[Mb-civic] Mideast Investment Up in U.S. - Washington Post

[William Swiggard]

Mideast Investment Up in U.S.
Proposed Ports Deal Is Just Part of Flood of Oil Wealth Spilling Ashore

By Paul Blustein
Washington Post Staff Writer
Tuesday, March 7, 2006; A01

Middle Eastern investment in the United States is once again picking up 
steam, showing big gains since the tense period following the Sept. 11, 
2001, terrorist attacks. And while some takeovers are triggering alarm 
-- most famously, the purchase by a Dubai-owned company of a seaports 
management firm -- others are evoking warm welcomes.

Spearheading the trend is Dubai's Mohammed bin Rashid al-Maktum 
(popularly known as "Sheik Mo"), ruler of the freewheeling city-state, 
which is part of the United Arab Emirates. The ports deal is just one of 
a series of recent purchases by companies he controls.

Other acquisitions include a $1 billion portfolio of 21,000 apartments 
in U.S. Sun Belt cities; a 2.2 percent stake in the automotive giant 
DaimlerChrysler AG that cost another $1 billion; and a Manhattan 
landmark building, 230 Park Ave. The emirate also made major purchases 
in other countries over the past year, notably a $1.5 billion takeover 
of Britain's Tussauds Group, which owns the famous waxworks, along with 
theme parks, roller coasters and other entertainment-oriented businesses.

On Thursday came news that yet another Dubai acquisition is drawing Bush 
administration scrutiny because of the national security risks -- this 
time of plants in Georgia and Connecticut that make precision components 
used in engines for military aircraft and tanks.

But an entirely different reaction greeted the disclosure several months 
ago that Dubai Investment Group had acquired the Essex House hotel in 
Manhattan and promised to sink $50 million into renovating it.

That announcement prompted New York City Mayor Michael R. Bloomberg to 
exult: "Another iconic hotel overlooking Central Park will be preserved 
and its unionized workforce protected. This is excellent news for New 
York's tourism and hospitality industries."

Behind such transactions are two powerful forces. One, of course, is the 
high price of energy, which has left several oil-producing Arab 
countries swimming in cash. The other is the burgeoning U.S. trade 
deficit -- $726 billion last year -- which means that the United States 
needs foreign capital; a country that imports more than it exports must 
cover the gap with money from abroad.

Until now, investments in the United States from Europe and other parts 
of Asia have dwarfed those from the Middle East. But an increasing share 
of the foreign money required to fuel the U.S. economy is likely to come 
from places that, like Dubai, trigger visceral reactions among Americans 
seared by memories of the Sept. 11 attacks.

"The price of oil is going only one way -- up -- for the next five 
years, because it is going to take at least that long for alternatives 
to kick in," said Youssef M. Ibrahim, managing director of the Strategic 
Energy Investment Group, a consulting firm based in Dubai. "So there is 
no question in my mind that billions of dollars will continue flowing 
this way, and people cannot handle all of that kind of money here. 
You've got to circulate the money, and the United States is still the 
biggest market."

Already, the list of U.S. businesses owned by Arab investors -- not just 
from Dubai -- includes some well-known names. Among them are Caribou 
Coffee Co., the fast-growing rival to Starbucks Corp.; Church's Chicken, 
a fast-food concern; Loehmann's, a specialty retailer; TLC Health Care 
Services Inc., a provider of home nursing and hospice care; and even 
several financial publications, including the American Banker.

Such "direct" investment in hard assets -- companies, factories and real 
estate -- is generally preferable for the U.S. economy, in the view of 
most economists, to foreign investment in bonds, stocks and other 
financial assets. One advantage of direct investments is that they 
cannot be dumped in a panic the way that, say, a Treasury bond can. 
Moreover, they often involve high-wage jobs. Average annual compensation 
per worker at U.S. subsidiaries of foreign companies is about $60,500, 
34 percent higher than the rate at all U.S. companies, according to the 
Organization for International Investment.

The main drawback of a direct investment is that it involves foreign 
control, which can raise national security concerns. That is why an 
interagency government panel, the Committee on Foreign Investment in the 
United States, reviews many foreign takeovers. That process may be 
revamped by Congress due to indignation over the panel's decision to 
approve the purchase by Dubai Ports World of Peninsular and Oriental 
Steam Navigation Co., a British firm that manages container terminals on 
the East Coast.

