Sovereign Wealth Concerns in Davos

DAVOS, Switzerland (Thomson Financial) – Sovereign wealth funds are a visible force at the World Economic Forum (WEF) in Davos this year, reflecting their new-found power, but even at a meeting celebrating globalisation they face suspicion in some quarters.

The state-run investment funds, founded in oil-exporting countries and Asian exporters to invest their reserves, are feared by some as Trojan horses that could be used by governments for political rather than commercial ends.

Lehman Brothers chief executive Richard Fuld said Sovereign wealth funds (SWFs) are estimated to manage about 2.5-3.0 trln usd, with five countries managing about 70 pct of this.

Fuld said the amount under management could rise to 15-20 trln usd in the next five years.

SWFs exist in Russia, China, Kuwait, Singapore, the United Arab Emirates and Norway and several of them recently made a 60 bln usd cash injection into Western banks struggling with the fallout of the US sub-prime crisis.

This action, widely viewed as the emerging countries coming to the rescue of ailing Western institutions, increased the funds' profile but also calls for closer inspection of their activity.

Larry Summers, a treasury secretary under former US president Bill Clinton and now a Harvard University professor, said SWFs were potentially riven with conflicting interests.

He said the US had made a decision not to allow its federal social security trust fund to invest in anything other than government bonds because of the danger of holding investments that could pose political or moral problems.

'Given that we've made that decision, that we'll not invest our government's money in companies because of the risks of politicisation, it is not absurd to have concern when other people's funds invest,' he said.

An SWF could invest in an airline to secure flights to its national capital or put money into a bank to encourage business with its own state.

Other undesirable motives could be for an SWF to pressure a company into changing its suppliers to benefit firms from its own country, or to try to damage a foreign company to help a national champion, Summers said.

'The growth in the size and number of sovereign wealth funds is such that vigilance is required,' Robert Kimmitt, deputy secretary of the US Treasury, told the debate.

He said that the International Monetary Fund and World Bank had been mandated by the Group of Seven industrialised countries to consult with SWFs and draw up a voluntary code of conduct.

Others spoke out in favour of the funds, notably Stephen Schwarzman, the chief executive of US private equity giant Blackstone, which is 9.4 pct owned by China Investment Corp — Beijing's recently formed SWF.

'Our experience is that they're smart, they're long-term and they're highly professional. They're really model sorts of investors,' he said.

The question of transparency and a code of conduct was cooly received by Kuwait Investment Authority managing director Bader Al Sa'ad and Saudi Arabian Monetary Agency deputy head Muhammad Al Jasser, who saw in it the spectre of unfair regulation.

'There is a lot of worry about the sovereign funds but all these worries are not real cases. They are either assumptions or misinterpretations,' Al Sa'ad, told a debate.

Norwegian Finance Minister Kristin Halvorsen, whose country has the most transparent state fund in the world, appealed for cooperation.

'I think we would benefit, all of us, if we could agree on a common code of practice,' she said, before referring to fears in countries where SWFs have invested recently.

'Now, it seems like they don't like us — but they need our money.'