Deal with the enemy: how Saudi Arabia became a major creditor of the United States

The deal of the century

Over the past 40 years, no one knew how much Saudi Arabia has invested in us Treasury bonds, so-called treasuries. Data is published one line with information in 14 other countries under the “umbrella” name of “oil exporters”. This category also included UAE, Nigeria, Kuwait, Qatar and other countries — members of OPEC.

As explained by Bloomberg, the volume data of us bonds in Saudi hands remained secret at the direct request of the Saudi king Faisal as part of a large-scale transaction concluded four decades ago between Riyadh and Washington.

Details of the arrangements reporters learned from the California financier Jerry Parsky. He now heads his own investment firm Aurora Capital Group, which manages assets of $2 billion, but in 1970-e years worked as the assistant to the head of the U.S. Treasury capital markets.

The us Treasury from 1974 to 1977 was headed by financier William Simon. In addition, he was an “energy Tsar” — so in American politics called the government official responsible for energy policy in Washington. Just a month before his resignation in the Wake of the Watergate scandal in July 1974, President Richard Nixon sent Simon and Parsky in Saudi Arabia with a proposal for a major intergovernmental transaction.

Relations between the two countries were difficult. In October 1973, in response to the support of USA and Western European countries Israel in the “Yom Kippur war” OPEC imposed its oil embargo. A few months oil prices soared several times, that put US on the brink of traffic jams and led to a sharp rise in public spending. In response, Washington ordered the creation of a Strategic petroleum reserve, to remove the limit on oil imports and, on the contrary, to prohibit its export.

As told Parsky, many Western countries secret from the allies tried to reach an agreement with Riyadh on future deliveries of oil, so that the Nixon administration was no exception. In June 1974, the US President visited Saudi Arabia on an official visit, and in a month there, headed the delegation of the U.S. Treasury.

Simon’s offer was as follows: Saudi Arabia resumes oil supplies to the USA, instead of receiving from the Americans military aid and equipment. The proceeds from the trade in petrodollars Riyadh re-directs in the United States — in the form of buying us government bonds in order to Finance the costs of the US budget. After months of negotiations, the last request of king Faisal was the secrecy of the transaction — to avoid complaints from neighbours of Riyadh in “trade with the enemy.”

The fragile partnership

Americans over 40 years to keep his word: they maintained the secrecy of transactions for the purchase/sale of bonds by conducting additional auctions: Riyadh received the right to invest in bonds, bypassing the official tenders. To do this, the Finance Ministry used the law to hide the names of individual investors from countries which are not major holders of treasuries. According to one estimate, by 1977 Riyadh has accumulated up to 20% of the total us Treasury obligations.

In 1979 the chamber of the United States stated that such practice does not exist “any statistical or legal basis”, but the Ministry of Finance and then, he continued to refer to this law. By the time left the scene of the main players in the deal: Nixon resigned in August 1974, king Faisal in March 1975, he was shot dead by his nephew, Simon left office in January 1977 together with the Republican administration of President Gerald Ford, Nixon’s successor.

An investigation by Bloomberg, “the Untold story of 41-year-old secret U.S. debt before Saudi Arabia became possible after in may the American Ministry of Finance has responded to their demand to reveal the share of Saudi Arabia among the holders of Treasury bonds. To get the materials, journalists referred to the Law on freedom of information (FoIA), the Agency decided that the requirement “is consistent with the principle of transparency and the letter of the law” and revealed data published on 16 may monthly report.

By March 2016 Saudi Arabia owned U.S. Treasury bonds by $116.8 billion, It puts it at 13th place in the world. By a large margin in the list are the leaders of China and Japan, whose authorities have been approximately $1.2 trillion of US government bonds. Of all the various state owned treasuries worth almost $6.3 trillion.

Offshore possessions of Riyadh

Bloomberg doubts that the attachment of Riyadh in us Treasury bonds are limited to $116.8 billion of Foreign currency reserves of Saudi Arabia amounted to $587 billion, respectively, US bonds account for only 20% of this amount. The General practice of Central banks, according to statistics from the IMF, involves placing two thirds of foreign exchange reserves in dollars.

Citing anonymous experts Bloomberg suggests that a significant portion of their investments in foreign debt Saudi Arabia holding through numerous offshore companies. Accordingly, the amount of data of the U.S. Treasury are shown as investments from other countries. For example, the third place among the holders of treasuries is a Cayman Islands with $265 billion.

Ready to make a sale

Beginning in 2014, another oil crisis, Saudi Arabia may require additional cash to clean up public finances. To get it, you may need as privatization oil Corporation Saudi Aramco, and the yield of us treasuries.

In April, Riyadh has threatened to withdraw from the States up to $750 billion of their assets (including money from bonds), if the US Congress is legally allowed to use third country in the proceedings on cases on compensation of damage resulting from terrorist attacks — primarily this applies to Saudi Arabia and the activities of its secret services, who were not able or did not want to prevent the attacks of September 11, 2001. Yet, according to the us Treasury, last year investments of Saudi Arabia to the US national debt is not only not decreased but even increased by 10% (from $102.8 billion in March 2015).