Posts Tagged 'Guest Blog'

Guest Blog: Nigeria’s SWF Strife Continues

Jason Mosley

During the course of 2011, momentum has appeared to be building behind Nigeria’s new Sovereign Wealth Fund (SWF).  Legislation was passed in May establishing the SWF, and setting out its three functions.  These include a future generations fund, an infrastructure fund and a stabilisation fund.

However, Nigeria already has a stablisation fund — the Excess Crude Account (ECA), which was estblished in 2004.  Unfortunately, the troubled history of the ECA may be at risk of repeating itself.  The key factor at play in the previous disputes over the ECA and now over the SWF is the constitutional status of the states (and to some extent the local government adminstrations) in decision-making and management around the country’s oil revenues.

There have been tussles for many years over the formula and procedures used to divide up oil revenues — a national asset — across the federal system.  And in Nigeria, where the rents derived from control over government budgets have long been at the heart of the political process, these debates take on additional political urgency.  Disagreement between oil-producing states in the Niger Delta area and other (particularly northern) states over the ‘derivation’ formula were at the root of the effective collapse of national dialogue over constitutional reform more than five years ago.

The current constitution was drafted by a caretaker military government between the death in office of military dictator Sani Abacha in 1998 and the return to elected civilian rule in 1999.  It entrenched a trend towards increased federalism that has extended across Nigeria’s post-independence history.  The creation of smaller federal units in principle is a way to create more local legitimacy for governments and thus manage ethnic or regional tensions (Nigeria suffered a brutal civil war between 1967-70).  It is a live process — with the creation of new states still being discussed in the present.

However, while it is possible from the outside to view the federal strategy as a ‘central authority’ technique for managing tensions across the nation, in practice it has seen the creation of disparate concentrations of political and fiscal authority across the nation.  State governments are quite powerful, and are highly significant players in the federal fiscal context.  As such, the political logics at work at the state level are important factors in federal government efforts to manage the economy.

Nowhere has this been clearer than in the — ostensibly highly sensible — efforts in the past 7 years to improve governance and management of oil revenues.  Establishment of the ECA was a key factor in Nigeria’s efforts to consolidate its debt position, leading to a major debt clearance and partial write-off in 2006.  Likewise, the establishment of the SWF this year, and expectations that it would form part of a broader fiscal consolidation, have improved external perceptions.  Fitch Ratings raised its sovereign outlook to Stable on October 21, for example.

However, the constitutionality of the ECA came under legal challenge from state governments in 2008.  Envisaged as a stablisation account, the legal workaround achieved — which enshrined the entitlement of state and local governments to a share of revenues — seriously undermined that function.  Instead the ECA regularly disbursed its revenues under the management of the Federal Account Allocation Committee, leaving the fund nearly depleted by 2010.

As such, the effort to push through the SWF without altering the constitutional framework was almost destined to hit the same hurdle.  And yesterday, after weeks of back-and-forth between the Nigerian Governors Forum and the federal government, 23 of the 36 state governments filed suit at the Supreme Court, requesting that it block the federal government’s effort to transfer funds from the ECA to the new SWF, and requesting that the Supreme Court take direct control over the ECA until the dispute could be resolved.

It may be that the state governors are using the SWF as a bargaining chip over other state-federal disputes (such as the debate on the national minimum wage).  After all, the seed funding is only 1 billion, and the ECA continues to exist.  However, it may well be that the SWF is some way from being free enough from these tussles to function effectively.

Guest Blog: Latin Sovereign Wealth Funds

Javier Santiso

Sovereign wealth funds are more fashionable than ever. There are around 50 at present, and another 15 countries are considering getting one. From Algeria to India, South Africa, Japan and Israel, candidates to adopt an instrument of this sort are proliferating. In Latin America, some countries – Chile, Trinidad and Tobago and Venezuela – already have theirs. Brazil joined them in 2010, with reserves of over $250 billion, and at the end of that year Peru, Colombia, Panama and Bolivia initiated debates to create one.

All these countries now have abundant reserves and face the challenge – the Andean countries in particular – of managing the raw materials boom. Their investments and exports are still highly concentrated within these low-intensity areas for added value and jobs. Hence their desire to make better use of this abundance to take a leap forward production-wise and diversify their economies, an issue that remains pending. Sovereign wealth funds may be strategic vehicles to this end, as long as the institution is nurtured by providing it with first-rate professionals and processes.

