More questions than answers over sovereign funds

Gazprom, the Russian gas company, has made a bit of a name for itself in Europe. This is not so much because it is such a giant - one of the biggest energy enterprises in the world - but because it looks too much like a monster.

It is a state-controlled firm which, through its dominance, in such a cold region, of the market for a vital heating fuel, helps the Kremlin keep a tight grip on the country at large. It is also ready, when called upon, to operate as an instrument of Moscow’s foreign policy, which is why the UK government is blocking it from taking over Centrica, the country’s main gas supplier.

What would the world be like, then, with say 20 or 50 Gazproms, giant, state-controlled companies operating apparently under the rules of international capitalism but also as instruments of a monolithic state? Well, guess what, this is one of the ‘downsides’ of the particular form of economic globalisation which has evolved over the past 20 years and which is already taking shape.

It is causing all sorts of concern among the rich industrial countries which, hitherto, have been quick to praise the way in which globalisation has helped reduce world poverty, but are only now having to confront the fact that some of this globalisation’s manifestations are not quite as benign as they thought. Indeed, sage analysts are wondering whether, just as globalisation is forcing policymakers to confront the reality that there are, conceptually, two kinds of inflation, inflation in goods and in asset prices, so we may soon be confronting two forms of protectionism. One is the traditional effort by states illicitly to shape international trade in goods to their advantage. The other is a protectionism which seeks to prevent fore-ign investors getting control of ‘strategic’ industries.

Where does the threat come from? Partly it is from companies such as Gazprom, state-owned vehicles that are raising huge sums on global capital markets to expand internationally but whose dominant shareholders are governments - think big Chinese banks or PetroChina - and whose governance and modes of operation are, to say the least, opaque. In addition there is the explosive growth of so-called sovereign wealth funds (SWFs). Getting to grips with the significance of these fast-growing entities has so risen up the list of priorities of governments that SWFs made a brief appearance in the latest Group of Seven (G7) advanced economies communiqué, featured in Dominique Strass-Kahn’s first press conference as managing director of the International Monetary Fund (IMF) and were the subject of a short analysis in the IMF’s new report on global financial stability. As Gerard Lyons, chief econo-mist at Standard Chartered Bank, points out in a thor-ough analysis of the pheno-menon, SWFs are not really new. Governments have put funds into investment vehicles they own since at least 1953. Lyons estimates that these fast expanding SWFs are currently worth around $2.2 trillion (€1.5 trillion). But within a decade they will be manag-ing assets of $13.4 trillion, some of them ranking among the biggest individ-ual investors in the world.

What is also new, alongside their growth, is that countries such as Russia and China have joined Abu Dhabi and Norway in creating SWFs, and are pouring huge sums into these state-controlled investment vehicles. But, unlike Norway, they are operating in ways which are not transparent.

A series of high-profile deals, the (subsequently blocked) acquisition of some US ports by a company controlled indirectly by the government of Dubai and, in September, Dubai and Qatar’s moves to grab dominant stakes in the London Stock Exchange and the US Nasdaq stock market, have highlighted the potential influence such sovereign funds could have.

Their frequent lack of transparency and their scale also makes them vehicles through which secret stake building or share manipulation could take place, especially in a world where well-heeled players can add financial muscle by using equally opaque derivatives markets. So the debate is under way. What, if any, regulatory requirements can the transatlantic economies insist upon in return for permitting access to their markets and to the build up of stakes in their companies by, in effect, foreign governments? Should we go back to a world in which ‘golden shares’ are deployed to protect ‘strategic’ industries and companies? If new rules are needed, should they be devised at European level or nationally? And how can we ensure that they are not used to undermine the free movement of capital within the EU itself or to disrupt the deepening transatlantic market-place?

• Stewart Fleming is a freelance journalist based in Brussels.

Gazprom, the Russian gas company, has made a bit of a name for itself in Europe. This is not so much because it is such a giant - one of the biggest energy enterprises in the world - but because it looks too much like a monster.