by Robert Baer
The reason that Saudi Arabia has forgone huge profits on its oil sales is because it does not want the United States to forget who is its most reliable supplier. Not only has it paid a lot to hold that position, it has turned a deaf ear to increasingly shrill Asian complaints about the “Asian premium.” As I write, Russia has plans in place to build pipelines east across Siberia, which one day might cause Saudi Arabia to lose its Asian market. The bottom line is that what the Saudis really care about is driving home the message to Washington that it needn’t worry: Sure, we’ve lost control of our country, and our citizens are slaughtering yours, but you can depend on us to keep your cars on the road and your houses warm. And, by the way, you’ll feel better if you don’t think about the unpleasant reality that your oil bank is sitting on dangerously shifting sands.
The Saudi oil subsidies didn’t fall on Washington like some weird, benevolent meteorite. The business landscape is filled with such deals, each of them pointed reminders that even apocolyptic acts of terrorism needn’t get in the way of business. In 1997, Saudi Aramco set up a joint venture with Texaco, Inc., later joined by Shell Oil, to refine roughly eight hundred thousand barrels of Saudi crude a day. In 1998 the same three companies joined to form Motiva Enterprises, one of the largest oil-refining and marketing companies in the United States. AT&T got into the game with a $4 billion contract to expand the Saudi telecommunications network. Even Lucent Technologies, a collapsed star of the U.S. high-tech stock-market bubble, landed a July 2001 contract worth $240 million to improve mobile-phone service.
In May 2001, the Saudi Higher Economic Council approved long-term contracts with American oil companies worth “tens of billions of dollars,” according to the Saudis, to provide desalinization and power-generation plants and to develop the kingdom’s natural-gas resources. A few months earlier, the Saudi Arabian General Investment Authority issued a license to a consortium of U.S. contractors to build three thousand new schools in the kingdom, at a cost of $3.5 billion. Allah alone knew where the Saudis were going to get all the money, but that didn’t seem to be bothering anyone on either side of the Atlantic. The point was that we couldn’t do without our Saudi fix.
It’s not just that Saudis spend boatloads of money in the United States. Spending boatloads of money was part of the deal from the very beginning: The U.S. would buy the House of Sa’ud’s oil and provide protection and security, and the Saudis would buy their weapons, construction services, communications systems, and drilling rigs from the U.S. All this recycling, to judge solely by the numbers, was a dream come true. Collectively, two-way trade between Saudi Arabia and the United States grew from $56.2 million in 1950 to $19.3 billion in 2000.
Money only goes so far, no matter how much you have to spend. Professional sports are full of filthy-rich owners who can’t buy a title for love or money. What has made the Saudi money so effective is that it is well targeted, and in Washington especially, the Saudis have hooked up with a culture that seems willing to do almost anything to get it.
Call it a poetic coincidence. But right as the Carlyle Group was getting into its annual investor conference at Washington’s Ritz-Carlton Hotel on September 11, 2001, American Airlines Flight 77 slammed into the Pentagon, only two and a half miles to the south. If United Airlines Flight 93 had hit the White House, its presumed target, the Carlyle attendees would have felt the shock, and it was a group fairly hard to shock. At the meeting were the group’s senior counsel James Baker, secretary of state in the Bush I administration; then Carlyle chairman Frank Carlucci, Ronald Reagan’s last secretary of defense and national security adviser before that; and Shafiq bin Laden, representing the Bin Laden Group - one of the world’s largest construction companies - but far more famous today as Osama bin Laden’s brother. The gathering was the perfect metaphor for Washington’s strange affair with Saudi Arabia.
Named for the luxurious Manhattan hotel where the private investment company was dreamed up in 1987, the Carlyle Group has had a long and profitable relationship with the Al Sa’ud family. In 1991, as one of its first big coups, Carlyle paved the way for Prince al-Walid bin Talal to purchase nearly $600 million in Citicorp stock. A nephew of King Fahd, Prince al-Walid was named the world’s sixth richest person by Forbes in 2001, with assets of roughly $20 billion, most of that through his Riyadh-based Kingdom holding company.