Arab direct investments would probably be more extensive were it not for 
the political and legal atmosphere in the post-Sept. 11 era. "Middle 
Eastern investors are still a little skittish about investing in the 
United States," said James A. Fetgatter, chief executive of the 
Association of Foreign Investors in Real Estate.

To some extent, Arab investors think U.S. property is overpriced, so 
they are putting more of their overseas bets in Asia, said Gary Sheehan, 
an executive with Sentinel Real Estate Corp. in New York. But an 
additional factor is their fear about what might befall their holdings 
at the hands of U.S. authorities.

"I was in Bahrain the week before last and had a meeting at a bank where 
they said they would love to invest in the States," Sheehan said. "But 
they said: 'Syrian interests own 12 percent of our bank. So we know that 
if push comes to shove' " -- that is, a serious confrontation between 
Washington and Damascus -- " 'our assets will be frozen.' "

Such negativity toward investing in the United States could well deepen 
as a result of the controversy over the Dubai ports deal, some in the 
region warn. Sheikha Lubna al-Qassimi, the UAE economy minister, told 
the Financial Times last week that the United States will become less 
attractive if investment decisions are subject to political 
interference. "There are other countries that are competing for [our] 
money," she said.

But worries about a drying-up of Arab investment are overblown, 
according to others, including C. MacLaine Kenan, an executive in the 
Atlanta office of Arcapita Inc., one of the biggest firms serving as a 
conduit for foreign Arab investors in U.S. businesses.

Arcapita has raised billions of dollars from investors in the UAE, Saudi 
Arabia, Qatar and neighboring countries and has invested the majority of 
it in the United States, where it owns Caribou Coffee, Church's Chicken 
and other companies, as well as real estate. The investments have to 
conform with sharia, or Islamic law, which means that they cannot 
involve businesses that traffic in alcohol, pork, pornography or 
gambling and that they have to use special types of financing to avoid 
violating Muslim rules against charging interest.

"Our investors will spend some time complaining about U.S. politics, but 
at the end of the day, they're pretty shrewd in divorcing the economic 
opportunity from the political issue," Kenan said. "And they generally 
know the political problems will in most cases blow over. So every now 
and again, we get people saying: 'I wish this [U.S.] administration 
would do better. But by the way, how's this investment going?' "

The typical Middle Eastern investor is "a pretty happy camper," Kenan 
added, because markets in the region have soared along with oil prices. 
"So they have more appetite for investment abroad, and they know the 
United States is a place a smart investor needs to have some money."

Whatever Arab investors abroad finally do, their clout is relatively 
small -- at least for now. At the end of 2004, investors from Arab 
countries held just $4 billion in direct investment in the United 
States, according to Commerce Department data.

British investors, by contrast, held $252 billion, Japanese investors 
held $177 billion, Dutch investors held $167 billion and German 
investors held $163 billion. Their holdings span industries often deemed 
"critical," such as telecommunications (Finland's Nokia Corp. and 
Sweden's Ericsson Inc.), energy (British Petroleum PLC and Royal Dutch 
Shell PLC) and utilities (E.On AG of Germany, which controls much of the 
gas and electricity distribution in Kentucky).

Although foreign investors are far from controlling the U.S. economy -- 
their payrolls constitute an estimated 3.5 percent of the nation's 
workforce -- the United States is growing increasingly dependent on them 
as the trade gap widens. To obtain the money necessary to pay for 
imports, the United States this year will probably need to attract 
foreign capital at the rate of about $20 billion a week, which is equal 
to selling three companies the size of the maritime firm purchased by 
Dubai Ports World, noted Brad Setser, an economist with Roubini Global 
Economics LLC in New York.

To be sure, most of the money flowing into the United States comes in 
the form of Treasury bonds and other financial assets rather than 
corporate acquisitions. Foreigners held roughly $9 trillion of U.S. 
financial assets at the end of 2004, according to government data. 
Middle Eastern oil exporters held a modest percentage of that, including 
about $121 billion in U.S. government securities, the data show.

But the oil revenue flooding into the Mideast means that the region's 
financial strength is rising apace. The cumulative trade surplus of 
Middle Eastern oil exporters, which was $500 billion from 2000 to 2005, 
will come close to $800 billion by year-end, Setser wrote recently.

"Which is just to say," he said, "that there are a lot more Dubai Ports 
Worlds out there."

http://www.washingtonpost.com/wp-dyn/content/article/2006/03/06/AR2006030601817.html?referrer=email
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