Should SWFs Be Used to ‘Strengthen Ties’?

Ashby Monk

I came across quite an interesting story by Jungmin Hong this morning in Businessweek about Brazil asking Korea to direct the Korea Investment Corporation to invest in Brazilian bonds so as to strengthen bilateral ties. While Hong’s article is very short — it’s literally less than 80 words — it makes up for brevity with provocation:

“Brazil asked South Korea’s sovereign wealth fund to boost investment in real-denominated bonds to strengthen financial ties between the countries…Brazilian Finance Minister Guido Mantega also asked his Korean counterpart, Yoon Jeung Hyun, to share its experience of managing the fund, South Korea’s Ministry of Strategy and Finance said today in an e-mailed statement.”

Now, it’s one thing to offer experience and advice on running a SWF. But it’s another thing altogether to ask a country’s political leadership to direct their SWF to invest in your country in order to ‘strengthen ties’. Unfortunately, Hong seems to have forgotten the punch line. So, we’re left wondering whether the Korean government ever did direct the KIC to invest in Brazil’s bonds.

My assumption is that it did not. The KIC is a highly transparent SWF and a signatory of the Santiago Principles. Remember, GAPP Principle 19 says that SWFs’ investment decisions should aim to maximize risk-adjusted financial returns only. In other words, investments should focus only on economic and financial benefits. In my view, the Brazilian request falls beyond these criteria and lands somewhere in the geopolitical realm.

By the way, Brazil should know better than to ask a country to use their SWF in this manner, as it participated in the International Working Group that developed the Santiago Principles as one of the “Recipient Country Representatives”.

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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