Llewellyn
King
Read Llewellyn's bio and previous columns
December 3, 2007
Sovereign Funds: Power
by Wealth and by Stealth
A
new species has invaded the financial markets of the world – sovereign
wealth funds. Some see these state-run investment pools as a godsend.
For example, Citigroup has just been helped over a hurdle by a $7.5
billion infusion from the Abu Dhabi Investment Authority. Others see
sovereign funds, which are growing in size and influence daily, as
another threat to the well-being of the United States and its Western
allies.
Sovereign funds are set up when countries, often with small populations,
have more money than they know what to do with. After the central banks
of these countries have accumulated sufficient foreign reserves to meet
any contingency, they form sovereign wealth funds that are free to
invest in financial assets such as stocks, bonds, property or hedge
funds.
On the up side, sovereign funds are pumping a lot of cash into financial
markets and are helping to offset banks' losses from the subprime
mortgage fiasco. But these are not foreign companies investing – these
are foreign countries investing. Abu Dhabi now owns 4.9 percent of Citi,
the nation's largest bank. This is not the same as a wealthy foreigner
buying a chunk of an American corporation. And that worries some people.
Sovereign funds are not new. What is new is that they are growing at an
extraordinary pace and very small, resource-rich countries have the
money to demand that they are taken seriously.
Of the 10 largest sovereign funds, seven are based on oil and gas. Only
China, South Korea and Singapore have funds that are based on
non-oil-and-gas trade surpluses.
No one knows exactly how much money is being controlled by sovereign
funds because there is no regulation or formal reporting mechanism. Best
estimates are that $3 trillion to $7 trillion are under management by
sovereign funds. It is expected that this sum will increase to $10
trillion in five years.
To understand the implications of this expansion of sovereign funds,
take a look at little Qatar – a desert sand pit that protrudes 100 miles
into the Arabian Sea. It has some oil and the world's second largest
reserves – after Russia – of natural gas. While Russia has more than 140
million people to take care of, Qatar has less than a million, including
hundreds of thousands of guest workers.
There is nothing much in Qatar – a large U.S. air base, the pristine
capital city of Doha, and, well, a lot of sand. The two big activities,
from what I could discern when I visited there, were racing off-road
vehicles on the sand dunes and shopping. The Qataris are trying to
create a great financial center in their desert home. But this will just
be window-dressing for the gigantic flows of cash that their liquefied
natural gas exports around the world are going to produce.
It probably does not matter if Qatar buys large chunks of U.S. companies
over time, or snatches up a lot of real estate. Americans probably will
not have a fit if the Qataris buy chunks of Manhattan.
But there are countries that are a lot less attractive and have agendas
that are not benign. They include China, Kazakhstan, Libya and Iran,
which is free to invest in parts of the world that are not honoring the
U.N. sanctions.
In short, there is an enormous amount of money sloshing around the
world, and with hydrocarbons fetching record prices, there will be more
money looking for a home in a stock market near you.
Like immigration, sovereign funds have grown quietly but relentlessly,
to a point where the governments that control them are going to have a
say – political as well as economic – in the countries that need the
investment. Sadly, the United States is one of those countries. For all
our power and superiority, we are a debtor nation, and we cannot
question the color of the money we need.
© 2007 North Star
Writers Group. May not be republished without permission.
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