SWF Radar Gazprom

Interfax reports that, “Russia’s Gazprom, Libya’s National Oil Corporation and Italy’s Eni will hold talks in November on joint projects.”

The Financial Times reports that, “Investments by Russian companies and sovereign wealth funds into the US are likely to face tougher scrutiny in Washington in the wake of the country’s conflict with Georgia, experts predict.”

The article adds that, “Gazprom, the energy giant majority-owned by the Russian government, said in June that it was considering building its presence in the US through acquisitions. Any attempt by Gazprom to invest in the US was already likely to be closely examined by the Committee on Foreign Investment, or Cfius, the executive branch agency that investigates sensitive deals on national security grounds. But Cfius is now likely to view such a transaction even more sceptically.”

Thomson Reuters reports that, “Russian gas export monopoly Gazprom will set up a joint refining venture with Libya’s National Oil Corporation, the Russian gas giant said on Wednesday.”

The Observer quotes Angel Gurria, head of the Organisation for Economic Co-operation and Development (OECD), as saying in an interview that, “We constantly preach to developing countries that they should open markets. Suddenly we become closed and protectionist. This is before sovereign wealth funds. With them, it is even worse.”

The article adds that, “Gurria has no sympathy for Britons nervous about the long rumoured prospect of Gazprom, the giant energy firm regarded by some as an extension of Russian foreign policy, buying UK energy firms. Never mind the rows between BP and its Russian partner, he says, any investment should be judged [exclusively] on competition, corporate governance and corporate social responsibility criteria.”

The Financial Times reports that, “Gazprom is looking to make its first acquisition in the US as part of its move to enter the North American market.”

The US House of Representatives’ Committee on Foreign Affairs has put online the transcript of the oral testimony of Gerard Lyons, chief economist and group head of global research at Standard Chartered Bank, given before it today on the rise of sovereign wealth funds and the impact on US foreign policy and economic interests.

One passage that caught our eye states that, “[I]t is important to stress that there are some generic issues. Many of the concerns are not, strictly speaking, just about SWFs but are often more about government controlled companies. For instance, Russia's SWF [its National Wealth Fund] is relatively transparent, yet worries are very much focussed on Russian government influenced companies, such as Gazprom.”

EU internal market commissioner Charlie McCreevy yesterday asked, “What's the difference between a state-owned enterprise and a sovereign wealth fund?” This is an important question that itself raises further questions about the usefulness of the standard understanding of the term “sovereign wealth fund.”

The standard definition

Taking “sovereign wealth fund” to mean, as is standard, state-controlled funds like ADIA, KIA and CIC, then on the most superficial level, the difference between SWFs and state-owned enterprises is obvious: It is the same as that between any type of investment fund and any type of company, a few edge-cases excepted.

Go a bit deeper, and in the context of the current debate about SWFs, the difference disappears as we see state-owned companies such as China’s Chinalco acting as a conduit for their respective state’s sovereign wealth, as part either of a longer channel involving a sovereign wealth fund or of a shorter channel between the foreign reserve manager and target company.

Go deeper still, and differences emerge again, but not in a way that answer McCreevy’s question reassuringly. For while SWFs so far have shown little interest in taking on an activist role as investors, companies, by definition, manage and control their assets. Since control is one of the issues spooking the west, sovereign investment channelled via state-owned companies should perhaps be causing more of a headache than such investments channelled via dedicated state-owned funds.

And it should be noted that the two cases that heralded the beginning of the new wave of sovereign investment involved the state-owned companies CNOOC of China and DP World of Dubai, not any sovereign wealth fund as commonly understood.

Unhelpful

This must surely pose a challenge to the authors of the various codes of conduct and sets of guidelines for SWFs currently in development. An SWF code of conduct would serve little more than a public relations purpose if it encouraged sovereign investment to flow through other investment vehicles not covered by the code.

The answer to McCreevy’s question is therefore surely to suggest that, as commonly understood, there are many similarities between sovereign wealth funds and state-owned enterprises in the context of the latest wave of sovereign investment, but that the common understanding of what the term “sovereign wealth fund” means is for this very reason unhelpful.

A broader definition

It might then make sense, once this unhelpfulness is recognized, to go on to redefine sovereign wealth funds along broader lines as something like, in the recent words of Robert Kimmit, “large pools of capital controlled by a government and invested in private markets abroad,” rather than as the funds that serve exclusively as investment vehicles for these pools.

With “sovereign wealth fund” defined in this way, a code of conduct for SWFs would cover sovereign wealth at its source, regardless of the route it then took to reach any foreign investment target.

A code that settled on the more standard definition could find itself in the pointless situation of being rigorously adhered to by e.g. Norway’s Government Pension Fund - Global while Russia’s Gazprom, which Charlie McCreevy today likened to a SWF (hence his question), felt no need to take any notice of it.

Update (Feb 29; quotation updated Mar 3 to match edited source): Rachel Ziemba of RGE Monitor highlights some further problems for legislators and codifiers posed by the standard definition of “sovereign wealth fund,” writing that:

A broad definition of sovereign wealth would capture related holding companies, state owned enterprises and possibly some public pension funds as well. A narrow definition might just mean that funds are channeled through other actors. More complicatedly, it means assessing their financial actors funded by sovereign funds - private equity for one. Australia hopes its new review achieves that. The US Treasury has used such a definition since at least the summer to my knowledge - but its becoming more common in the discourse. The EC defines them as “state owned investment vehicles which manage a diversified portfolio of domestic and international financial assets.” but there is little to no discussion of other investors backed by sovereign funds.

The acquisitions by SOEs are probably more concerning than those of SWFs. By their nature, SOEs prefer significant stakes as they usually want to build market share or increasing their supply chain. Voting rights are part of the package.

Even in the same country funds might have very different governance structures and goals. Despite Gazprom's penchant for threatening cutoffs for delayed payment or resisting new market rates, it is likely that Russia's new wealth fund will be bound to more disclosure requirements than most of the Gulf funds are currently- largely because it is bound to report to the Russian people.

She finishes her article with a list of the various foreign investment channels and vehicles through which sovereign wealth could be piped.

The Guardian reports that, “Brussels likened Russia’s state-owned gas monopoly, Gazprom, to a sovereign wealth fund (SWF) [Wednesday] and warned of a new age of industrial espionage unless the funds were subject to greater scrutiny and disclosure rules.”

The article quotes EU internal market commissioner Charlie McCreevy as asking, “What’s the difference between a state-owned enterprise and a sovereign wealth fund?” This question is likely to be asked more often over the coming months as various SWF codes of conduct take shape.