Countries as Investors - by Nick Holland

Markets and exchanges are filled with individual and institutional investors, but what happens when countries want to get involved?

One possibility is that they are just another participant, and nothing is wrong. They are looking for profits just like the next investor. But is that always the case? What if a country is using investing as a tool for foreign policy? What if a country is investing heavily in a different country in order to gain political influence?

Sovereign Wealth Funds (SWFs) are raising these questions. Essentially, they are a country’s investment portfolio of foreign assets. Some SWFs have been for decades, but many have popped up in recent years. They typically earn the funds they invest from natural resources, predominantly oil. Soaring gas prices partially account for the recent increase in the numbers of these funds.

Even though there have not been any SWF abuses as contemplated in the questions above, domestic and European politicians are still worried. The uncertainty of whether SWFs are investing for economic or political reasons bothers them. The Committee on Foreign Investment in the United States, commonly referred to as CFIUS, already evaluates some foreign investment within this country. But some may think that more legislation is necessary. To help allay these fears, the International Monetary Fund (IMF) and a SWF international working group brokered a set of guiding principles for SWFs and published them last October. These principles are called the Generally Accepted Principles and Practices (GAPP) or the Santiago Principles (the IMF negotiated and adopted them in Santiago, Chile). GAPP advocates disclosure and transparency in the SWF, but they are entirely voluntary.

SWFs represent trillions of dollars of wealth, but politicians and others are skeptical of the SWFs’ motivations because there is much uncertainty about them. Hopefully, GAPP will close this information gap, and allay people’s fears. Only time will tell.