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Trouble Inside Kuwait's Money Machine


International Business

TROUBLE INSIDE KUWAIT'S MONEY MACHINE

Ever since Iraq invaded Kuwait last August, the Kuwaiti government-in-exile's financial brain trust has tried to calm nerves on worldwide markets by insisting that the nation wouldn't start a mass liquidation of its roughly $100 billion in Western and Asian assets. But as the U. N.'s Jan. 15 deadline for Saddam Hussein's withdrawal draws closer, the ruling al-Sabah family's main overseas financial arms, the Kuwait Investment Office (KIO) and its parent, the Kuwait Investment Authority (KIA), are dipping ever deeper into their pockets.

Since summer, sources say, Kuwaitis have spent $8 billion to $10 billion to help finance Operation Desert Shield (page 32) and support Kuwaiti refugees and corporations. About half has come from cash and short-term securities in Kuwait's accounts. The rest was raised by selling stocks and bonds worldwide.

LIKELY VICTIM. Now, disputes over the control and disposition of the remaining assets have broken out among the al-Sabah family, Kuwait's bureaucrats, and the country's London staff of Western and Arab money managers. Some observers think the infighting could grow even more heated if the Kuwaitis win their country back and adopt a more democratic form of government. One likely victim of such a shift, some well-placed Kuwaitis say, could be Finance Minister Ali Khalifa al-Sabah, a former Oil Minister and the architect of Kuwait's overseas investment strategy.

Even if the Kuwaitis don't regain their homeland anytime soon, the financial dispute could have profound implications for many markets and multinational companies. Since the 1970s, Kuwait has used its petrodollars to amass large holdings in a host of corporations, including British Petroleum, France's Paribas, Germany's Daimler Benz, and Santa Fe International in the U. S. But now, the Kuwaitis are going the other way.

Among the assets they have unloaded, sources say, are some $3 billion to $4 billion in German and Japanese stocks and bonds, plus a 10% stake, worth $123 million, in London real estate developer Mount Charlotte Investments PLC. Even more sales are in prospect. Pressures from Washington to share the Desert Shield spending burden will likely accelerate. And Kuwaiti officials are already sounding out Western contractors about rebuilding their homeland, at a possible cost of $60 billion. In any case, says one Western banker, "anyone managing Kuwaiti money has to assume their funds will be tapped."

Already, some Kuwaiti moneymen are resigning themselves to a far less exciting future. "Ultraconservative management" should be the norm for the next few years, says Fouad J. Jaffar, a former KIO general manager who remains close to the office. "I don't think they should make the spectacular investments we made in the past."

COLD SHOULDER. Such caution appears to have touched Citicorp, which has been attempting to raise new cash around the globe. Several senior Kuwaitis say the banking giant recently tried to interest Kuwait in buying part of a proposed offering of $1 billion to $2 billion in convertible bonds. Although some Kuwaiti politicians are understood to be sympathetic to the offer--to show their support for the U. S. effort in the gulf--the country's moneymen so far have balked. They are expected to give just as cold a shoulder to any funding requests from companies that Kuwait controls. For example, London real estate developer St. Martin's Property Corp. and the Spanish conglomerate Grupo Torras are both said to be interested in expansion. But sources say financing for any new ventures will have to come out of the companies' own resources, not from the Kuwaitis. Says one senior Kuwaiti financier: "The most important point is to remain liquid for reconstruction."

Amid the strains of the asset sales and foreign aid payments, longstanding tensions within Kuwait's close-knit financial structure have suddenly broken into the open. In late December, sources say, KIA Assistant General Manager Salah al-Maousherji, a Kuwaiti, and 11 other executives offered their resignations in a protest over Ali Khalifa's reluctance to grant them more influence over investment policy. The sources say another dispute is emerging between the Kuwaitis who want to sell assets faster to support the exile community and those who want to continue investing despite the growing need for cash.

'OPEN UP.' The feuding may lead to major changes if Saddam withdraws and the Kuwaitis move back in. If Kuwait liberalizes its government as the price of its restoration, tighter controls on the free-wheeling KIO are almost certain to result.

The secretive office came in for sharp criticism at home and abroad after buying 21.6% of BP in 1988, only to see former Prime Minister Margaret Thatcher force it to slash its stake by more than half. Now, the sources expect the KIO to be subjected to more rigorous performance standards and forced to make far greater public disclosure, perhaps to a new parliament. "They will have to open up," says a New York banker. Agrees a Kuwaiti: "Much more accountability is needed."

The Kuwaitis are likely to help finance reconstruction through a combination of asset sales and borrowings overseas, using their remaining international holdings as security. While Kuwait isn't expected to dump such trophies as, say, its 25% interest in German chemical maker Hoechst, all bets might be off if the cost of the gulf crisis spirals out of control.

When Saddam Hussein invaded Kuwait, the first big worry was whether he would gain control of the country's wealth. A U. N.-backed global asset freeze put that fear to rest. Now that D day is approaching, a whole new question of control is brewing. As Kuwait dips into its $100 billion savings account, world markets will be waiting anxiously to see what's on the withdrawal slips.Richard A. Melcher, with Stephanie Cooke, in London, and William Glasgall in New York


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