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 Holds 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, there are now 91 sovereign wealth funds worldwide, with assets of over $9.1 trillion.
Top 10 sovereign wealth funds by country (in billions) 2021
Norwegian Government Pension Fund Global Norway $1,364
China Investment Corp. China $1,222
Kuwait Investment Authority Kuwait $693
Abu Dhabi Investment Authority UAE $649
Hong Kong Monetary Authority Hong Kong $580
Singapore GIC $545
Temasek Holdings Singapore $484
China National Social Security Board $447
Public Investment Fund Saudi Arabia $430
Investment Corp. from Dubai UAE $422
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, is available here.
The financial and political power of national sovereign wealth funds
China’s recent military buildup and seizure of the Philippines’ Exclusive Economic Zone (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 Corporation 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 United Arab Emirates Army trains the Somaliland Army and establishes 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.
Russia’s sovereign wealth fund, the National Wealth Fund, has 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)
The RDIF was created to help foreign companies invest in Russia without having to go 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 Government Pension Fund Global (GPFG) and the Government Pension Fund Norway (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.
Nicolai Tangen, CEO of the Norwegian government pension fund, has signaled a sea 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 “his role is to create a ‘safety zone’ where fund members 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 private beer company Kirin on its watch list because of the ruling military junta’s ties to the 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’s Public Investment Fund (PIF) 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 markets team by hiring Maziar Alamouti, the former head 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 recorded a return on investment of 7% and expects to grow 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 company. 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 “crowding out”. 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 safeguard against such pressures in the Committee on Foreign Investments in the United States (CFIUS), which was recently reformed and strengthened by the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) , the question must be asked if other modern economies of 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 stage. The CFIUS would not be able to affect such a scenario.