By Una Galani
BreakingViews
Reuters
27 April 2017

Malaysia will bear most of the burden of 1MDB. Abu Dhabi helped the Southeast Asian nation finance the upstart sovereign fund back in 2012. It subsequently looked like the Gulf emirate would share a large part of the multi-billion dollar fallout relating to the fund, now the focus of money-laundering probes around the world. But Malaysia is throwing its chequebook at the problem, paying up to try to repair relations between the two states before Prime Minister Najib Razak seeks re-election.

A debt settlement agreement announced on Monday addresses most of the lingering financial mess. 1MDB will repay a $1.2 billion loan to IPIC by the end of this year. It will also re-assume responsibility for two bonds, which will cost another $4.8 billion including interest.

The Malaysian investor had initially played hardball with Abu Dhabi. It stopped paying coupons on the notes last year after the pair fell out over a separate $3.5 billion payment that went missing. 1MDB paid that amount to an entity with a similar name to a unit of IPIC, which the latter has claimed it never received.

Executives from the Abu Dhabi outfit were later named in U.S. lawsuits seeking to seize $1 billion of assets, which prosecutors claim were bought with money stolen from 1MDB. The pair have agreed to enter discussions about this final part of the dispute outside of court. But it is unlikely the funds will be fully recovered.

The entire agreement is backstopped by the Malaysian finance minister – Najib himself. So effectively the outstanding liabilities of 1MDB, now mostly a shell company, sit squarely with the taxpayer. That is, unless one or both sides renege on the deal, as they did with a previous settlement in 2015.

Najib is in a strong position ahead of a general election, which may take place later this year. The opposition is weak and he has few strong internal rivals within the ruling party. But the ongoing global investigations around the vehicle that he helped create could yet throw up nasty surprises – and this deal suggests Najib is uneasy of the threat that poses. Patching up relations with Abu Dhabi removes one potential source of bad news, and is the first step to repairing ties with a key ally, albeit at a high price.