Commentary: Why Sovereign Funds Help Global Economy

Вавилов А.П.

The issue of Sovereign Wealth Funds activity was an important topic of discussion at the recent G-7 meeting of finance ministers and central bankers, and rightfully so. Some of these funds are expanding at an average annual rate above 20 percent on the back of accumulating excess export revenues, exceeding billion annually — more than twice the total amount of hedge funds. But many Western nations see these funds as a threat to capital markets.

SWFs are a relatively new global phenomenon and demonstrate very active behavior in the world capital market, and are not subject to regulatory constraints. And various extrapolations of SWF trends predict total volume growth of 5 to 10 times over the next decade.

In the past, typical state foreign reserves were held in high-liquid but low-yielding government papers like T-bills or bank deposits in developed countries. This setup was convenient for all parties until some of the export intensive countries decided to enter the world capital markets with large amounts of money to earn high, real returns in excess of scanty interest payments. The first reaction of western policy-makers on the new reality was negative, as the anti-liberal legislative initiatives in the USA and Europe have clearly demonstrated.

Threat of protectionism in the capital market

The main argument against SWF is that they are non-transparent, pursue non-commercial goals and threaten national security. The belief is that stakes in companies are purchased with the purpose of getting access to secret information or putting political pressure on the governments of recipient countries.

These unjust accusations are especially popular with respect to Russia and China. Western politicians talk about a threat of re-nationalization, making meaningless the large-scale privatization campaigns of the '80s and '90s. What would be the reason to privatize the state property if it would again belong to the state, this time the foreign one?

These debates reflect the fact that politicians in developed countries have not yet adopted a rational strategy to deal with the new phenomenon. Instead, they prefer to take a defensive position and to signal that all attempts of strategic investment by the SWF will be subject to tight control by authorities. The latter will have discretion to decide whether or not these funds are allowed to participate in strategic deals, with less priority given to investments from China and Russia.

The last summit of G-7 ministers recognized the new reality “that SWFs are increasingly important participants in the international financial system and that developed economies can benefit from openness to SWF investment flows.” This official statement does not eliminate, however, politically motivated fears roused in Western mass media.

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