This is precisely what was masterfully achieved by Chile. In the middle of the last decade it created two sovereign wealth funds with stringent rules and top-level human and institutional capital. The outcome is that this Latin country has become a worldwide reference, on a par with Norway, in matters of sovereign wealth funds. In the case of Chile, the funds are set in the context of a strict fiscal responsibility law, adopted in 2006, which requires 0.5% of the GDP of the surplus of the previous year to be allocated to the first fund (pension reserve fund); the next 0.5% of the GDP of the surplus to capitalise the Central Bank, and whatever surplus is generated above that amount, to the second sovereign wealth fund (Economic and Social Stabilisation Fund).

Several lessons can be learnt from this successful Latin experience. The first is that this sort of instrument is inseparable from a serious fiscal policy. The second is that very rigorous regulatory and institutional frameworks are needed, especially when we are talking about emerging countries. And lastly, it is equally essential to provide the institution with the right human capital. In the Chilean case, both in the previous government and the present one, we are talking of professionals and economists of great value, starting with the two finance ministers who supervised (Andrés Velasco) and supervise (Felipe Larraín) the funds, together with those directly in charge of them in the previous government (Eric Parrado) and the current one (Ignacio Briones), all of them with a PhD in Economics, a long academic career and ample professional experience.

However, the Chilean funds are not strategic funds, i.e., aimed at encouraging business development and diversification. Some emerging countries such as the Emirates, Singapore and Malaysia created strategic funds with the clear aim of contributing to business development and production diversification. One might imagine Chile equipping itself with a (third) sovereign wealth fund for this purpose. The beauty of the Chilean scheme is that it potentially offers the right structure of incentives to do so: the present three successive layers for fiscal surplus allocations could be joined by a fourth for a strategic fund. This would only be activated if the first three items are fulfilled. Therefore it would only be activated above a significant level of fiscal surplus. The strategic fund could then operate as a fund of funds, pushing production diversity towards technology sectors or even mining industry suppliers, for example.

In fact it is remarkable that, although it is the world’s leading producer and exporter of copper, Chile has no world-scale multinational supplying that industry with vehicles, diggers or explosives. They are all foreign: Caterpillar and Joy Global are listed in New York, Komatsu in Tokyo, Atlas Copco and Sandvik in Stockholm, Boart Longyear, Leighton and Orica are Australian, the Weir Group is Scottish and Hatch is Canadian. They are all large-scale creators of high value added jobs. Coldelco, the world’s biggest producer of copper, employs just under 20,000 people – a great deal fewer than the Swedish multinationals Sandvik (44,000 employees) and Atlas Copco (30,000 employees). Its income is seven times lower than that of Caterpillar, which also employs almost five times more people than the Chilean multinational.

Latin America does not lack natural resources, and it is undoubtedly a blessing. However, except for Mexico and Brazil, which possess a wide range of industrial activities, there has been little product diversification. On average, more than 50% of the region’s exports are still linked to raw materials, and over $150 billion of investments are expected in these industries in the next five years. Having raw materials is not a curse; it all depends what you do with them, as shown by the cases of highly raw material dependent and highly developed economies such as Norway, Australia and Canada. In the end, the question we must ask a country that has lithium, for instance (as do Chile, Argentina and Bolivia), is the following one. Where do you want to be in the value added chain: in the market of lithium as a raw material, estimated to be worth a little over $1 billion? Or the lithium battery market, estimated at a little over $25 billion? Or even the electric car market, which will use lithium batteries and is estimated to be worth $200 billion?

Part of the answer to this question may lie in the creation of strategic funds. The experience of other countries, particularly in the Arabian Peninsula and Southeast Asia, can serve as a model in this regard.

In the Emirates, the Mubadala fund, for example, is Abu Dhabi’s strategic vehicle for diversifying the oil economy. This institution, set up in 2005, is endowed with some $10 billion and owns Masdar, a city that aspires to be the Silicon Valley of renewable energies. It made investments and strategic agreements with multinationals such as General Electric (it owns 0.7% of the US giant), which created R&D centres in the Masdar complex. Mubadala and GE fostered a joint investment fund now endowed with $2 billion. In this way the Emirates seek to position themselves as an aerospace hub, and to this end they reached an association agreement with the European multinational EADS (Airbus), in which another Arab sovereign wealth fund, Dubai International Capital, owns over 3% of the capital. Mubadala was also involved in strategic agreements with multinationals such as the French Veolia Water and, at the end of 2010, the Spanish technology company Indra. Furthermore, in 2010 it undertook an aggressive diversification strategy aimed at emerging markets, reaching agreements with the Malaysian sovereign wealth fund ($7 billion) and a Russian private venture capital fund ($100 million).

