Sovereign funds, including the Russian reserve fund and fund for future generations, were discussed at a session of the U.S. Senate Foreign Relations Committee on June 12. Funds in the People's Republic of China, Singapore and...
Sovereign funds, including the Russian reserve fund and fund for future generations, were discussed at a session of the U.S. Senate Foreign Relations Committee on June 12. Funds in the People’s Republic of China, Singapore and the Persian Gulf countries, a total of seven, were also scrutinized. Senators Joseph Biden and Richard Lugar intend to make sure that the United States is capable of countering potential attempts to use money from those funds for political goals, such as market manipulation or obtaining “access to sensitive technology.” Committee members say that it is a question of the use of $100 billion, which, according to Biden, could become a “significant threat.”
Until the DPW group, a subsidiary of a sovereign fund of the United Arab Emirates, attempted to buy six U.S. seaports in November 2005, sovereign funds were not seen as a real problem. The largest funds were located in the UAE, Saudi Arabia and Singapore, and they easily reached agreements with the owners of strategic assets. Since 2006, however, the U.S. and European Union (especially Germany) have introduced legislation allowing national governments to block deals with sovereign funds. The Russian law “On Foreign Investment in Strategic Sectors,” passed in May of this year, was largely a response to those initiatives. When sovereign funds from Singapore, China and the Persian Gulf supported the liquidity of banking groups, such as UBS and Citibank, that legislation was softened, however.
At the same time, the International Monetary Fund, World Bank and EU began to develop “framework” conditions for the free operation of sovereign funds internationally. Transparency of operations and declarations of freedom from political goals were the main requirements set for acquisitions. Biden and Lugar have presented the opposite side of the spectrum of opinion from that liberal approach.
The problem with sovereign funds was described in military-political terms at the Senate hearings. Biden declared that “a number” of top officials in the U.S. administration consider sovereign funds a serious threat. Biden cited Michael McConnell, head of the U.S. National Security Agency, who pointed to the acquisition by the Russian Vneshtorgbank of a share in EADS, the main shareholder in Airbus, as an example of a security threat.
At the hearings, it was recommended that the U.S. administration create a system to check the intentions of such investors. If the process started by the senators continues, it may counteract the efforts of the IMF, World Bank and EU to create international guidelines for sovereign funds, and restrictions in the U.S. may become substantially stricter than in the rest of the world. U.S. Treasury Secretary Henry Paulson already complicated the international organizations’ efforts in March by signing a political agreement with UAE and Singaporean sovereign funds just hours before the IMF board of directors began official work on a set of rules.
