Rich nations must not demonize us, say state funds
2008-01-24

Category Sovereign Wealth Fund World Economic Forum Nations U.S. Russia United Arab Emirates City Dubai Event 2007 Global Credit Crunch 2006 U.S. Port Controversy Company Merrill Lynch

The United States and other countries must not demonize sovereign wealth funds as they come to the aid of troubled U.S. banks, some of the world's biggest state-run investors said on Thursday.

A senior Bush administration official denied the United States feared such government-controlled investment funds, many of which are based in Asia, the Gulf and Russia, but said their rapid growth demanded vigilance.

Sovereign fund managers at the World Economic Forum in Davos accused rich nations of labeling them as a potential threat, when there was no evidence that they are destabilizing the global economy.

"It's like the sovereign wealth funds are guilty until proven innocent," said Mohamed Al-Jasser, vice governor of Saudi Arabian Monetary Agency. "Are we creating a straw man before we destroy it? We have to be careful about that," he told a panel discussion packed with business and political leaders.

The Davos gathering has been dominated by talk of the failings of the U.S. financial system, and whether state-run investment funds pumping billions of dollars into troubled banks are essential to calming global markets.

Government-owned funds have replaced hedge funds and private equity as the major driver of the global market as they seek to invest huge currency reserves in Western businesses, notably the troubled banks. But this has raised concerns they might try to wield political influence or even threaten national security.

On Wednesday President George Bush issued an order to clarify procedures for a U.S. law strengthening national security reviews of foreign deals, while saying the United States welcomed foreign investment.

The order came after several foreign government-controlled funds from the Middle East and Asia injected tens of billions of dollars into major U.S. banks, which badly need capital to write down losses related to U.S. subprime mortgage investments.

The head of the Kuwait Investment Authority, which injected $5 billion into Citi and Merrill Lynch this month, emphasized all its investments have been commercially driven and wealth funds are no different from other large investors.

"We look at the bottom line, we don't look at anything else. We have been passive in all our investments," said Bader al Sa'ad, managing director of KIA, noting that his fund had been a shareholder in carmaker DaimlerBenz since 1969.

"We haven't been active in any of our (holdings). All this fear about sovereign wealth funds has no real basis... Why only sovereign wealth funds need to be regulated and not other large investors?"

VIGILANCE

The U.S. administration official denied Washington feared sovereign wealth funds. "At this point, the history with sovereign wealth funds is they are generating higher investment returns without generating political controversy," said U.S. Deputy Treasury Secretary Robert Kimmitt.

"However, the growth in the size and the number of these funds is such that vigilance is required," he told the panel.

Sovereign wealth funds' assets are set to reach $12 trillion by 2015, almost 10 percent of all financial assets in the world.

Kimmitt noted a 2006 investment by Dubai government-owned DP World in which it had to relinquish control of some U.S. ports, due to political resistance in Washington on security grounds.

"Since Dubai Ports World, we have had over 200 cases that have come through the Committee on Foreign Investments in the United States -- none of those has been blocked," Kimmitt said.

On Wednesday, OECD Secretary-General Angel Gurria said fears about the influence of sovereign wealth funds have so far been unjustified and they should not be over-controlled.

The finance minister of Russia, whose state energy holdings face likely hurdles to investing in the European Union, urged countries to identify the potential threat first before drawing up rules.

"There is no cause for concern, but we are discussing a code of practice," Finance Minister Alexei Kudrin told the panel discussion. "So far, we have not identified any negatives but we are already talking about a code to protect us. Let's first define what could give rise to concern."

In December the European Commission said it was not in favor at this stage of proposing mandatory rules to control sovereign wealth funds, but the EU executive wants some ground rules or guidelines on governance.

For full coverage, blogs and TV from Davos see: http://uk.reuters.com/news/globalcoverage/worldeconomicforum2008

(Additional reporting by the Davos news team; writing by William Schomberg and David Stamp; editing by Sue Thomas/David Stamp)