Sovereign Wealth Funds – a Potential Tool of Asymmetric Warfare
Role of Sovereign Wealth Funds Controlled by the Authoritarian Great Powers
David J. Jonsson
August 10, 2007
Liberal democracy, led by the United States may have emerged triumphant from the struggles of the 20th century. But the rise of the non-democratic powers of Russia, China and the Islamist states utilizing the combined power of control of energy resources and the growth of Sovereign Wealth Funds (SWF) leaves the liberal democracy’s ultimate victory and future dominance in doubt. Overseas investments by Sovereign Wealth Funds have always had the potential to cause alarm in the destination countries. Because they are driven by governments of the totalitarian and Authoritarian Great Powers, they compel countries to take immediate attention.
How powerful Sovereign Wealth Funds decide to invest their vast armory of cash will play a pivotal role in reshaping financial markets in the next decade. These funds are going to have the ability to buy any global company, to create panic in markets if they move too precipitously, even to dwarf the political clout of international financial institutions. They can no longer be ignored.
The Sovereign Wealth Funds are potentially a powerful tool of asymmetric warfare like none we have witnessed before.
The Leftist/Marxist – Islamist Alliance is using its propaganda machine to convince us that investment funds run by authoritarian governments sound scary. They are not. So trumpets The Economist print edition of July 26, 2007.
Go for a walk in Chelsea, an expensive bit of London, and you may stroll by the Coldstream Guards' barracks, now the property of the government of Qatar, a branch of the venerable Barclays bank, soon to be part-owned by the People's Republic of China, and then buy a picnic at Sainsbury's, Britain's oldest supermarket, which the Anglophile Qataris are trying to buy too. What goes for Chelsea may soon be true for neighborhoods in open economies all over the world: governments are on a shopping spree. (See Governments go shopping.)
In considering the role of Sovereign Wealth Funds it is imperative to consider the difference between state vs. private ownership. However, in some cases the difference is blurred because in some cases the state influence, political motives and ideology override the fund ownership as in the case of funds from Islamist countries.
In much of Europe and emerging markets, it took decades for many economies to be free from the controls of state-owned enterprises (SOEs). Are we now seeing the return of state ownership in the infrastructures and large industries, not by the local governments, but by foreign states?
In any case, there should be more discussions and studies on whether SWFs are really returning our Western economies to the former days of state-owned enterprises, but to an even worse case that of foreign state owned entities.
Beware, wakeup, a foreign state entity – be it either from an Authoritarian Islamist state or Russia or China – may be the new owner of your newspaper, radio station, electric utility, and even your most sensitive supplier of war material. The rapid growth of Sovereign Wealth Funds poses risks beyond that of national security. There are worries over competence within some funds; concerns that their scale and ability to affect asset prices could lead to market volatility; and suspicion that they could help countries preserve a favorable currency regime. If decisions are swayed by political considerations, they could also undermine market discipline that matches rewards to sound corporate governance. The ownership may also have a devastating impact on employment practices and human rights. Big and powerful, they are coming to company near you or one you work for.
The Tempting Foreign Investment
In the short term, seeking foreign investment was all too tempting. The savings of Asian and oil-exporting countries have helped fuel the current boom. Their purchases of Western government bonds have funded the external deficits created by profligate consumers and lowered real interest rates, boosting asset prices. Countries such as the UK and US haven’t worried about running huge trade deficits, funded in the main by the willingness of countries producing oil and other resources to run big surpluses. We didn’t mind when they recycled those dollars and pounds by putting cash on deposit in our banks, or buying bonds issued by our governments. We should have and we need to change our ways.
But the long-term consequences of the bargain are now clearer. Non-US official entities now hold 30 per cent of all Treasuries and they are, quite rationally, keen to diversify. Sovereign reserves stand at $5,500bn - or 29 per cent of US market capitalization. Governments are moving from lending to the West to owning chunks of it.
The Challenge
The challenge is here to stay. Asian and oil exporting countries cannot be expected to buy Treasuries forever. And many Western economies rely on capital inflows. Protectionism is not the solution but neither is widespread direct control of companies by governments, with the resulting potential for capital misallocation and inefficiency. By working to insert market imperatives between governments and their investments, these two outcomes can be avoided.
With oil prices spiking in recent years, the petro-states' windfall is staggering. This sort of wealth should be a godsend for impoverished, post-Soviet countries. However, such positive impact is by no means certain in unaccountable governing systems where a small group of elites tend to control a large part of the resources. Other than Norway, which enjoyed the advantage of having accountable institutions in place when it came into its energy wealth, the track record of countries rich in energy resources is quite poor.
With so much money flowing into these countries the stakes are raised for powerful elites who dominate these systems and control these formidable resources. To protect their lucrative positions they seek to limit scrutiny of their activities by silencing the press, political opposition, civil society and other independent institutions.
The Growth of SWFs has been Accompanied by Restrictions on the Free Press
Russia has
seen the most precipitous press freedom decline in recent years. Today, all of
the major national television channels (Channel One, RTR, and NTV), from which
most Russians get their news and information, have come under state control and
are effectively censored. Control of national television news broadcasting is,
however, only one piece of a broad and comprehensive campaign to bring
independent media under the sway of the authorities. The energy industry has
had a significant hand in the pacification of independent news media.
