I hear a lot of convincing arguments about why we shouldn’t worry about the Kremlin’s sovereign wealth ambitions. After all, Russia’s $150 billion stabilization fund is comparatively tiny considering the returns that Gazprom and Rosneft are bringing in (though the dire lack of transparency of these state-owned firms make any estimation of capital management difficult), and Moscow’s practically silent announcement in early February that $32 billion of this fund will be carved out for some more adventurous speculative investing in equities and bonds passed through unnoticed by the media. Considering that the “scary” UAE Abu Dhabi sovereign wealth fund wields $875 billion, dwarfing any sense of threat from the Russian government managed fund, the histrionics seem unwarranted. Furthermore, some Middle Eastern sovereign wealth funds have +30 year records of non-political capital appreciation seeking conduct – and according to many brokers, there is not a sense that these guys are getting calls from the president’s office about what to buy and sell. Despite these assurances, politicians on both sides of the Atlantic are calling for more information and clearer rules – often with good reason in my opinion. However when do these calls for transparency go too far, and result in hypocritical protectionism?
Luxembourg Finance Minister Jean-Claude Juncker has led the charge in the EU, clearly sourcing his resistance to SWFs from Russia over the reciprocity issue. He told Ashahi Shimbun that “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.”Like practically every other global finance challenge the EU is becoming quickly divided, this time over whether or not to design a unique set of laws, separate from a consensus international code, with Britain and France clashing over the issue. Interestingly, it is France and Germany, the countries which have so openly engendered Russia’s resource nationalism and power politics via pipelines, who are raising the biggest ruckus that SWFs from authoritarian governments may extend beyond the purely commercial. This disconnect between corporations like E.ON, BASF, Total, and Gaz de France, with their willingness to surrender energy security to the Russians, and the current conduct of their elected representatives vis-a-vis SWFs, illustrates a fundamental and urgent contradiction over what needs to be done to draw all players into a predictable rule-based system.Over in the United States, similar concerns over sovereign wealth have surfaced, most notably with the Merrill Lynch and Morgan Stanley deals as well as China’s attempted bid for Unocal and other protectionist barriers. Writing in the Wall Street Journal, Sen. Evan Bayh stated that “The oil-rich nations of the Persian Gulf have a long track record of passive investing, but Russia’s recent behavior and China’s drive for economic advantage — including rampant intellectual property theft, currency manipulation and subsidies for manufacture and export — raise serious concerns about how sovereign funds might be used.“It is precisely these “track records” that are of greatest concern to policymakers with regard to sovereign wealth rules, and in the case of Russia, the show trial of Mikhail Khodorkovsky and the seizure of Yukos is coming back to haunt them. Fred Halliday of the London School of Economics has an important new article out today on SWFs which points out that even if the United States, Britain, France, and everyone else were to arrive to an agreement on sovereign wealth investment rules (i.e. – accounting and transparency standards) – it would largely be irrelevant:
The idea that a “code of practice” can address such systemic conditions is unreal. The kinds of practice Russia has engaged in – tearing up contracts with foreign firms, appropriating the business of figures like Mikhail Khodorkovsky of Yukos Oil – is evidence of the state’s controlloing ambition; while the conduct of Saudi Arabia in relation to the al-Yamamah arms deal with Britain in the late 1980s – and the investigation into the bribery associated with this deal, which was abandoned in 2006 – reveal the way the House of Saud is used to doing business. The ideas of “transparency” and “accountability” beloved of western NGOs and progressive business advocates look irrelevant in this context (see Michael Hopkins, “The politics of responsible business“, 8 June 2007).
There are several more reasons the West should be concerned about Moscow’s politically-motivated investment ambitions. The $150 billion stabilization fund was recently a focal point of the spy wars, resulting in the draconian jailing of the Deputy Finance Minister Sergei Storchak as part of a campaign to oust Alexei Kudrin, allegedly to gain control of the fund. According to the speculation of some of my sources, these efforts snap away the fund partially backfired, resulting in the nomination for the presidential ticket of “liberal reformer” Dmitri Medvedev (who despite his loyalty to Putin, was not the preferred candidate of the siloviki), and a strengthening of the technocratic voices over Russia’s economy (most powerfully marked by Kudrin and Chubais open disagreement with Putin).Another point of concern is that in the past, Putin has openly declared that he believes sovereign wealth should be used to invest in domestic securities of Russian companies – a surprise announcement that left even his closest aids and advisers taken aback. The kind of market distortion and opportunities for corruption that come with the state proposing to pump up the RTS are unimaginable, and if this same line of thinking over preferential investments is brought to bear over the international growth strategy for Russia’s SWF, then we have a big problem.There is also no shortage of examples of how the state has used the management of Gazprom to achieve political leverage through non-commercial activities. Even the prospectus for Rosneft’s IPO explicitly stated that the company might not always pursue profits given its function on behalf of the state.The question at the end of the day for us to consider is whether or not the Russian government is capable of exercising its will to not intervene in the decision-making process of its fund. Again, if we take the example of what’s happened to democracy, media, or civil society under this administration, we do not see a very strong track record of any invisible hand or trust in the marketplace.Sovereign wealth has been around a very long time, and it is not going anywhere anytime soon. States that erect unnecessarily restrictive protectionist measures against SWFs will come to regret it, as the capital moves elsewhere to enjoy growth. These funds require no prejudicial or special treatment, but simply a strong, clear, fair, and pragmatic code. Investment-receiving countries need not have access to the full books, but rather we should talk about how we can guarantee the independence of investment decision-makers from political influence – perhaps by multi-national oversight committees. Russia has done nothing with its fund so far to deserve any treatment different from that of Norway or Singapore – but there needs to be clear and transparent rules to which all sovereign funds will be held accountable.