Europe Wary of Russia’s Sovereign Wealth Funds

juncker020708.jpgThe lack of investment reciprocity between Europe and Russia, especially in energy assets, is beginning to raise some concerns among officials – especially considering that the president-to-be recently called upon the business sector to go on aggressive spending sprees abroad. Now all eyes are on Russia’s modest brand new sovereign wealth fund, fueled by $32 billion in oil and gas profits. This amount represents a split from the massive $150 billion stabilization fund, which was mostly a rainy day fund specialized in investing in foreign debt. Control over these funds has been a great source of internal tension within the Kremlin, culminating last year with the arrest of Deputy Finance Minister Sergei Storchak, who along with Alexei Kudrin formerly held the keys to the most powerful instrument of political leverage outside of Gazprom. No one seems to be certain whether the creation of this new sovereign wealth fund is a direct product of the spy wars, but there certainly are some outstanding questions to address.

Did Putin and the liberal-leaning technocrats have to throw this bone to Igor Sechin and the siloviki in order to make sure the elections proceeded smoothly? Regardless it seems almost comical at this point that Kudrin was sent to Davos to market Russia as an “haven of stability” from global market turmoil while his #1 man Storchak languishes behind bars on likely false charges, the stock market tanking, What we do know is that the two non-siloviki men in charge of overseeing Russia’s most important economic prize came under an aggressive coordinated attack to oust them, and now we have a radical change to the fund. Does it seem very likely to you that a government which cannot tolerate a 2% opposition candidate (Kasyanov), which cannot tolerate OSCE observers, would actually take a “hands off” approach to sovereign wealth like Dubai and let the investment analysts make all the market decisions?But Europe might not go along quietly as usual on this one.Luxembourg Finance Minister Jean-Claude Juncker gave an interview to the Japanese newspaper Asahi Shimbun expressing his frustration with the lack of progress in talks with Russia about opening up the economy, and his concerns over how this new sovereign wealth fund could be used for political leverage: “It is unacceptable that while Russia’s government-affiliated fund is sweeping into Europe, European companies are in a situation where they are unable to do similar activities in Russia. (…) We should respect the principle of reciprocity. “It is dangerous to leave everything up to the market. It is necessary to take strong political action to strengthen surveillance and ensure transparency in financial markets.“However it is interesting that Juncker only speaks with such clarity to an Asian newspaper, and that we never see comments from European officials in their own headlines. Clearly there is institutional hesitance in the EU not to “rock the boat” with Russia, which suits their interests perfectly. I agree with most analysts that the majority of sovereign wealth funds represent no threat whatsoever, and simply operate on the basis of profit-maximization just like private equity. But the past established patterns of how the Kremlin have used Gazprom as a foreign policy instrument require that we ask for greater transparency and exercise careful oversight.