Gazprom-Media, an arm of the state-controlled gas behemoth, has acquired
control of a number of previously
independent news outlets and either closed their doors or drained them of
independent reporting. In July 2006, President Putin signed a law that expanded
the definition of extremist activity to include public slander of a government
official related to his or her duties, using or threatening violence against a
government official or his family, and publicly justifying or excusing
terrorism. The definition of extremism in this new law is so broad that it allows the
authorities to use unchecked power against their critics, including in the
media.
The Kremlin,
meanwhile, having already effectively constrained independent organizations and
voices at home is now pursuing an international dimension to its antidemocratic
campaign. Russia's leadership has apparently set its sights on limiting the
ability of important international organizations to scrutinize its conduct.
The Impact of SWFs Will Play Out Over Time
“The full impact on financial markets will manifest itself over multiple years,” says Ramin Toloui, emerging markets portfolio manager at Pimco, one of the world’s largest fixed-income managers.
But the current wave, driven by an oil boom that has seen oil prices peak at $78, has been on a different scale. While some petrodollars have been invested at home, the Gulf cannot absorb most of them. So, after an initial hesitation following the 9/11 attacks, Arab investors are eyeing foreign assets, especially in the UK and, increasingly, in Asia.
Before this petrodollar boom, only one Arab billionaire investor's name sprung easily to mind in the West: that of Prince Alwaleed bin Talal of Saudi Arabia, who invested in Citigroup, News Corp, AOL-Time Warner and Euro Disney.
Governments are Different then Private Investors
Governments are very different from other economic actors. Their investments should be governed by rules designed with that reality very clearly in mind.
Radical Islam finds liberal democracy repugnant, and the movement is often described as the new fascist threat, however Radical Islam, in many cases utilizing some democratic principles has made progress in establishing Islamist – Political Islam in a number of previously secular nations. In some cases, the Islamist parties have utilized the promotion of capitalism, as in the case of Turkey and other Middle Eastern countries to gain credibility. It is the potential use of weapons of mass destruction – by state and transnational actors, such as Hezbollah, Hamas, al-Qaeda etc. that makes militant Islam a menace. However, potentially even more threatening to the West is growth of Sovereign Wealth Funds within Islamist countries resulting from oil revenues which pose the threat.
In previous articles and my book Islamic Economics and the Final Jihad: The Muslim Brotherhood to the Leftist/Marxist - Islamist Alliance I develop the role of Islamic Economics as a tool for world domination.
The second, and equally significant, challenge emanates from the rise of non-democratic great powers: the West's old Cold War rivals China and Russia, now operating under authoritarian capitalist, rather than communist, regimes. Authoritarian capitalist great powers played a leading role in the international system up until 1945. They have been absent since then. But today, they seem poised for a comeback. Reference: The Return of Authoritarian Great Powers by Azar Gat from Foreign Affairs, July/August 2007.
“While the Iraq crisis continues, the strategy of the Grand Chess Masters: Russia the bear and China the dragon, along with their pawns the Leftists, Marxists and Islamists continue to develop and put in place their strategy for the ultimate goal of world domination.”
In prior articles we discussed the fact that in reality there has arisen a cabal which brings together the authoritarian powers of the Islamist States with China and Russia. As I discussed in the article, The Global Strategy of the Russian-Iran Cabal the tough questions that must be answered if the allies joined for freedom and liberty will support a battle against the forces of evil. These are:
· Who is the enemy?
· What are their goals?
· What is the definition of success, and finally
· What will the world be like if we lose?
Decades from now, historians will discover that the United States, the West and the international community were being targeted by global ideological movements which emerged in the 1920s, survived World War II and the Cold War, and carefully chose this timing for its onslaught against liberal democracy.
The utilization of Sovereign Wealth Funds for control is common to the Islamist countries and the West's old Cold War rivals China and Russia, now operating under authoritarian capitalist, rather than communist, regimes. See my Op-Ed: Nationalization – A Plan for World Domination.
Strategic Implications of Sovereign Wealth Funds
Attempts by foreign interests to buy large companies at the forefront of a nation's commercial life often arouse strong protectionist feelings. When the buyer is an overseas government, the resistance may be stronger - especially if the target has strategic significance.
So it is no surprise that the arrival in the US and Europe of state-backed foreign investors with enormous amounts to spend on corporate acquisitions has caused a frisson among politicians and business interests. Countries such as China and Russia, with fast-growing foreign exchange reserves, are following the lead of those where savings stem from extracting oil and other commodities in creating Sovereign Wealth Funds to invest in advanced economies.
As a result of a shifting pattern of demand away from relatively safe assets such as bonds, Morgan Stanley estimates that bond yields will gradually rise by 30-40 basis points during the next 10 years. The equity risk premium – the excess return over the risk-free rate that compensates investors for taking on the higher risk of equities – could fall by 80-110 basis points.
Nicholas Brooks, senior economist at Henderson Global Investors, says of China’s plans to create a State Investment Corporation that, if a primary goal of its asset allocators is to reduce the share of US Treasury bond holdings, yields on those should rise. If the SIC were to invest along the lines of Singapore’s GIC (assuming bond allocation is 25 per cent and 60 per cent of this is in US bonds) and reserves rose at the same pace as in 2006, net new annual buying of government debt would drop from $89bn to about $56bn, he says.
In the absence of any big change in US government net debt issuance, this would imply around a half-point increase in the yields on US 10-year Treasury bonds. But Mr. Brooks adds: “It is not in China’s economic, financial or political interests to roil US debt markets or antagonize its smaller neighbors by creating undue upward pressure on their exchange rates and equity markets . . . [so] asset allocation changes will be gradual and timed to minimize their impact on markets.”
