPEC oil prices, SAMA was headed by a Pakistani.

In that year Abdul Aziz al Quraishi, now 51, became the first Saudi to hold SAMA's purse strings. A member of the kingdom's expanding corps of Western-educated technocrats, Quraishi has a master's degree in business administration from the University of Southern California, but has had to learn about banking through on-the-job experience. A trio of early outside advisers helped him to master the mysteries of global high finance: John Meyer, onetime chairman of New York's Morgan Guaranty Trust, Alfred Schaefer, once chairman of Union Bank of Switzerland, and Robert Fleming, who headed his own merchant bank in London.

Today, Quraishi moves among international bankers with ease. Almost every day financial pilgrims to SAMA check into Riyadh's sumptuous Inter-Continental Hotel near the bank's headquarters and await an audience with Quraishi. Even David Rockefeller, recently retired chairman of the Chase Manhattan Bank, was once spotted in the Inter-Continental lobby whiling away the time before his appointment.

Though Western bankers give Quraishi high marks for learning his craft quickly, he still leans on outside help. Among the 300 staff members at SAMA's central office are currently perhaps a dozen key foreign advisers, including investment strategists on loan from Merrill Lynch, the largest U.S. brokerage house, and Baring Brothers, the venerable British merchant bank that 178 years ago helped finance the Louisiana Purchase. Top-level outside advice also flows in from senior officials of Morgan Guaranty, London's National Westminster Bank and Frankfurt's Deutsche Bank.

To reduce its dependence on foreign counsel, SAMA is now feverishly training a cadre of young Arab moneymen. Boot-camp is the Saudi International Bank in London, owned by SAMA and six of the world's leading financial institutions, including Banque Nationale de Paris and the Bank of Tokyo. The apprentice Saudi bankers soak up seasoning from their more experienced colleagues and practice their skills by helping to manage the bank's $1.2 billion loan portfolio.

Despite their shortcomings, the Saudi officials at SAMA are no soft touch. Says Michael Callen, who is managing director of the Saudi American Bank, a Riyadh-based affiliate of New York's Citibank: "A lot of borrowers think they've got a bank here run by people who ride camels. But the Saudis are tough and sophisticated. The foreign advisers may do the studies, but the Saudis make the decisions." One sign of tight Saudi control at SAMA: no telex can be wired from headquarters without a Saudi signature.

The chain of financial command in Saudi Arabia is short and autocratic. On multibillion-dollar investments, Crown Prince Fahd, who oversees most government matters for King Khalid, makes the final decision. For medium-scale transactions of a billion or two, Finance Minister Mohammed Ali Abdul Khail can give the approval. In deals involving no more than a mere $500 million, SAMA Governor Quraishi is empowered to act entirely on his own.

A quiet man with a hint of gray around the temples, Quraishi is somewhat aloof from the press. When asked for an interview, he sometimes demands written questions in advance. If he dislikes what he is being asked, he substitutes his own questions and pens a response.

By contrast, within the close-knit fraternity of international bankers, Quraishi's moods can vary from cold calculation to disarming cordiality. Says a London banker who deals with him often: "When he squints his eyes, you have to watch out. When his eyes twinkle, you know you are doing well."

In private, Quraishi displays the overflowing hospitality characteristic of Saudis. Richard Debs, a managing director of New York's Morgan Stanley investment banking house, recalls the time that Quraishi invited him and his wife on an excursion to the hills north of the Saudi town of Medina, where they picnicked Bedouin-style on rice and lamb among the Nabataean ruins.

SAMA's coziness with Western bankers, and its safety-first investments, have stirred resentment among the Saudis' poorer neighbors. A leading Lebanese newspaper, As Safir, charged last month that Saudi Arabia was "a hostage of the West" held by "chains of gold." Arab nationalist groups throughout the Middle East argue that more of the Saudi surplus should be invested in the Third World.

The premium prices that the Saudis and other OPEC members command for their oil have pushed many developing nations into a state of destitution. The mountain of Third World debt now exceeds $370 billion, but the Saudis have used only a small fraction of their available revenues for foreign aid and low-interest loans. Demands are thus increasing that the Saudis do more to help out.

The Saudis seem willing to oblige, but they prefer their loans to be channeled through organizations like the International Monetary Fund, whose members share the hazards of lending the money. Last March SAMA agreed to loan the IMF nearly $10 billion over the next two years. In exchange, the Saudis received a permanent seat on the fund's executive board. That body decides which countries get financial help from the IMF and the conditions attached to the loans.

In fact, some students of Saudi policy wonder whether the government's motives are really all that altruistic. Saudi Arabia has in the past urged the IMF to grant observer status to the Palestine Liberation Organization, and critics of Saudi foreign policy like Middle East Scholar Rand Fishbein, of Johns Hopkins University, now fear that the Saudis will use their new clout within the fund to force IMF cooperation on the P.L.O. question.

Any such petrowealth power play would, of course, be dangerous for world political as well as financial stability, and so far the Saudis show no sign of undertaking it. That is to be expected. As the holder of more dollars than it knows what to do with, the Saudi Arabian Monetary Agency stands to gain much by caution and prudence, and to risk everything by impulsive actions that upset the world's finances. With enormous wealth comes large responsibility, and SAMA seems up to the challenge. --By Charles Alexander. Reported by Gisela Bolte/Washington and Adam Zagorin/Beirut

With reporting by Gisela Bolte, Adam Zagorin

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