Likewise, Malaysia offers an interesting examples of successful strategic sovereign wealth funds. Khazanah, the Malaysian sovereign wealth fund, manages around $30 billion. It made strategic investments in 50 companies, including the world-leading telecommunications group Axiata (with 45% of the total) and the car manufacturer Proton (in which it owns 42% of the capital), today the biggest in Southeast Asia. It has interests in airports, airlines, hospitals and banks all over the country, where 90% of its portfolio is concentrated. It also started up an international expansion process in line with the industrial strategy of the country to position it as a regional healthcare hub. In this way in 2010 it took over Parkway Holdings, the main private hospital operator in Asia, for a record sum of nearly $3,5 billion. On the strength of these successes, at the end of 2009 Malaysia equipped itself with a second sovereign wealth fund, 1Malaysia Development Berhad, thus multiplying the cooperation agreements with the Qatar sovereign fund (by creating a $5 billion co-investment vehicle) and the oil company PetroSaudi International (to invest $2,5 billion).

These examples illustrate to what extent sovereign wealth funds can be strategic actors for the diversification and development of an economy. In the case of Latin America, Brazil has, through the BNDES, effectively operated with an instrument of this sort, producing giants such as Vale and Petrobras in raw material industries, but also in cutting-edge industries such as the case of Embraer in aviation. Today countries like Peru and Colombia, heavily dependent on raw materials, are adding their voices to the debate about whether or not to create sovereign wealth funds. They could look to Chile to design strategies, but also further afield, to the Emirates, Singapore and Malaysia, and think of a scheme that would also enable them to set up a strategic fund, something that Chile itself could consider too.

Guest blog: Be Thankful for Europe

Adam Dixon

With yesterday’s downgrade of Italian sovereign debt by S&P, we can be sure that the chorus of euro skeptics will be further emboldened in their criticism of the European project, mainly in terms of the monetary union but also in the larger sense.

Yes, Italy has an unsustainable debt burden; growth has been anemic for the better part of a decade; the political system seems unable to adequately address the problem; and the list goes on. Coupled with the problems in Greece and elsewhere in the periphery, talk of breakup of the eurozone has never been higher and more real.

Proponents claim that deficit countries would then be able to devalue, which would reduce aggregate prices and wages, thus increasing competitiveness in these countries. You know the argument.

For all the macroeconomic arguments about letting a few countries out to effectively “do their own thing”, it is important to ask whether this will undermine the political will for sustaining free trade and limiting financial protectionism. So, what is the greater cost: keeping struggling periphery economies in, or cutting them loose only to see free trade undermined?

Indeed, anything that undermines the European project is actually quite unsettling. For one, the European project has been a major force in pushing forward free trade globally and in the removal of barriers to capital flows — i.e. creating a more hospitable space for investors at home and from abroad.

Since the end of the Second World War the international system has never been about letting countries “go it alone”. It has been about bringing countries closer together. The United States helped rebuild Europe; European countries have sought to bring themselves closer politically and economically; the world opened to China and the former Soviet States; and the list goes on. In doing so much prosperity was gained. No one really wants to reverse this trend.

For long-term investors, a resilient global economy that is open to trade and the free flow of capital is important. Hence, talk of a eurozone breakup or even the exit of a few countries is actually quite disconcerting. If enough countries start to lose faith in free trade and the free flow of capital, then long-term investors have a real problem. Greek default and even Italian default would seem like minor events.

Again, reducing debt in Europe’s periphery and igniting growth is going to be difficult and costly, whichever way it occurs. If they are left to “go it alone”, then there is little opportunity to reinforce principles of free trade in goods, services and capital in the process.

Guest Post: Post-revolutionary Libyan investment in Africa

Jason Mosley

As the Libyan revolution enters its final stages, and the National Transitional Council (NTC) looks to make the transition from rebel movement to governing body, the question is emerging of post-revolutionary Libya’s relations with the rest of Africa.