In addition to China’s State Investment Corporation; Beijing raised the limits for overseas investment by Chinese insurance companies, potentially making up to $50bn (£24bn) available. Chinese insurers have a combined Rmb2,500bn (£161bn) in assets and the total is growing at 25 to 30 per cent a year.
The loosening of China's capital controls forms a route for Chinese money to enter global markets, as the country moves from being a huge net importer of capital to a net exporter.
Chinese commercial banks, fund managers, and securities companies are already allowed to invest in global bonds and equities. They are expected to invest at least $50bn in international capital markets during the next two years, JPMorgan estimates.
Jing Ulrich, chairman of Chinese equities at JPMorgan, calculates that by 2020 capital outflows from China may top $1,500bn at current growth rates in savings, provided that the country's capital account is fully open by then.
In my Op-Ed of April 3, 2006 Structural Changes – Destruction Of The U.S. Dollar from the Global Politician I commented:
“No longer satisfied with the income from lending their cash to the US and other governments by buying bonds, these funds want to acquire assets that offer better returns. Their actions are stirring up concerns in the countries they target and the feared motivations of some of the sovereign investors are prompting calls for measures to block foreign takeovers of strategic assets.”
“There is a distinct risk that foreign funds turning from creditors to owners will trigger reactions from the recipient countries that will undermine globalization,” says Stephen Jen, a currency analyst at Morgan Stanley.
The SWFs are notoriously difficult to keep track of since they are blended with the massive pool of private capital. SWFs in general, they ascertain, rank below even the most secretive hedge funds in terms of disclosure of fund performance, investment strategy or even basic philosophy.
Another reason why SWFs are so notoriously difficult to keep track of is because they often channel their investment through discreet secondary managers. This is done to avert nationalist backlashes when purchasing foreign companies seen locally as having strategic importance. There are serious doubts whether these funds are operating on a purely commercial basis or to fulfill broader goals of national governments.
Implications of Shariah-Compliant Sovereign Wealth Funds
Islamic Finance is core and kernel to the Islamic ‘Way of Life’. It is also central to the teachings of the Muslim Brotherhood. It is fundamental to establishment of the ‘Islamic kingdom of God on Earth’.
Islamic country based SWFs will be operated on the basis of compliance with Shariah Law (Islamic Law) and will be “Shariah-Compliant.” Shariah governance requires the development of Islamic finance to be orderly and compliant with the Islamic Injunctions.
It is impossible to exaggerate the dangers inherent in Shariah-Compliant SWFs. On the face of it, we are dealing merely with "interest free" financial instruments. For the investment funds, there is a requirement that they have a Shariah Board which is involved with all aspects of a proposed transaction so that it would issue a formal fatwa endorsing it as fully Shariah compliant. The expansion of Shariah-Compliant SWFs will require ultimately the change of Securities Laws to consistent with Shariah law. Efforts are underway in the US and the UK to implement the changes.
Shariah compliance limits the type of companies and lending practices of the companies. Large Shariah compliant funds will have an affect on equities. This fact by their vary nature would indicate that the funds are operated to fulfill the broader goals of the national governments and incremental Islamization of the host countries. Islamic ownership may in the future further impose restrictions on activities of the companies not consistent with Islamic principles. Clearly, such boards are not only bound to raise the cost of the international finance (some members get as much as $500,000 for their participation) but also are open to obfuscation and corruption.
Even more importantly, such boards are sure to increase the power of the most orthodox Imams who alone have the standing to issue a fatwa accepted by all Muslims. Just consider the additional future vulnerability of countries which would find themselves in Islamist cross hairs in the manner Denmark has. There is little doubt that Imams sitting on Shariah boards would be pressured to withhold their approval of any instrument directly or indirectly connected with the "offending" country or institution. The term self-censorship is bound to acquire a new meaning.
While Western elites focus on the problems of immigration and assimilation, they ignore the threat Islamic banking is posing to the global economic system. Indeed, we are facing the emergence of a new financial Berlin wall or a Shariah-Compliant global financial system.
Government Reactions to Sovereign Wealth Funds
UK reaction to Qatar Investment Authority, which controls $40bn of funds, already owns 25 per cent of Sainsbury and has mooted a bid for the rest. J. Sainsbury, the supermarket chain that supplies groceries to Britain's middle classes.
There are signs of deepening concerns elsewhere in Europe, where politicians and business leaders are already more resistant than the British to foreign acquisitions. Angela Merkel, German chancellor, said this month that Berlin was considering legislation to make it harder for Sovereign Wealth Funds to take over German companies.
The European Commission has launched an inquiry into whether vast state-controlled investment funds from Russia, China and the Middle East threaten the continent's single market.
Even Charlie McCreevy, EU internal market commissioner, a leading champion of free markets, is concerned about sovereign funds.
His spokesman said they were “a new phenomenon” and the commissioner would “look at this very carefully in the autumn”. Officials had already started work on the issue.
“The internal market rules are based on rules of investment,” Mr. McCreevy's spokes-man said. “Things are different if people are paying above the market price and are trying to buy certain assets for different reasons, other than making a good return on their investment.”
Angela Merkel, German chancellor, and Nicolas Sarkozy, president of France, believe so-called sovereign funds sometimes buy European companies for political and other reasons.