Prince al-Walid has a knack for saying what’s on his mind. Shortly after the September 11 attacks, the prince flew to New York City to donate $10 million to the Twin Towers Fund, set up by New York mayor Rudy Giuliani to aid the families of the victims. Al-Walid couldn’t resist offering the helpful advice that the United States needed to “reexamine its policies in the Middle East and adopt a more balanced stance toward the Palestinian cause.” Apparently, the Carlyle Group forgot to tell him that New York City is overwhelmingly pro-Israel, and that Americans don’t like being reminded about living off Saudi charity and putting our foreign policy up for sale. But Rudy Giuliani didn’t need the Carlyle Group to remind him of the realities of American politics. He immediately told the prince what he could do with his check. And in case you’ve been sailing the Galapagos Islands without a ham radio for the last three years, the White House never offered to return the $2.8 billion oil subsidy in solidarity with Giuliani.
One thing certain about Carlyle’s management: It never missed an opportunity to make money. Tap into the uninterrupted flow of Saudi oil and arms, the Carlyle thinking went, and you couldn’t go wrong. Look at a couple of Carlyle deals, and you get the point. For much of the 1990s, the defense contractor BDM International, in which Carlyle then had a controlling interest, received $50 million annually to provide training and operational and logistical services for the Saudi Arabian National Guard, the Al Sa’ud’s bodyguards. (Carlyle sold its stake in BDM to TRW in late 1997.) Until shortly after the 9/11 attacks, Carlyle also served as adviser to the royal family on the Economic Offset Program. In the official literature of the kingdom, the Economic Offset Program encourages foreign investment in Saudi Arabia and helps to ensure that a critical percentage of its oil revenues remain there. Unofficially, and more accurately, the program assures that a percentage of all arms sales to the Saudis are siphoned off into fees and commissions to businesses owned almost entirely by royal family members.
Carlyle has also made a fortune through buying up small defense contractors and flipping them to defense giants like Boeing, Lockheed Martin, and TRW International, a major weapons provider to the Saudis. Along the way, it bought its own arms business, United Defense, America’s eleventh largest defense contractor. As the world’s largest consumer of U.S.-made armaments, Saudi Arabia virtually makes the secondary market for American fighter planes, missiles, tanks, armored vehicles, and other weaponry and supporting services. Saudi Arabia was also the second largest consumer, after the U.S. military, of the Bradley Fighting Vehicle, which was for many years the mainstay of United Defense’s product line.
In Washington, to bring up the “revolving door” between government and business is like discussing incest in the family. But Washington’s franchise players head straight for the Carlyle employment office as soon as they’re out of the government.
In addition to serving as a professional home for James Baker and Frank Carlucci, Carlyle also employs Arthur Levitt, former head of the Securities and Exchange Commission; William Kennard, who chaired the Federal Communications Commission during the second Clinton administration; Afsaneh Beschloss, former treasurer and chief investment officer of the World Bank and wife of historian Michael Beschloss, a regular on PBS’s The NewsHour with Jim Lehrer; and Richard Darman, who ran the U.S. Office of Management and Budget under the first president Bush and, during the Reagan administration, served as assistant to the president and the Treasury deputy secretary. Just to prove that Carlyle is truly an international conglomerate, former British prime minister John Major serves as chairman of Carlyle Europe.
No one in Washington has better contacts or has
worked them more effectively than Frank Carlucci. In addition to his posts as defense secretary and national security adviser, Carlucci was deputy director of the CIA from 1978 to 1980, after a stint as ambassador to Portugal. He also competed on the Princeton University wrestling team with Donald Rumsfeld and has stayed friendly with him in the years since.[text omitted]
In 1972 Carlucci was deputy to Caspar Weinberger at Richard Nixon’s Office of Management and Budget when a new White House fellow named Colin Powell, on loan from the U.S. Army, reported for work. Eight years later, when Ronald Reagan made Weinberger secretary of defense, Powell became his senior military adviser. In 1987 Carlucci, who had been serving as assistant to the president for national security affairs, succeeded Weinberger as secretary of defense, and Powell stepped into Carlucci’s slot as national security adviser. (Carlucci likes to call himself Powell’s godfather.)
Carlyle did its own godfather schtick for George W. Bush as well. Back in 1990, when the future president was wandering the Lone Star State in search of a career, Republican insider Fred Malek found Bush a slot on the board of a Carlyle subsidiary: Caterair, an airline-catering company. A decade later, when Bush II was governor of Texas, the state teachers’ pension fund invested $100 million with the Carlyle Group.