Libya has been a major player, in investment and diplomatic terms, across much of the rest of the region.  Under the regime of Muammar al-Qadhafi, Libya regularly contributed almost 12.5% of the African Union’s annual budget — surpassing the contributions of much larger economies — reaching 15% in 2010.  Libya directly covered the membership dues of several poor African countries.  The government had a number of investment vehicles, such as the Libyan Arab African Investment Company (LAAICO), which made significant investments across several sectors in nearly two dozen African countries.  Rumours abound of Qadhafi’s less transparent financial support for individual leaders in other African countries, usually associated with the less democratic governments.

Libya’s focus on Africa was in part a reflection of Qadhafi’s influence building enterprise, having alienated the West and most of his fellow Arab governments during the course of his nearly 42 year rule.  The passing of his regime is hardly mourned by most other Arab League members.  However, it is having significant repercussions within the African Union.  Speculation is intense on the intentions of the NTC towards the rest of the continent.  One outcome being discussed is that a democratic Libya has a chance to bolster its relations and linkages with Africa even further, and to take a senior leadership role in the region — and one that would be largely ‘above board’.  As the country’s assets are unfrozen, it is conceivable that a more transparent and well-governed Libya could use its investment clout to build relationships, strengthen its influence and promote better governance across the region.

It is tempting to buy into this optimism.  However, even leaving aside the question of whether the NTC will prove able to manage the major challenge of retaining its coherence through the next phase of the revolution — a huge uncertainty for a disparate group held together mainly by its various factions’ common goal of pushing out the Qadhafi regime — there are some good reasons why the new Libya will not be focusing on its relations with Africa south of the Sahara for the foreseeable future.

The first and most obvious factor is the major socioeconomic strain that underpinned the revolution in the first place.  Like its neighbours, the country has a major youth bulge, and many of these young people are unemployed or underemployed.  Unemployment was officially running at about 21% in 2010, although the true figure was probably closer to 30%.  Along with many other countries, the population has experienced the pressures from globally high commodity prices, feeding through into domestic inflation.

A second major consideration will be the country’s reconstruction needs, following more than six months of conflict.  As funds become available, restarting health and social services, paying civil servant salaries and repairing infrastructure — including that related to the oil sector, some of which was targeted during the conflict.  The costs of reconstruction are still unknown, and it may be some time before they are fully assessed.

An added complication will be the state of the country’s finances, following sanctions and assets freezes in multiple jurisdictions.  Although some countries have started to lift restrictions, and repatriate assets to the NTC, the African Union has not yet recognised the NTC as the legitimate government of Libya (although several African nations have individually done so).  South Africa, for example, is maintaining its assets freeze.

The new leadership will be hard pressed to justify investments in Africa countries — and perhaps even in maintaining its current levels of support for African institutions, let alone growing them — under these circumstances.  And given the divisions in the NTC, it seems unlikely that any individual leaders will want to take a stance that appears not to prioritise Libya’s domestic needs, for fear of giving an opening to rivals.

Guest Blog: Sovereignty in the Long Term

Adam Dixon

We like to think of SWFs as truly long-term investors, perhaps even super long-term investors. They don’t have liabilities like pension funds or insurance companies; they can largely ignore the day-to-day, the month-to-month, and conceivably some of the year-to-year fluctuations of the market; and, their sheer size gives them the ability to invest in ways that others, aside from maybe the largest pension funds, can’t.

Put simply, for those interested in the ways financial markets can contribute something to addressing long-term existential issues such as climate change, the potential for super long-term investors is quite seductive. They’ve got the firepower to realize long-term objectives others won’t, or are too focused on the short term to do so.

But, can SWFs really be counted on to be super long-term investors? One would hope so. And for many SWFs the answer is probably a resounding yes. Unfortunately, a look at geopolitical history may temper such optimism.

With the Arab Spring and the fall of Colonel Gaddafi in Libya we are reminded about how fragile ‘sovereignty’, in whatever form it takes, can be. Just think about the massive geopolitical transformations of the 20th century. Dictators came and went; liberal democracies were brought to the verge of collapse; European colonialism left a patchwork of artificial nation-states; and there was the rise and fall of the Soviet Union.

The recent history of the 21st century is not as bloody, but geopolitical transformation and the subsequent reconfiguration of sovereign authority continues. Take, for example, the recent split between North Sudan and South Sudan. Suffice it to say, uncertainty as to the stability of sovereign authority may significantly shrink time horizons, at least in some places.

This does not mean that SWFs won’t take long-term investment positions. (Was Gaddafi expecting to lose his authority 18 months ago?) In fact, SWFs are likely to be used as a means of protecting the structure of sovereignty in a country, whatever that may look like. But if major political change occurs such that the structure of domestic sovereignty is radically transformed, what are the implications for the SWF?