Germany is attracted by the US approach of vetting potential acquisitions and blocking them in sensitive industries. However, an alternative approach was outlined last week by Peter Mandelson, European Union trade commissioner, who said a vetting process would deter legitimate investors. He suggested instead that the EU could allow governments to use “golden shares” to stop foreign state-controlled funds buying sensitive companies that the buying country protected domestically.
Brussels has opposed golden shares in the past and forced European governments to scrap them other than for sensitive industries such as defense. Mr. Mandelson said any system should be regulated at a pan-European level to avoid distorting the single market. “You cannot leave it simply in the hands of a member state that is pursuing its own national interests,” he said. “These shares must reflect the European interest, not the national one.”
But by adding that it would be wrong to exclude Sovereign Wealth Funds altogether, he strengthened the impression among some observers that the real target for European concerns is Russia.
France and Germany, for example, seemed happy to allow Dubai's ruling family to buy its stake in EADS maker of Airbuses and Eurofighters this month. The fund will not be seeking board representation. Not that it would be able to get it. Appointing EADS directors is a privilege reserved for the members of the shareholder pact that controls 58 per cent of the shares. Rather, as with Dubai International Capital (DIC's) recent purchase of HSBC stock, the strategy is to take long-term stakes in the world's largest companies. The acquisition of shares of HSBC makes it “one of the leading shareholders” in HSBC, Europe's biggest bank. DIC is the private-equity arm of conglomerate Dubai Holding, founded by Sheikh Mohammed bin Rashid Al Maktoum, who is prime minister and vice president of the United Arab Emirates and ruler of Dubai.
Political considerations cannot be ruled out though. The 5 per cent stake in EADS held by Russian bank VTB looks to be aimed partly at winning sub-assembly work for Russia. There are signs that Qatar and China may also seek a closer relationship too. For Dubai, the inside track on EADS-owned Airbus wouldn't hurt. Airbus is the main supplier of aircraft to the Emirates airline and Dubai is hoping to expand its position as a major aircraft maintenance hub.
Libyan Connection
On August 3, 2007 Gadaffi seals EU missiles deal, just as Nicolas Sarkozy, the French president, on Friday yielded to calls for an inquiry into France’s deepening ties with Libya, amid concerns over recent nuclear and weapons deals with Tripoli.
It came just hours after the announcement of a European anti-tank missile deal with Libya. This had prompted opposition demands for a probe into links with the government of Muammer Gadaffi, following unease about France’s role in persuading Tripoli to release six imprisoned Bulgarians last month.
On Friday, it was announced MBDA Missile Systems had finalized a contract to supply Tripoli with an unspecified number of Milan anti-tank missiles. MBDA is 37.5 per cent owned by EADS, the European aerospace and defense group, which is partly owned by the French state. BAE Systems, the British defense supplier, has another 37.5 per cent and Italy’s Finmeccanica owns the rest.
The missile deal, which still needs to be formally signed, was on Friday confirmed in a statement by EADS, which said the agreement had been under negotiation for more than 18 months.
EADS said it was in the course of finalizing a deal to sell Libya a consignment of Tetra radios, a secure communication system made solely by EADS.
It is important to review some recent events regarding Libyan leader Mu'ammar Qaddafi as discussed in my Op-Ed of April 21 in The New Media Journal, The Followers of Ismail..
“In recent weeks we have seen resurgence in the followers of the Ismaili sect of Shia Islam. Libyan leader Mu'ammar Qaddafi called, in a speech in Niger to Tuareg tribal leaders, for the establishment of a second Shi'ite Fatimid state in North Africa, after the model of the 10th-13th century empire that ruled North Africa, Egypt, and parts of the Fertile Crescent.”
“On March 30, 2007, Libyan leader Muammar Gaddafi said that it was a mistake to believe that Christianity was a universal faith alongside Islam according to the Reuters correspondent Salah Sarrar writing from AGADEZ, Niger. See: Gaddafi says only Islam a universal religion.”
Quoting Gaddafi:” There are serious mistakes -- among them the one saying that Jesus came as a messenger for other people other than the sons of Israel,” he told a mass prayer meeting in Niger.”
“Christianity is not a faith for people in Africa, Asia, Europe and the Americas. Other people who are not sons of Israel have nothing to do with that religion,” he said at the prayer meeting, held to mark the birth of the prophet Mohammed.
Gaddafi, who is seeking to expand his influence in Africa, said his arguments came from the Qur’an. He led similar prayers last year in Mali.
“On March 31, 2007, Libyan leader Mu'ammar Qaddafi called, in a speech in Niger to Tuareg tribal leaders, for the establishment of a second Shi'ite Fatimid state in North Africa, after the model of the 10th-13th century empire that ruled North Africa, Egypt, and parts of the Fertile Crescent. In his speech, Qaddafi denounced the division of Muslims into Sunni and Shi'ite as a colonialist plot, and rebuked the Arab League members for “hating Iran” according to the article In Overture to Iran, Qaddafi Declares North Africa Shi'ite and Calls for Establishment of New Fatimid State by MEMRI Special Dispatch Series – No 1535 of April 6, 2007.”