Carlyle’s most famous adviser is George Herbert Walker Bush, the forty-first president of the United States. Greatly admired among the monied classes in Saudi Arabia and Kuwait for their leadership in the Gulf War, Bush and John Major have traveled frequently to both places on Carlyle’s behalf, opening the doors to some of the world’s most well-heeled investors. Indeed, even as his son was campaigning for the presidency in 2000, Papa Bush flew to a posh desert compound outside Riyadh to discuss Saudi-U.S. business relations with Crown Prince ‘Abdallah. Carlyle insists that Bush was not carrying the investment firm’s portfolio on the trip, but it could not have escaped the notice of his superwealthy hosts that G.H.W. Bush is a trusted and highly valued Carlyle senior adviser - with that son making a run at the White House.
Like many advisers to high-powered equity firms, G.H.W. Bush is compensated for his time, reputation, and Rolodex with shares in the investments he helps to generate. Bush is also allowed to plow back into Carlyle investment funds money he earns by giving speeches on the firm’s behalf - generally in the $80,000-to-$100,000 range for each speech. Again, Carlyle is a private entity, and Bush I a private citizen. No reporting of total take is required or expected, but it would strain credulity to think that the former president has earned less than the mid-seven figures from his decade-old association with the investment firm, the bulk of that either directly or indirectly from Saudi Arabia. Anything less would be almost disrespectful.
Because Carlyle is privately held, only its principals know how much of its money - $13.9 billion under management as of November 2002 - comes from Saudi investors. The Bakr bin Laden family had a piddling $2 million invested in the Carlyle Partners II fund, a portfolio that includes United Defense and other defense and aerospace companies. With embarrassment spreading on both sides, Carlyle and the bin Ladens parted company in October 2001, some five weeks after the World Trade Center and Pentagon attacks. About a dozen other Saudis are thought to still be investors in the group.
Carlyle is also not required to reveal annual compensation to its partners, or their net share in the firm. An article in the March 5, 2001, New York Times estimated that Jim Baker’s share might then have been worth in the vicinity of $180 million, but that was arrived at simply by dividing the firm’s eighteen partners and one outside investor into the estimated total equity of $3.5 billion. (That was before Carlyle took half the stock in United Defense public, reaping what was said to be a nearly $700 million profit.) You can be certain the Carlyle Group is no penny-ante game. When Frank Carlucci resigned as chairman in November 2002, former IBM CEO Lou Gerstner stepped into his slot.
It was a Carlyle partner who confirmed to me the detail work on Azouzi’s $4.6 billion palace. I was in southern France in August 2002, visiting a friend who keeps a small sailboat near Cannes. We had just moored when we spotted a man on a brand-new yacht next to ours that was flying an American flag. As it happened, my friend knew him. He said the man worked for the Carlyle Group. We struck up a conversation across the water and got to talking about Saudi Arabia. At the first opportunity, I asked about Azouzi’s palace. The man knew about it, adding that he’d recently been in it. As soon as he’d confirmed the price tag on the amusement park, he asked why my interest. When I told him I was writing a book on Saudi Arabia, he went below deck, suddenly seasick.
FOR A CITY of supposedly dull bureaucrats, Washington is endlessly inventive about tapping into Saudi funds. Between his stints as secretary of defense and vice president, Dick Cheney served as CEO of Halliburton, a frequent beneficiary of Saudi construction projects both during and after his tenure. In late 2001, with Cheney a step from the presidency and his old company reeling from accounting scandals, Halliburton landed a $140 million contract to develop a new Saudi oil field. The company’s subsidiary, Kellogg Brown & Root, also placed a successful $40 million bid with two Japanese partners to build a new ethylene plant there.
Like the Saudis, Cheney has shown a sharp interest in Central Asian oil, both privately and publicly. As Halliburton chairman, Cheney defended Heydar Aliyev against charges that the Azerbaijan strongman routinely violated human rights, while simultaneously castigating the Clinton administration for its “failure… to recognize the strategic asset of the oil and gas business.” Cheney also helped put together a 1993 deal between Kazakhstan and Chevron as he was serving on the Kazakhstan Oil Advisory Board.
As Halliburton chairman, Cheney was instrumental in securing a $489 million in loan guarantees from the Export-Import Bank for the scandal-plagued Tyumen Oil Company, or TNK, a Russian entity formed to exploit the oil reserves in the Caspian Sea region. According to the Moscow Times, the bulk of the Ex-Im Bank loan guarantee, $292 million, was to go for buying equipment from Halliburton to develop TNK’s Samotlor oil field. Halliburton also has a major engineering contract with the head of the Caspian Consortium, BP Amoco.