It is too early to say what the new government in Libya will do with the country’s resource wealth. One would imagine that the fund will be used to help rebuild while maintaining its international diversification. Yet, the new government and the people of Libya, assuming stability returns, may want something radically different done with their sovereign wealth.

Guest Blog: No SWF for Australia, superannuation instead?

Angela Cummine

In case you missed the escalating back and forth of the SWF debate down under these past few months, it reached a crescendo last week. On Wednesday, Australia had the dubious honour of becoming one of the few countries in the world to rule out establishing a SWF, at a time when more countries than ever have established or are considering the creation of these vehicles.  It is particularly surprising given Australia’s abundant seed capital for an SWF from unprecedented resource windfalls reaped during the most sustained mining boom in the country’s history. Mining industry revenue grew from $43 billion in 1999-2000 to an estimated $195bn last financial year. Australia’s terms of trade are 60 per cent above the average for the 20th century, seen by some experts as part of a ‘sustained shift’ rather than temporary appreciation in the exchange rate.

The announcement is not surprising given both the Prime Minister and Treasurer’s persistent rejection of a sovereign fund proposal.  But in recent months, the government has came under increasing pressure from Business Leaders, Economists and key opposition members to capture a share of the country’s historic resource profits.

What was surprising however, was the basis for the Prime Minister’s opposition to the idea.  After many months, the Australian public was finally given a formal explanation, at least an attempt at one, for the government’s SWF skepticism. Essentially, the Prime Minister believes Australia already has a sovereign wealth fund in the form of their AU$1.4 trillion superannuation industry.

Labour has hinted at this idea before. Treasurer Wayne Swan in particular has argued that mining boom proceeds should be used to increase everyone’s superannuation from 9 – 12%, rather than setting up an SWF, suggesting that this is tantamount to investing in millions of individual SWFs. Avid readers of this blog will recall Ashby’s compelling critique of the conflation between superannuation savings and a national-level savings vehicle for future generations.

But this was the first time the Prime Minister tried to elaborate how the private retirement savings of individual Australians could substitute for and alleviate the need for a sovereign fund.  Essentially, the Prime Minister’s argument boiled down to three ideas, each of which confirm the ongoing conceptual confusion about the fund management industry suffered by those at the helm of political power in Australia.

‘The biggest surprise of the talk was the claim that Australia does not need a collective savings fund since our superannuation savings already provide the country with a ‘trillion-dollar sovereign wealth fund’. This argument completely misconstrues the idea of superannuation, wrongly conflating it with the fundamentally different vehicle of a sovereign fund, a point on which Opposition member Malcolm Turnbull has previously attacked the government. Turnbull correctly pointed out the inability of superannuation savings to offer the stabilization or wealth creation role of an SWF, since private super savings tend to be offset by falls in other areas of private savings. In contrast, an SWF offers a means for turning temporary windfalls into permanent public savings allowing for smoothed consumption over time or future investment. Functionally, superannuation as private savings is totally distinct from public savings in an SWF.

In case some readers are unfamiliar with the term superannuation, it is just the Australian word for compulsory private pension savings funded by employers. While during our working lives these funds may be pooled with others retirement savings and invested collectively by fund managers, at no point is this capital anything other than the asset of the individual in whose name contributions are made.  The fiduciary must manage these assets solely for the benefit of that individual.  In other words, super is money that belongs to individuals, not Australia as a nation, as the Prime Minister implies.

The idea that the super industry could substitute for the government’s responsibility to save for the nation as a collective not only shifts the buck, literally, from government to individual, but far stranger, it echoes Margaret Thatcher’s infamous statement ‘there is no such thing as society, only individuals and families.’

The next argument was that Australia does not want a sovereign fund because it would be centrally managed ‘by a Canberra-appointed manager’.  Instead, we have superannuation ‘privately managed by thousands of trustees’.  But this argument strikes one as strange given the exemplary governance arrangements of Australia’s existing SWF, the Future Fund, a AU$70 billion pool of reserve pension assets managed by an independent Board of Guardians.  Yes, the Board is Canberra appointed, but the Fund is not centrally managed. On the contrary, the Future Fund has considerable autonomy from Canberra protected through a series of provisions that quarantine it from political influence: exclusion of government representatives on the Board, no restrictions in mandate, and the requirement that fund expenses come from the fund, not a Budget appropriation liable to politicization.