The Russian Connection
But with Russian companies such as Gazprom saying they are interested in acquiring energy assets in the EU, there are fears that strategic sectors could fall under Moscow's control - particularly in the eastern and central European countries that have just broken free from its grip. Gazprom, a Russian conglomerate in effect controlled by the Kremlin, has strategic interests in the energy sectors of a number of countries and even a stake in Airbus. The energy stakes are particularly high for Europe. EU imports of Russian energy are expected to grow from 50 percent to 70 percent over the next decade and a half.
The US Looks at the Impact of SWFs
In the US, a senior Treasury official has also warned that the growth in sovereign Wealth Funds could create new risks for the international financial system. Clay Lowery, acting under-secretary for international affairs, said little was known about their investment policies, which meant minor comments or rumors would tend to increase volatility in capital markets.
He warned that the funds were rarely subject to market disciplines, being controlled by public servants imperfectly accountable to the citizens for whom they were investing. There were also dangers for those who dealt with them if they assumed that the funds were underwritten by the state that owns them. “With so much money invested across a wider range of asset classes, Sovereign Wealth Funds will need to have strong fiduciary controls and good checks and balances to prevent corruption.”
The is SEC looking at sovereign wealth funds. According to MarketWatch—the Chairman questions funds' motives during Senate hearing on July 31. SEC Chairman Christopher Cox told a Senate Banking Committee hearing that these funds, which are government investment vehicles funded by foreign-exchange assets, pose challenges to the U.S. regulatory system.
Sovereign Wealth Funds are “significantly less transparent” than hedge funds, Cox noted.
The SEC chief said the growing governmental and potentially political influence over capital market flows that the Sovereign Wealth Funds portend “presents challenges to a regulatory system premised on free markets, the free flow of information and investor incentives based on profit and loss.”
During a question-and-answer session with senators, Cox said motives for investment decisions may “go beyond profit and loss.”
The value of the funds could reach $12 trillion by 2015, up from $2.5 trillion now and dwarfing hedge funds' value. And by 2022, their assets will reach $27.2 trillion, according to recent estimates by Morgan Stanley.
Their size will then be twice the official central bank reserves and their share of worldwide financial assets will have grown from the current 2.5 per cent to nearly 10 per cent. It is likely that this shift in SWFs towards equities will lead to higher P/E ratios, lower bond prices and rising interest rates. If oil prices should fall, the share of Asian surpluses and SWF assets is expected to increase, while a rise in oil prices will lead to rising assets of the SWFs of oil exporters and would set off concomitant declines of the SWFs of Asian manufacturers.
The bottom line is that the importance of SWFs in world finance is about to rise significantly in any case. See: West’s growing fear of state funds by Dr Eckart Woertz. He is Program Manager, Economics, at the Gulf Research Centre in Dubai writing in The Peninsula.
The International Monetary Fund is working on the issues raised by the growth of Sovereign Wealth Funds, which will be on the agenda of the IMF's annual meeting in October. Simon Johnson, chief economist, expressed concern last month that financial flows were going increasingly through “black boxes” and could pose risks to global stability.
The Funds
A specter is haunting international financial markets – the specter of Sovereign Wealth Funds (SWFs) buying up Western assets, putting them at the disposal of potentially “unfriendly” regimes and seriously pushing markets out of balance by changes in their asset allocation towards equities and other higher risk instruments. These developments will affect the foreign investment decisions of Gulf Cooperation Council (GCC) investors in a major way. The SWFs are not owned by private individuals and institutions, but by governments of countries that command substantial current account surpluses, i.e. industrializing countries in Asia and oil exporters. Hardly known only a few years ago, they now dwarf the glamorous world of hedge funds and other private institutional investors. Everybody knows George Soros or Warren Buffet, but when it comes to assets under management they are just poor cousins in comparison to the Abu Dhabi Investment Authority (ADIA), Singapore’s Temasek or the official reserves of China and Russia, which are currently being moved away from conservative central bank management to the auspices of newly generated SWFs. (See: West’s growing fear of state funds)
As Lawrence Summers comments in the Financial Times article of July 30, Sovereign funds shake the logic of capitalism, “For some time now, the large flow of capital from the developing to the industrialized world has been the principal irony of the international financial system. In 2007 this flow will total well over half a trillion dollars, a figure that will be comfortably exceeded by the build-up in reserves and Sovereign Wealth Funds (SWFs) in developing countries.
As Summers comments, Apart from the question of what foreign stakes would mean for companies, there is the additional question of what they might mean for host governments. What about the day when a country joins some “coalition of the willing” and asks the US president to support a tax break for a company in which it has invested? Or when a decision has to be made about whether to bail out a company, much of whose debt is held by an ally's central bank?
The Norwegian Government Pension Fund
The Norwegian Government Pension Fund - which has invested much of the country's North Sea oil riches and is now worth more than $300bn - is widely acknowledged to offer a model of good governance and accountability.
The biggest equity owner in Europe, it lists all 3,500 investments on its website and is an activist investor, voting on all resolutions - against poison pill protection from takeovers and for pay linked to future performance. Its stakes are typically small in each company so, far from feeling threatened by its investments, companies often welcome it to their share registers.
The Gulf Cooperation Council
Collectively, the Gulf Co-operation Council countries, which include Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, control foreign assets worth $1.6 trillion, 225% of their gross domestic product, according to the Institute of International Finance. See: Tracking the assets that make the Gulf an economic powerhouse.
Sovereign Wealth Funds themselves have been around for decades. The Kuwait Investment Authority, created in 1960 to invest the emirate's oil revenues, has accumulated more than $100bn (£49bn, €73bn) of assets, including a recent 3.1 per cent stake in EADS, the aerospace group.
