CAIRO - The decision by the world's largest sovereign wealth fund to invest billions in struggling Citigroup has highlighted the growing economic power of Arab Gulf states, awash with money because of high oil prices.
US officials have voiced concerns about such funds' secrecy in the past. But the injection of money by the Abu Dhabi Investment Authority could help stabilize Citigroup Inc., the United States' largest bank, as it struggles with billions in losses from America's mortgage crisis.
The tension illustrates the broader dilemma the United States faces in deciding how to deal with such sovereign funds: It relies on their capital inflows to bolster the US economy, but some officials worry that foreign ownership of key US companies could jeopardize national security.
Analysts said Abu Dhabi's minority investment appeared to be structured to produce the least possible backlash from politicians concerned about its strategic implications.
The issue is likely to grow: Merrill Lynch estimates the total assets managed by sovereign funds already may exceed $2 trillion - more than all the world's hedge funds combined - and could grow to $7.9 trillion by 2011.
The bank estimates the assets of the Abu Dhabi Investment Authority - a secretive government fund composed of the emirate's oil revenues and ultimately controlled by the city-state's ruler - alone could total $875 billion.
Washington has relied on the oil-rich Gulf countries, and China, to fund its growing budget deficits by buying vast amounts of US Treasury securities, propping up the value of the ailing dollar.
Record oil prices, which have risen more than 60 percent this year, have swelled the coffers of Gulf countries like the United Arab Emirates.
That has prompted them to look for other financial opportunities, like Abu Dhabi's planned $7.5 billion investment in Citigroup revealed late Monday.
Morgan Stanley estimates the funds have spent $35 billion since the start of last year on stakes in financial organizations, with $26 billion coming in roughly the last six months.
Kenneth Rogoff, a Harvard University economics professor, said the latest investment in Citigroup could help improve the funds' image over time.
"The [Abu Dhabi] fund has a very professional reputation and will probably be a good shareholder and will cast sovereign funds in a good light. But that won't happen overnight," he said.
Rogoff also warned that some people might view Abu Dhabi as buying Citigroup at a "fire sale price."
