Kadafi’s long reach
Regardless of how the Libyan revolt plays out, in the global economy the humanitarian crisis is just one deadly aspect of the fighting. Thousands are believed dead, and the fabric of society has been shredded in what has become a civil war. But to the nations of Europe that have come to rely on a steady flow of oil and petrodollars from Moammar Kadafi’s nation, the destruction of what could be called Libya Inc. is likely to be the most painful blow.
When the United Nations lifted sanctions on Libya in 2003, after Kadafi’s regime accepted responsibility for the bombing of a Pan Am jet over Lockerbie, Scotland, many European countries rushed to do business with Kadafi, despite his erratic history. Why? Because Libya was sitting on a deep, largely untapped reservoir of oil and a mountain of cash. It has more than 40 billion barrels of proven petroleum reserves, ninth most in the world, and its central bank holds $110 billion in foreign exchange reserves while its sovereign wealth fund, the Libyan Investment Authority, has $70 billion more to invest.
Seeing the opportunity, Europe pounced. As a result, today just about all of Libya’s major trading partners are European. Take Italy, for example. Italy is by far Libya’s most active business partner, with more than $12 billion in two-way trade annually. Libya supplies almost a quarter of Italy’s oil, and Italy is the world’s largest importer of Libyan crude. Libya also owns 7.5% of the Italian bank UniCredit and has investments in Fiat, the defense conglomerate Finmeccanica, the energy company ENI, the soccer team Juventus and a variety of other Italian businesses.
This financial backing helped Italy stave off the most damaging effects of the global recession that started in 2008. In response to international pressure, Italy has frozen some Libyan assets, but none belonging to the country’s central bank or the Libyan Investment Authority.
However, Italy’s hardly the only cash-strapped European nation to forge significant economic ties with the Kadafi regime. In 2009, the European Union’s two-way trading with Libya amounted to more than $37 billion, with Germany, France and Spain among its leading partners. Naturally, the bulk of this was petroleum because Libya supplies more than 10% of Europe’s oil. For a sense of just how much that is, consider that the United States, which had just $2.6 billion in two-way trade with Libya in 2009 and imports virtually no petroleum from the country, gets roughly 10% of its oil from Saudi Arabia. That’s what Europe is losing as Libya burns.
In many ways, the nation with the most at stake economically is Britain. Although its annual trade with Libya amounts to less than $2.5 billion, Britain has recently emerged as a major target for Libyan investments. Libya has spent hundreds of millions of dollars on prime London commercial real estate. And last year, a senior executive with the Libyan Investment Authority announced that the fund had earmarked $8 billion exclusively for Britain. This pledge was welcome news for the British government, which has been trying to sell more than $40 billion in state-owned property to help address its yawning budget deficit. In short, it needs the money.
Libya’s fascination with Britain stems from Kadafi’s second-oldest son and presumed political heir, 38-year-old Seif Islam, who earned a doctorate from the London School of Economics, owns a $16-million mansion in London’s fashionable Hampstead Garden neighborhood and even opened the Libyan Investment Authority’s first foreign office in London. Over the years, the erudite younger Kadafi charmed his way into British society, befriending Prince Andrew and visiting Buckingham Palace and Windsor Castle.
Of course, now that he’s become a full-throated defender of his father’s savagery, Seif Islam’s erstwhile friends are rushing to distance themselves. The London School of Economics, which has come under heavy criticism for accepting a $2.4-million donation from a Kadafi charity, is looking into accusations that he plagiarized parts of his doctoral thesis. And his abandoned London home has been occupied by anti-Kadafi protesters from throughout Britain.
But none of these reprisals changes the cold reality that with Libya descending into chaos, Europe is losing a major partner just when its key economies are struggling to regain their footing. Though the timing may be terrible, the outcome shouldn’t be surprising. Europe’s leaders chose to look past the mercurial Kadafi’s violent past, seeing only Libya’s fortune. And in a matter of weeks, Kadafi has destroyed everything.
As populist movements spread from North Africa to the Arabian Peninsula, where protests have erupted in Bahrain and Yemen, the U.S. will probably face similar issues over its troubling economic alliances, particularly with Saudi Arabia. So U.S. leaders would be wise to pay close attention to what happens with Libya and Europe. An entire continent is wondering: If not the Kadafis, then who? And it probably won’t be long before America is asking the same questions about its friends as well.
Eric J. Weiner is a financial journalist and author of, most recently, “The Shadow Market.”
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