Kuwait acquired a stake of more than 20 per cent in BP in 1988, the British government forced it to reduce the holding to 9.9 per cent amid concerns over the influence of an oil producer on one of the world's largest oil companies.
The largest sovereign fund is thought to be the Abu Dhabi Investment Authority, which ING, the Dutch banking group, estimates has as much as $500bn under management.
In the US, Dubai Ports World, owned by the Gulf emirate, was forced to sell five port terminals it acquired when it bought P&O in 2006. Congressional opposition to allowing an Arab country to acquire the facilities led Dubai's ruler to decide on disposal to a US entity after the takeover. See also my Op-Ed: Dubai Ports – Strategic Implications.
Inchcape Shipping Services is the world’s leading marine services provider. Through their proprietary network of over 200 offices worldwide, we provide our customers with a truly world-class service - delivered locally and individually tailored to each customer’s needs. Their diverse customer base includes clients across the oil, cruise, navy and defense, offshore, container and bulk commodity sectors.
While the ports deal was being scrutinized in the press and in Congressional hearings, the ink was drying on another sale that, according to one insider, poses as great a risk to U.S. security.
In January 2006, Emirates-based Istithmar purchased U.K.-based Inchcape Shipping Services, or ISS, a company that specializes in “ship husbanding” in more than 200 ports worldwide. Ship husbanding includes providing supplies, crew transportation and some security to vessels making port calls. As a side note, on August 8, 2007 Jones Apparel Group and Istithmar have inked a new $942.3 million cash deal for the Dubai-based firm’s purchase of Barneys New York.
Al Qaeda operatives passed themselves off as boats crews assisting with ship husbanding (also known as “ship agents”) to pull off the 2000 bombing of the U.S. Navy destroyer Cole in the Yemeni port of Aden, killing 17 sailors. With this sale, the issue now is whether an Arab-run firm will continue with a British company's approach to security and manpower.
Qatar joins forces with Dubai to invest $1bn, two of the Gulf's most aggressive investors, have teamed up to create a new vehicle looking at international and regional investment opportunities. . It signals growing co-operation between the gas-rich emirate of Qatar and Dubai, the region's commercial hub. Both are ploughing billions of dollars into western companies, while also snapping up expensive London property.
However, reaction to a bid to take full control of a leading UK company could be tested by the proposed Qatari offer for J. Sainsbury, the supermarket chain that supplies groceries to Britain's middle classes. Delta Two, an arm of the Qatar Investment Authority, which controls $40bn of funds, already owns 25 per cent of Sainsbury and has mooted a bid for the rest.
The emergence of Gulf funds with significant stakes in HSBC and J Sainsbury this year has thrust the region's investors onto the British high street for the first time.
Now, Saudi Arabia's Maan al-Sanea owns 3.1 per cent of HSBC, the Dubai ruler's Dubai International Capital also owns a large stake in the bank.
Married into an established Saudi family, he has built up a diversified conglomerate to become one of Saudi's biggest “hammours”, the Gulf's popular fish that has given its name to the Saudi super-rich that dominate the stock market.
The Abu Dhabi Investment Authority has used the oil revenues of the past three decades to build up quietly a portfolio of international equities, debt and money markets that is said to reach $250bn-$500bn.
Another body, the Abu Dhabi Investment Council, is set to start up next month, to keep ADIA on its toes and focus on investing in the Middle East. Other leading investors from Saudi Arabia, such as the Olayan, Jufaili, and al-Jomaih families, are big predators in western markets but avoid the limelight. Down the road in Dubai, the hyper-development may have been fuelled by the region's petrodollars, but the government has profited heavily from land and property sales, tourism and commerce.
The city's investment houses, Istithmar and Dubai International Capital, have recycled much of these profits abroad as the city has emerged as the Gulf's business capital.
Like Dubai's loud marketing machine, these firms have taken on a more high-profile approach, bankers say.
Dubai International Capital, owned by Sheikh Mohammed, took advantage of HSBC's US subprime woes to buy a $1bn stake. DIC's other UK investments have included Tussauds Group, netting it £200m in two years, as well the purchase of the Doncasters engineering group and Travelodge.
DIC's HSBC stake was the first in its $10bn global equities fund, which the company has said will invest in 10-15 Fortune Global 500 groups.
DIC's domestic government-owned competitors, Istithmar and Dubai Group, have also looked at banking stakes, with Istithmar taking 2.7 per cent of Standard Chartered.
Dubai Group has taken stakes in Greece's Marfin Financial and Bank Islam Malaysia. Istithmar, which reports to a different wing of the Dubai government but is still owned by Sheikh Mohammed, is rapidly developing its real estate and leisure wing. The firm is understood to hold 15 per cent of its real estate assets in the UK, with about 50 per cent in the US.
Freedom of Press in Saudi Arabia
At present the Arab press is divided into a Saudi-owned press, a Saudi controlled press, a press controlled by the GCC and other countries friendly to Saudi Arabia who are loath to offend it and a small number of publications which oppose them and are fighting against huge odds. And the Saudis are still buying the loyalty of an increasing number of Western journalists.
Saudi Arabia has few safeguards to protect press freedom. Article 39 of the Basic Law exhorts the media to promote unity and bans material that “may compromise the security of the State and its public image.” While the 1982 Royal Decree for Printed Material and Publications upholds freedom of expression, it restricts press freedom by limiting the range of topics permitted to be covered. Criticism of the royal family and the religious authorities is forbidden. Violations are considered criminal offenses, punishable with imprisonment and/or fines.
