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Sovereign Wealth Funds in focus at Davos

The role of Sovereign Wealth Funds (SWFs) became the focus as the annual meeting of the World Economic Forum entered its second day on Thursday.

The funds, now estimated to be as large as $2.5 trillion globally, are pools of money derived from a country’s foreign reserves, which are set aside for investment purposes to benefit the country’s economy and citizens. Currently 36 countries or regions have their SWFs, notably Russia, some Middle East and Asian countries which accumulate huge foreign reserves from oil revenue or trade surplus. Their total assets are set to reach $12 trillion by 2015, almost 10% of all financial assets in the world. In face of the newly emerging economic powerhouse, some Western countries led by the United States have been concerned about increasing involvement of those funds in their domestic economy. “The growth in the size and the number of these funds is such that vigilance is required,” the US Deputy Treasury Secretary Robert Kimmitt told a panel discussion at the World Economic Forum, which gathered 2,500 political and business leaders in the Swiss mountain resort of Davos. However, Kimmitt denied the United States feared SWFs, saying the basic line of his country is commitment to open investment.

At the same panel, former US Treasury Secretary Lawrence Summers also raised questions about the SWFs, including corporate governance, multiple motives such as their own national development and potential abuse of political influence. The US demand for the SWFs to be more transparent was heightened as sovereign funds from Asia and the Middle East last week poured $20 billion into the Citi and Merrill Lynch, the two major US financial institutions which were thirsty for the capital to write off their losses related to US sub-prime mortgage investments. Besides the United States, the European Union is also facing calls from some member states to regulate the SWFs. Last December, the European Commission, the EU executive arm, ruled out the possibility of proposing mandatory rules to control the funds at this stage, but the commission said it may come out with some guidelines on governance. The regulation approach was opposed by SWFs holder countries.

Russian deputy Prime Minister Aleksey Kudrin told the same panel that fears of some western countries about the SWFs are not justified. “They (SWFs) play a very positive role on the global market. Any concern about the political underlining of these funds is exaggerated,” he said. Kudrin warned that some of the concerns and fears might create another problem by restricting the movement of capital. Mohamed Al-Jasser, vice governor of Saudi Arabian Monetary Agency, accused some western countries of being biased towards the SWFs. “It’s like the sovereign wealth funds are guilty until proven innocent,” he said, “Are we creating a straw man before we destroy it? We have to be careful about that.”

Bader al Sa’ad, managing director of Kuwait Investment Authority, which injected $5 billion into Citi and Merrill Lynch this month, said all of the fears about the SWFs arejust assumption and there is no real case for concern. He said all their investments have been on commercial basis and the SWFs are no different from other large investors like hedge funds and private equity. However, the Norwegian Finance Minister Kristin Halvorsen, whose country also run a pension fund, said a code of practices would benefit all. Kimmitt said that the Group of Seven (G-7) industrialized nations had specifically asked the International Monetary Fund and the World Bank to work with the SWFs to develop a voluntary set of best practices, including on governance, transparency and other matters. (