x Abu Dhabi, UAESaturday 20 January 2018

Forget where it is; who will run the Gulf Central Bank?

In the end, it was a bit of an anti-climax - Riyadh will be the home of the Gulf Central Bank.

In the end, it was a bit of an anti-climax - Riyadh will be the home of the Gulf Central Bank which will begin the process of steering the region towards a common currency, though on a still uncertain timetable. The decision that came out of a meeting of GCC heads of state in the Saudi financial capital last week lacked the razzamatazz of, say, the naming of a venue for the Olympic Games, but these are bankers, after all, and this was Saudi Arabia. Perhaps we can discern some of the style of the new bank from its origins. It will be low-key, dry as dust and very Saudi.

The UAE expressed its "reservations" about the decision, no doubt reflecting its disappointment that Abu Dhabi - which thought it had a good chance of playing host - did not get the nod. But in reality it was always going to be Saudi Arabia. The Kingdom is by far the biggest economic and financial player in the region; its near-$600 billion of GDP is more than all the other states combined, and its population of close to 30 million similarly dwarfs its neighbours by a factor of two to one. No contest, really.

Perhaps Abu Dhabi thought it deserved a crack at the job by virtue of its claim, often trumpeted in the press, to be home to the biggest sovereign wealth fund in the world. But Adia's hundreds of billions, and the further billions in the UAE capital's other foreign investment vehicles, are outweighed by the vast reserves of foreign exchange and bond investments at the disposal of SAMA, the Saudi Arabian Monetary Authority.

I'm not so sure the location of the new bank matters a great deal in the long run. In Europe 10 years ago, the choice of Frankfurt was a foregone conclusion too, partly because London ruled itself out of consideration by its refusal to join the euro, and by Germany's status as the commanding economy of Europe. The existence of the European Central Bank in the German city did nothing to damage London's position as the leading financial centre in the European time zone (though the havoc wrought by the financial crisis will take its own toll on the Square Mile).

Likewise in the USA, the presence of the Federal Reserve in Washington did not create a rival to the great financial magnet of Wall Street in New York. When the apparatus of the new Gulf bank is fully in place, there is still nothing to check the ambitions of Abu Dhabi, Dubai, Qatar or Bahrain to be independent financial centres in their own right. In fact, given the difficulties non-Gulf citizens experience in travelling to Saudi, those cities might hope to benefit as more customer-friendly gateways to the region's capital markets.

In any case, the location of the central bank probably matters less than the composition of its personnel. The European example is of relevance here. When the ECB was set up in 1998, the French cannily conceded the location in Germany, but insisted the first head of the bank should be a Frenchman. The other European states were initially opposed to this, and a compromise candidate was chosen in the shape of Dutchman Wim Duisenberg, on the understanding that a Frenchman, Jean-Claude Trichet, would eventually succeed him.

This could be the model for the Gulf, to assuage any Emirati resentment at the selection of Riyadh. Perhaps the first chairman of the Gulf monetary council, the forerunner of the central bank, will be a Bahraini, with the first governor proper an Emirati. If that were acceptable to the Saudis, it would help overcome the perception that the new bank would be merely a reflection of Saudi financial power, and become instead a true representative of the wider region, accessible to and at ease with the rest of the world.

PIPELINE STRATEGY Call me a sad old man if you like, but I've become fascinated by oil pipelines. In one scene in the great film Syriana, the oil-broker character played by Matt Damon has a desert meeting with the sheikh of a nameless Gulf state and lays out his vision for the sheikhdom's future. With a few flourishes in the sand, he shows how the sheikh could bypass traditional oil export routes and reach producers at lower cost and with less risk. "I've just doubled your profit," he concludes. "I think that's a pretty good idea."

The great idea was a new oil pipeline, and this scene came back to me last week on the news that plans to build a trans-Emirates pipeline were on schedule, and the project will be completed by the end of next year. The 320km pipeline will carry 70 per cent of the UAE's crude from the Hanshan oilfield in Abu Dhabi to the east coast port of Fujairah, by-passing the Straits of Hormuz in the process. The Straits already witness the passage of 17 million sea-borne barrels per day, some 40 per cent of the global total, but are dangerously congested and strategically vulnerable. Iran has threatened to close the Straits in the even of an American or Israeli attack on their nuclear facilities.

The pipeline, being constructed by Abu Dhabi's International Petroleum Investment Company, is a truly strategic initiative on a grand scale. Earlier reports of an "oil canal" smacked of science fiction, but a pipeline is a realistic and achievable goal. While the technical difficulties of getting it over the Hatta mountains should not be underestimated, and there will be the issue of continued aerial vulnerability in the case of a Gulf confrontation.

At a stroke the UAE reduces the cost of transportation of its main export commodity and significantly reduces the risk of supply interruption. As Damon says in the movie, that's a pretty good idea.