Russian Stabilization Fund
More recently, Russia launched the Stabilization Fund, which has received every dollar of oil revenue above a certain price since 2004 and is now worth more than $100bn.
More recently, talk of a bid for Centrica, the UK utility, by Russia's Gazprom sparked widespread concerns last year in a country known for its openness to foreign bidders. The government was divided over the possibility that an arm of the Russian state could take effective control of the company that distributes gas to much of the British market.
Asian Funds
Singapore – Temasek Holdings
A second type of Sovereign Wealth Fund was created by Singapore to invest its foreign exchange reserves for higher returns than the government bonds that are usually held to fend off speculative attacks on currencies. Temasek Holdings, established in 1974, has an $85bn portfolio that includes stakes in Singapore Airlines, India's ICICI Bank, China Construction Bank and Standard Chartered, the UK emerging markets bank. The Government of Singapore Investment Corporation (GIC), created in 1981, owns overseas equities, bonds and property worth more than $200bn.
Entities controlled by the governments of China and Singapore are offering to take a substantial stake in Barclays, giving it more heft in its effort to pull off the world’s largest banking merger, with ABN Amro.
China Investment Corporation
China recently announced its intention to launch the China Investment Corporation with $200bn to invest. But with many Asian countries accumulating foreign exchange reserves far in excess of what is needed to protect their exchange rates, the amount of money diverted into Sovereign Wealth Funds is forecast to rise sharply.
In 2005, CNOOC, the Chinese state-controlled oil company, was forced by Congressional opposition to drop its $18.5bn bid for Unocal, the US energy group. Supporters of Chevron, the domestic rival bidder that won Unocal instead, had portrayed CNOOC as a front for Beijing's strategic energy interests.
China's $3bn investment last month invested in the initial public offering of Blackstone, the US private equity group. Perhaps chastened by previous experiences, the Chinese won an informal nod from the Treasury in advance of taking a 9.9 per cent non-voting stake.
Strategic Technology and Media Control
Nuclear Technology – Kazakhstan
Kazatomprom, Kazakhstan's state atomic energy agency, one of the world's leading uranium producers, is negotiating to acquire 10% of the Westinghouse Electric stake for about 486.3 million dollars as part of its strategy to transform itself into a global company involved in all aspects of the nuclear power generation cycle. Westinghouse Electric, the US nuclear systems company is owned by Toshiba. Toshiba, which took control of Westinghouse last year, hopes to use the share sale to Kazatomprom to improve its access to uranium supplies, an increasingly important factor in Westinghouse's ability to win contracts to build nuclear power stations. All real power in Kazakhstan is concentrated in the hands of Nursultan Nazarbayev, the authoritarian president, prompting concern about the long-term stability of the regime.
According to AFP Kazakhstan to buy Westinghouse stake from Toshiba Japan and Kazakhstan have agreed to cooperate in uranium-processing technology and trade.
US government approval is required for transactions in which a foreign entity takes a stake in an American business possessing nuclear technology, the Nikkei said.
US officials have indicated that the deal poses no problems, the newspaper added.
Analysts maintain that Kazakhstan's nuclear cooperation with the United States will allow Astana already in 2014 to replace its uranium exports (including those to Russia) with finished products with a high added value. Now that Astana has bought shares in America's Westinghouse company, Russia may lose lucrative contracts for the construction of power plants in the CIS. “If Westinghouse combines its commercial activities with political support from the White House, Astana's multi-directional policy in the nuclear field will become one more test for the relations between the Russian and Kazakh leaders. Moreover, Russia's irritation with the American direction of Kazakh energy cooperation may be just as great as its disappointment with Kazakhstan's participation in oil and gas projects bypassing Russian territory.” (Delovaya nedelya, July 27).
Kingdom Holding Company – Media and Finance
“In an article—Arab Boycott Campaign Worries US Business, appearing on the Palestine Solidarity Campaign website there are quotations of particular interest given below. The quotations are from billionaire Saudi businessman HRH Prince Alwaleed bin Talal. Prince Alwaleed is a major investor in Citigroup, TimeWarner, News Corp. etc. Prince Alwaleed is the Chairman of the Kingdom Holding Company headquartered in Saudi Arabia. At the inauguration of his new Four Seasons hotel in Damascus on March 24, 2006 he is seen on the right side of the Syrian President Bashar al-Assad. According to Bryan Whitman a senior Defense Department spokesman, “there's no doubt” that Iraq has experienced problems along its western border with Syria, where terrorist crossings into Iraq have been alleged to occur.”
Although Kingdom Holding Company is not a Sovereign Wealth Fund, it does illustrate the influence of the wealth transfer.
Come August 2007, the Wall Street Journal chief executive is Murdoch’s “dance partner.” We have seen the degree of concern over News Corp's acquisition of The Wall Street Journal, most not understanding the close relationship of Kingdom holding Company and News Corp. How differently should one feel about a direct investment stake of a foreign government in a media or publishing company?
