Halliburton Move is Not Good for the Dollar

On Sunday, Halliburton Company, the largest military contractor in Iraq announced that it will be moving its headquarters along with the head of its company, Dave Lesar from Houston to Dubai, in the United Arab Emirates. For Halliburton shareholders, the benefits may be substantial, but for the US economy and the US dollar, Halliburton’s exit may particularly hurtful.

Even though CEO Lasar has indicated that the decision to move was to focus on the opportunities in Dubai, two more immediate benefits probably played a larger role in the company’s decision since more than 50 percent of the company’s business is still coming from North America. The first is the opportunity for substantial tax savings and the second is to avoid the consequences of recent legal inquiries. The evaporation of what is estimated to be hundreds of millions of dollars in taxes could widen the US budget deficit, raise concerns about protectionism, and encourage more US corporations to consider a similar move, which would be detrimental not only to the US economy and the US labor market, but also to the US dollar.

[B]Why is Halliburton Relocating?[/B]

According to MarketWatch, in 2006, over one third or 38 percent of Halliburton’s $13 billion oil revenue was generated in the eastern hemisphere, which indicates that the company already does a lot of business in the Middle East. Dubai is the gateway to Middle East oil and many countries have already poured money into there. The Chinese government and corporations have been investing and developing in Dubai and clearly Halliburton wants a bigger piece of that pie. Furthermore, with many of the company’s subsidiaries located outside of the US, Halliburton is notorious for using tax havens and in Dubai, they will be paying next to zero in corporate taxes for the most part. Many employees In Dubai, who also live and work in one of their investment zones could be exempt from taxes as well. A city that can be described as Las Vegas on steroids the Western lifestyle is not only available, but taken to the next level with luxuries such as an indoor ski complex.

Moving to Dubai will also allow Halliburton to escape some recent scandals. Last week, Harper’s Magazine called Halliburton a Company of Thieves. The author, Ken Silverstein talked about an inquisition into bribing activities between the company and Nigerian officials back in 1995. According to ABC News, Halliburton is already being investigated by different government agencies for various allegations of improper business dealings, and it is in the cross hairs of Democrats in Congress for alleged over billing by $2.7 billion. Annual meetings have also drawn violent protests for their activities in Iraq – no company wants this type of publicity whether its warranted or not. Therefore from both an economic and political standpoint, Halliburton’s move to Dubai will be particularly advantageous to shareholders.

[B]Will the US Block the Deal?[/B]
Yet, what is good for shareholders, may not be good for the economy. Congress is already upset about Halliburton’s move. NY Senator Chuck Schumer said “"For one of the largest contractors with the United States government to move its headquarters overseas? [It] just doesn’t look good, doesn’t sound good, doesn’t smell good." Concern for National Security could resurface, which brings back memory of the blocked Dubai Ports Deal and China’s bid for Unocal Corp. We are not sure how much Congress can actually do since this does not involve a cross border acquisition and Halliburton is a private company that will maintain some operations in the US. In order to keep the interests of their defense contracts in Iraq separate from their oil interests in Dubai, they will also be spinning off their KBR defense subsidiary into a completely separate company that will remain in the US. If Congress attempts to stop the move or screams louder about it, talk of protectionism will resurface.

[B]No Win Situation for the US Dollar[/B]
Even though Halliburton pays hundreds of millions in taxes, its contribution to overall US tax revenue is not significant but protectionism and the loss of tax revenue is still a no win situation for the US dollar. Whether or not Congress is able to block the deal is up in the air, but the economic and political consequences of their move could bring out old concerns that many traders and investors may have already forgotten about – which include the twin deficits and protectionism. If Halliburton gets away with this, more US companies may follow suit – which could hurt the labor market and take away more tax revenue. Unfortunately it comes at a particularly bad time when the shakeups in the sub-prime lending sector are already turning many foreign investors away from the US markets and the US dollar. [B][/B]