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15 April 2024

SWF and the global outburst of hypocrisy

By Frank Kane
Back to one of my favourite topics – the global outbursts of hypocrisy and double standards that characterise the debate over sovereign wealth funds (SWFs).
The subject is emerging as one of the big issues in international business, and is set to return to the top of the agenda as the European Union sets out its position on SWFs in the next few days.


I have no great love for the unwieldy and overpaid bureaucracy that runs the European Union and I expect some high-flying rhetoric and lofty statements of principle from Brussels – but little else.


The International Monetary Fund is also examining the SWF issue, and may come up with something more substantive, but the IMF does not have jurisdiction over SWFs. It can advise and recommend, and declare concepts of international best practice, but it has no legal power to compel SWFs.


This, of course, is the crux of the problem, and the source of much of the rank hypocrisy in the SWF debate. “Sovereign” means the supreme political and legal entity governing a territory; while in practice sovereigns may submit to higher authority, such as a code of international law or a supra-national organisation such as the United Nations, in theory they are not obliged to do so. Sovereignty, in fact, means never having to say you are sorry.


This is why the US Treasury recently sought talks with the Abu Dhabi Investment Authority and the Government Investment Corporation of Singapore – even the mighty United States realises that when dealing with SWFs there is no big stick that can force a change of position. Even the United States has to try to persuade, cajole and encourage if it wants to achieve its end.


The mere fact the US Treasury asked for these talks is a sign that, after its stonewalling over the DP World American ports, the United States has to come to terms with SWFs.

But the terms of trade have changed since DP World.


With the US financial system still at risk from sub-prime exposure and global credit shortages, even the bluest of America’s blue-chip banks have had to consider, even welcome, investments from around the world to bolster their creaking balance sheets.
Hence the big investments from the Middle East and Asia into US giants like Citicorp and Merrill Lynch. Beggars cannot be choosers, as the saying goes.


That is the first hypocrisy that hits you about the current debate. Middle East SWFs like Adia and the Qatar Investment Authority did not raid the market for their investments in US banks.


There was nothing hostile in their interest, which arose first out of the Americans putting out feelers on whether such investments must be forthcoming, if the SWFs were asked.

The executive boards of the banks concerned must have done their due diligence and satisfied themselves that the SWFs were entirely above board.


The big US shareholders – state and professional funds that act largely in the public sphere and are well plugged in to government – would have insisted on such checks by the big banks.


It appears Adia, in particular, went even further, and gave US executives undertakings that they would not be involved in operational running of Citicorp, would not seek seats on the executive board and would not increase its shareholding without the permission of the bank.

These guarantees were enough to satisfy Citicorp, and should also in this particular case, be enough to satisfy the Treasury too.


The lesson from the most recent round of SWF investment in the United States is this: if it is acceptable to shareholders and the executive board, that should be the end of the matter. There is no need for government interference.


That said, there is a role for government and international organisations in trying to set some ground rules for the SWFs.

Transparency, opacity and accountability are all desirable elements of business life, and if some guidelines can be produced to encourage SWFs to adhere to international best practice, then all to the better.


There is no valid reason – apart from historical and cultural custom and practice – for Adia to have less rigorous transparency standards than, for example, the Norwegian state pension fund.

But the real hypocrisy of the SWF debate, and my central objection to attempts to force new governance procedures on the sovereign wealth funds, lies in the more blatant political aspects of the whole affair.


The European Commission president, Jose Manuel Barroso, summed this up nicely in a recent interview: “We cannot allow non-European funds to be run in an opaque manner or used as an implement of geo-political strategy.”


Forget the Euro-centricism of that statement for a moment, and forget too the fact that European governments are currently just getting round to cleaning up their own “opaque” tax havens, like Liechtenstein. Just consider the ignorance of history Barroso displays.


It was European companies and merchants who first used business as an “implement of geo-political strategy” when, a half millennium ago, they forced open trade routes to the east, and then sought the backing of their governments to protect their interests in the Middle East, Asia and Africa.

You could view the British East India Company, for example, as an early example of a particularly aggressive and domineering SWF.


There are many other examples in history – look also at the record of British Petroleum and its historical antecedents in the Middle East – but it is not just past events that expose the West to the charge of hypocrisy.

When present-day European political leaders go on their grand tours of the world’s fast-growing economies, they take armies of businessmen and financiers with them to exploit the commercial opportunities the visit will throw up.


In America, the double standards are even more striking. US business, and in particular its military-industrial complex, acts as an arm of Washington in large parts of the world.

Latin America and the Middle East in particular have long experienced the use of American business as an “implement of geo-political strategy.”


Americans do not see anything wrong with this – what’s good for business is good for America – and in an increasingly globalised free market, it is hard not to accept that logic.


But what would be the US reaction if, for example, a company like Boeing was asked by a potential customer in a Middle East country to prove it was not acting in America’s strategic geo-political interests?


And what would be the reaction from Washington if Boeing successfully produced evidence that it was not acting in the national interest?


The SWF hypocrites must accept that other sovereign nations have the right to pursue their legitimate commercial and economic interests around the world.

Otherwise there are the twin risks of protectionism and economic neo-colonialism, which combined would turn back the clock of global business development by decades.