According to an associated Press article on August 4, China Curbs Foreign Satellite TV: “China is cracking down on cable television operators who offer unauthorized foreign satellite broadcasts — the communist government's latest bid to maintain its monopoly on information, a newspaper reported Saturday.” The highest profile victim of the crackdown could be Hong Kong's Phoenix satellite news channel, hugely popular among China's urban middle class and received in millions of homes across the country despite the restrictions. Murdoch's News Corp. also owns an 18% stake in Phoenix TV, a joint venture based in Hong Kong that was supposed to be News Corp.'s entrée to the Chinese TV market.
According to an article by Erik Sass in the Media Daily News: WSJ Says China Coverage Won't Change:
“Although Murdoch is reportedly frustrated by Chinese media controls and protectionist policies, his continuing business interests in China have fueled suspicion that he would adulterate content at his media companies to placate the Chinese government. In fact, StarTV has already bowed to political pressure on more than one occasion.”
“In 1994, for example, it yanked BBC World Service from its lineup after its coverage of the Chinese government grew too critical. And in 1998, HarperCollins, also owned by News Corp., canceled a book by the former governor of Hong Kong that was critical of the Chinese government.”
“This track record prompted The Wall Street Journal's Beijing bureau to write an open letter in May urging the Dow Jones board not to sell the company to Murdoch. It feared that would mean an end to investigative reporting in China, which has won two Pulitzer Prizes in recent years. The highly critical letter noted Murdoch's “well-documented history of making editorial decisions in order to advance his business interests in China and, indeed, of sacrificing journalistic integrity to satisfy personal or political aims.””
It is worth reviewing an interview with Prince Alwaleed bin Talal that appeared in the Financial Times by Simon Kuper on December 2, 2005, Lunch with the FT: Royal subjects. The lunch took place at his hotel the George V in Paris. He is the world’s fifth richest man, worth an estimated $21.5bn., he tends to own things. There are his chunks of Citigroup and News Corp, not to mention EuroDisney, Canary Wharf, Hewlett-Packard, Time Warner and so on. One of his grandfathers founded Saudi Arabia and the other was independent Lebanon’s first prime minister. Not content with being rich, the prince also believes he has a divinely ordained role to bring together “east and west”.
As Simon Kuper waited for the prince in the George V’s lobby the prince hangs with his buddies, Richard Parsons, chairman and chief executive of Time Warner, and Sandy Weill, then chairman of Citigroup. Then he goes to pray.
The next day he will be signing deals with Harvard and Georgetown universities to finance some of their Islamic studies. It’s all part of bridging the gap. “That’s why we focus on the east coast of America. Because that’s where the decision-making process is, with all respect to west coast, north coast, or south coast.”
The prince’s most famous attempt at bridging failed. He donated $10m to New York City after the September 11 attacks. But he also called on the US government to “adopt a more balanced stance towards the Palestinian cause”. Rudolph Giuliani, New York’s then mayor, returned the check, and accused him of trying to justify the attacks. A Saudi newspaper later quoted the prince blaming “Jewish pressures” for Giuliani’s rejection.
Yet as the prince knows, not everyone has a gleaming image of Saudi Arabia. Americans got particularly angry when 15 of the 19 hijackers on September 11 turned out to be Saudis. Did the prince take stakes in western media companies partly so that he could help clear up east-west misunderstandings?
He begins with the standard denial: “My investment in the United States is not really to influence public policy.” But then he adds: “When I meet Mr. Murdoch of News Corp, that owns Fox News, and BSkyB, or when I meet Mr. Parsons, who controls CNN, Fortune magazine, People, Time, America Online, I don’t intrude into the management of these companies. However, I do convey to them the message about where I believe they went wrong. It’s their discretion to decide what to do. My job is to open their eyes to things they may not have seen.”
Could His Highness give an example? “One time CNN, they brought the Palestinians’ so-called terrorist act against Israelis. I communicated to them, ‘Look, you have to give the other side of the equation. Look what the Israelis are doing to the Palestinians.’ And they did that. And they were censured and reprimanded by the Israelis. I do not claim it’s my right to intrude. But I have to do my best to try to influence events.”
At News Corp, the prince is currently helping Murdoch rebuff an attack from the investor John Malone. No doubt it is for literary reasons alone that Murdoch’s HarperCollins has just published the hagiography Alwaleed: Businessman, Billionaire, Prince by the former CNN anchor Riz Khan. The prince has a copy by his side. “Forwarded by President Carter,” he remarks. Then he says: “Yeah, it’s being forwarded by President Carter. President Carter. By President Carter.”
“Wow,” I finally reply.
“President Carter,” he says.
Conclusion
Because they are driven by governments of the totalitarian and Authoritarian Great Powers, they compel countries to take immediate attention. In order to address the threats to the US and European Union, the policies of the countries should be harmonized and individual countries should not go-it-alone in response to such an important global issue.
The key elements that need to be addressed are:
· Transparency of the funds ownership, management and investment philosophy.
· Reciprocity – the country must be as open to investment as the host country in which the SWF wishes to invest.
· Common ownership rules among the countries. There must be limitations in investment beyond a certain limit above which the SWF cannot go without host government approval. Care must be taken especially with investments in sensitive areas as security, defense, banking and media.
· The US and the EU must address the energy independence and continuing investment in terrorist states.
· The US must address its balance of payments and foreign trade deficit.
Although many will regard these proposals as protectionist and restrictions of foreign trade, it will be equally dangerous to allow the growth of the SWFs to become entrenched as a feature of the world economy and a tool of asymmetric warfare to implement the Final Jihad of the Leftist/Marxist – Islamist Alliance.
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