As vice president, Cheney has made sure that the Ex-Im Bank stays in friendly hands. The bank’s new chairman, Philip Merrill, was assistant secretary general of NATO during the Bush I administration and is a close personal friend of both Dick Cheney and his wife, Lynne. Although her official résumé omits the fact, Lynne Cheney worked in the early 1980s for one of Merrill’s publications, Washingtonian magazine. Merrill was sworn in to his new Ex-Im Bank post in early December 2002 at an invitation-only ceremony at the Cheneys’ official vice-presidential residence.
During the dark interregnum of the Clinton years, Donald Rumsfeld and Colin Powell joined former secretaries of state Henry Kissinger (Nixon and Ford) and George Shultz (Reagan) and other luminaries as company directors of Gulfstream Aerospace Corporation, the luxury jet manufacturer purchased in 1990 by an investment team headed by Teddy Forstmann, cochairman of Bush I’s failed 1992 reelection campaign. Their job was basically the same as Bush I’s with Carlyle - opening doors to governmental and super-wealthy private clients, including the Saudis and the Kuwaitis, where all four men have star drawing power. In 1998 Forstmann rewarded his directors by letting them cash in - at $43 a share - stock options that they had purchased at anywhere from $3 to $28 a share. Kissinger’s take for a mere five months on the board was $876,000 after expenses, Thomas Toch reported in the December 21, 1998, New Republic. Shultz took home $1.08 million and Rumsfeld $1.09 million, while Powell pocketed $1.49 million.
In November 2000, not long before he was nominated to be secretary of state, Powell received as much as $100,000 - one report said $200,000 - for a half hour of off-the-cuff remarks at Tufts University in Massachusetts. The speech was paid for through a Tufts speakers fund endowed by Issam Fares, the deputy prime minister of Lebanon. Virtually every penny Fares owns traces back to his dealings with Prince Sultan, the Saudi defen
se minister, and Turki bin ‘Abd-al-‘Aziz, another brother of King Fahd. Powell at least had a good precedent to go by. The first president Bush basically stiffed his own ambassador during a state visit to Paris by spending time at Fares’s elaborate digs on the &Bodoni-Book.xeb;le Saint-Louis.
There’s also plenty of space for the Saudis and their fat contracts in the boiler rooms of Washington. Over at Qorvis Communications, which was earning roughly $200,000 a month to buff the Saudi image in the U.S., it took three partners over a year after the 9/11 attacks to decide that being the mouthpiece for a state that supports terrorists might be a bad career move. The law firm of former Texas Republican congressman Tom Loeffler was not similarly stricken by conscience. Fund-raising chief for Bush II’s first gubernatorial race and finance cochair of his presidential campaign, Loeffler might be as close to the Bush White House, including Dick Cheney, as anyone in Washington. In late 2002, the Saudis approached Loeffler Jonas & Tuggey, waving a $720,000-a-year retainer to represent the kingdom’s interests. Tom Loeffler, the firm’s founder and senior government affairs partner, accepted the money. What’s the point of access if not to profit from it?
IN A DIFFERENT MORAL CLIMATE, all this chumminess among Washington, America’s corporate boardrooms, and Riyadh plus the rest of the Arab world might be at least cause for alarm: Economic incentives exist in every direction for President Bush and his advisers to close their eyes to the contamination in Saudi Arabia. In a sense, though, no one can be blamed for being too close to the Saudis, because finding a high-ranking former U.S. government official who isn’t at least tangentially bound to Saudi Arabia is like searching for a teetotaler at a Phi Gam toga party.
Brent Scowcroft, national security adviser in the Bush I administration and a longtime intimate of the older Bush, runs the Scowcroft Group, which markets intelligence services and market analyses to multinational corporations, including oil and other energy companies. The company’s literature notes the group’s “extraordinary regional expertise” in the Middle East and its “strong ties to key decision makers.” Scowcroft also sits on the board of Pennzoil-Quaker State. Incidentally, Scowcroft is an intimate of Bush’s national security adviser, Condoleezza Rice, and of CIA chief George Tenet, giving them both advice on how we can “improve” our intelligence in the Middle East.