A revolution is underway in global finance, and it seems the world is sound asleep. Nation-owned investment entities are forming rapidly around the world. These entities are called Sovereign Wealth Funds (SWF). While SWFs started out investing only in corporate debt, SWFs started investing in stocks, bonds (both private and public) and commercial real estate. As the capital of sovereign wealth funds increases, economic power will eventually translate into political power in global politics.
The term sovereign wealth fund was first coined by Andrew Rozanov in his article “Who owns the wealth of nations? Sovereign Wealth Funds are government-owned funds or investment entities that are financed primarily by: balance of payments surpluses; official currency transactions; proceeds from the sale of state land to private entities; rental of state land to private companies or individuals; taxes on companies extracting mineral resources from state-owned land; and fiscal surpluses and revenues resulting from resource exports.
The first recognized sovereign wealth fund is the Kuwait Investment Authority. The fund was established in 1953 with profits from the sale of Kuwaiti oil. The purpose of the fund is to preserve wealth and enable Kuwait to transition from an oil-exporting economy to a newer and more stable source of income for Kuwait and its people.
From 1953 to the present day, there are today 91 sovereign wealth funds in the world, with assets of more than $9.1 trillion
Top 10 sovereign wealth funds by country (in billions) 2021
There are informal rules of conduct for sovereign wealth funds under the Santiago Principles. While seeking to promote greater accountability of sovereign wealth funds, the Principles are voluntary and there is no enforcement mechanism. The Linaburg-Maduell Transparency Index, which measures the public transparency of sovereign wealth funds, can be found here.
The financial and political power of national sovereign wealth funds
China recent military build-up and seizure of the exclusive economic zone of the Philippines (EEZ) in the South China Sea has been facilitated by the success of Chinese sovereign wealth funds. The cost of the artificial island Fiery Cross Reef is estimated to have cost China $11.5 billion. The last known increase in military spending for China was $13.3 billion, easily funded by CIC revenues from 2017.
The Dubai Investment Company uses DP World, which it acquired in 2006, to expand its political and military presence in the sensitive geopolitical area of the Gulf Coast and Somaliland. DP World has purchased a 30-year concession, with an automatic 10-year extension, in the Port of Berbera on the Red Sea in the Republic of Somaliland. Berbera is located just across from Yemen, with the strategic Bab-el-Mandeb Strait between them. Some 4 million barrels of oil pass through these straits daily. The UAE Army trains Somaliland Army and the establishment of a naval base in the port. DP World is also developing the port of Bosaso in Puntland, another breakaway region of Somalia, and is currently considering investing in a third port in Barawe.
The Russian Sovereign Fund, the National Wealth Fundhas a valuation of $174.9 billion. Using its sovereign wealth funds, Russia has pursued a policy of influence in what they call the countries of the “Middle East and North Africa”, aka MENA. The Russian goal is to increase its economic and political ties with the oil-rich Persian Gulf states.
With Western sanctions cutting off Russia’s ability to borrow capital, Russia is tapping into the $174.9 billion pension fund to help fund Russian banks and keep them afloat. The Russians also have the Russian Direct Investment Fund (RDIF)
RDIF was created to help foreign companies invest in Russia without the tangles of going through Russian bureaucracy. The RDIF was responsible for the search for a Covid-19 vaccine, Sputnik V.
The Norwegian Sovereign Wealth Fund
he Norwegian government pension fund is actually two different funds. There is the Global Government Pension Fund (GPFG) and the Norwegian Government Pension Fund (GPFN). The GPFG is the part of the fund that invests in equities around the world, as well as government and corporate bonds and real estate investments, all around the world. GPFN invests in Scandinavian countries and in shares listed on the Oslo Stock Exchange. Both funds are managed by Norges Bank. The Government Pension Fund Global earned $180 billion in 2019.
Nicolas Tangen, CEO of the Norwegian government pension fund, has announced a radical change in its philosophy of investing in stocks, bonds and land around the world. Tangen is the founder of AKO Capital, a multi-billion dollar investment company and one of the largest investment banks in Europe. Tangen, in an interview with the Financial Times, said that “its role is to create a ‘safe zone’ where members of the fund can take risks”. Given Tangen’s performance as an investment manager at AKO Capital, it is safe to assume that the investment policies of the world’s largest sovereign wealth fund will be more aggressive in investing its global market assets in a near future.
In 2021, the fund placed the private beer company Kirin on her watchlist because of the ties of the ruling military junta with this company. The fund is closely monitoring Kirin’s plans to end its production of Kirin beer in Myanmar. The fund has publicly stated that it will dissolve its stake in Kirin if Kirin continues to operate manufacturing facilities in Myanmar.
Saudi Arabia Public Investment Fund
Saudi Arabia Public Investment Fund (FIP) was established in 1971 and is currently valued at $360 billion. At first, PIF invested in conservative causes, but that has changed.
In Q1 2020, the PIF poured $7.7 billion into blue chip stocks such as Citigroup, Facebook and oil company Total, but sold those stocks in Q2 to take advantage of rising stock prices and obligations of these companies. . PIF has invested $4.7 billion in exchange-traded funds. In July 2020, the PIF strengthened its public procurement team by hiring Maziar Alamouti, former director of Quilter Investors, a wealth management company. According to a senior Gulf banking official, PIF executives are participating in more equity analyst calls and using global brokers to execute trades under their direction. In 2020, PIF had a return on investment of 7% and plans to increase the value of the fund to nearly $1.9 trillion by 2030. For PIF to achieve this ambitious goal, the fund will need to take risks normally associated with a private investment bank.
Possible economic consequences of the rise of sovereign wealth funds
The rise and evolving nature of sovereign wealth funds poses a new challenge to financial investments in corporate capital markets around the world.
One of the effects of the more proactive investment activities of sovereign wealth funds is the economic concept of “eviction”. While the term crowding out has generally been used to define government spending leading to lower private sector spending, the increase in commercial investment by sovereign wealth funds around the world will eventually crowd out private investment banks by reducing their capacity to compete in the intermediation of capital in the world.
With private equity capital unable to compete with a national sovereign wealth fund, various funds have the potential to morph into entities competing for power and influence on the global stage, increasing the risks of open war between states. -nations that exercise power through their sovereignty. wealth fund.
Along with the ability of a sovereign wealth fund to bring in large amounts of capital for private investment also comes an implicit ability to lobby foreign governments to support the parent company of any sovereign wealth fund in business. policies.
While the United States has a measure of protection against such pressures in the Committee on Foreign Investment in the United States (CFIUS)recently reformed and reinforced by the Foreign Investment Risk Review Modernization Act 2018 (FIRRMA), the question must be asked do other modern economies around the world have the same protections in place? While the EU has adopted regulations for some protection against outside investors, EU regulations only suggest that member states review foreign investment in their respective economies.
It is not inconceivable that a sovereign wealth fund, such as the Saudi or Chinese sovereign wealth fund, could be used to pressure currently pro-US governments to oppose a political initiative that would result in a result adverse to the reputation of the United States. States on the world political scene. The CFIUS would not be able to affect such a scenario.