But Canberra still retains discretion over the purpose of the fund and has ultimate oversight of its activities – no bad thing if you believe that transparency and accountability in the management of public wealth empowers citizens, which the the Government, with its left-of-centre philosophy, should.

The final kicker was the Prime Minister’s economic logic.  The idea that Australia’s super industry provides an ‘anchor’ in ‘rocky international seas’, fostering ‘liquidity and stability’ is a stretch when we recall the recent perils of the US economy.  The US is the world’s largest fund management industry with US$36 trillion in assets under management, but that did not prevent the US losing its AAA credit rating status for the first time ever last month.  That’s because there is a difference between the people’s accounts and the government’s accounts. A flush funds management industry does not let the government off the hook in terms of its own fiscal management responsibilities.

In short, the idea of shifting risk to individuals and shirking government responsibility for long-term savings by substituting superannuation for a sovereign wealth fund is one massive missed opportunity for Australia and one scary indictment of the massive confusion regarding the funds management industry that exists at the top of the Australian Government.

Guest Blog: The Risk of SWF Investors

Victoria Barbary

Most regular readers of this blog will be aware that the International Forum of Sovereign Wealth Funds has long argued that SWFs should not be treated differently from other long-term investors, arguing that to do so would impede the international flow of capital and would emphasise global imbalances that SWFs have been established to mitigate. In many ways they are absolutely correct. There is no evidence to suggest that SWFs are anything but commercial investors. They should not, therefore, be discriminated against by a company or a country on the grounds that they might be used by their sovereign government owners for “political purposes”, by which is usually inferred nefarious ends to bring down a Western economy. Indeed, since the end of 2007, SWFs have provided a wide range of companies in the OECD – not only banks – with much-needed patient capital. Along the way they have also learned that they need to be active in corporate governance and actively engage with their asset, much like any private equity manager would do, to help increase its value. As such SWFs have brought many positives to the world economy.

And yet, while SWFs should not be discriminated against, potential investees and recipient countries need to have a more nuanced understanding of these funds and enter transactions with their eyes wide open. SWFs are a unique form of investor; indeed, why were they given a new label and a special International Forum created for them to interact if they were not different in some way? “Different”, however, does not necessarily equal “bad”, and as long as some of their unique features are understood there is no reason why free flow of capital should not continue, and SWF investment actively courted.

So what are these features that distinguish SWFs from other long-term, institutional, public investors?

First, as SWFs are owned by sovereign governments, they are subject to higher and different obligations for their investment flows. For example, in their investment practice they must maintain the integrity of the state and reflect a positive image of the state abroad as a responsible member of the international community. QIA has a particular strategy of using its high-status investments (which are only a small part of its portfolio) to project the image of Qatar and a dynamic, influential country, with an eye for quality and reputation, – well, at least that’s the idea.

Additionally, although SWFs are commercial investors, they are economic policy instruments. SWFs are created to prevent Dutch disease, ease inflationary pressures etc. As such, they cannot be fully separated from their home economies. This was particularly obvious in the case of the KIA, which was required by parliament to start a more active investment programme at home in 2008, when the economy was hit by extreme capital flight in the wake of the credit crunch. This was not something that had been a part of KIA’s remit, and in many ways it is still struggling with understanding this market. As such, SWFs’ international investments and divestments are linked to the economics of their home nations.

Consequently, given that they are both state-owned and economic policy tools, SWFs cannot be separated from the politics of their government owner. The political risks incumbent on the home nation could, therefore, be projected onto the investee. The Libyan Investment Authority is an extreme case in this regard. During the mid-2000s, Gaddafi was welcomed into the international community and countries around the world encouraged to engage, including accepting LIA investment. The events of 2011 and the impact of sanctions on those companies like Unicredit, Pearson, and Finnemeccanica, in which LIA had a substantial share, should make potential investee companies and recipient country governments take notice of the political currents that buffet nations with SWFs. Particularly in the case of Middle Eastern countries, which may now seem more vulnerable to political unrest than they did a year ago.

This is not to say that investments shouldn’t be accepted –SWFs can bring huge benefits to economies and companies worldwide – but potential recipients need to engage with these issues head-on and make an appropriate judgement call on the risk. This is just as relevant at the company and government level. Sanctions are an extreme measure and should be applied only in the direst circumstances, but if relations between countries decline, for whatever reason, a clear strategy should be in place to manage and mitigate any negative effects that association might have on the company’s equity value or political opinion.


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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