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Growing clout of sovereign funds

Some recent developments bring into sharp focus the enormous financial clout that oil producing nations have come to wield in the global economy. The most spectacular of them has been the $7.6 billion investment by the Abu Dhabi Investment Authority for a 4.9 per cent stake in the beleaguered Citigroup. That in effect has provided a lifeline to the world’s biggest financial services group that is reeling under the effects of bad loans to the housing sector. With that investment Abu Dhabi Investment Authority, a sovereign wealth fund, joins Prince Walid Bin Talal of Saudi Arabia as a top shareholder of Citigroup — significantly, both are from the oil producing nations of West Asia. There was no political opposition to the Abu Dhabi investment in what is generally considered a sensitive sector. Less than two years ago, politicians in the United States rallied against and eventually blocked the successful bids for a few major American ports by a Dubai-based, UAE government-owned ports operator. Strong commercial and financial considerations seem to have overwhelmed any incipient political opposition to the Citi deal. It is not clear whether such transactions will become a common feature with countries that are flush with oil money and other export earnings and have accumulated assets in the developed world.

It is however certain that the sovereign wealth funds, set up by governments to manage profitably their abundant foreign exchange resources, will acquire further clout. According to reliable estimates, the seven largest sovereign wealth funds — those of Abu Dhabi, China, Norway, Kuwait, Russia, and two Singapore entities — control nearly $1.8 trillion. The assets under their management will significantly exceed those managed by private equity, hedge funds, and other unregulated entities currently making a big splash in the world of high finance, including in India. Barring those of China and Singapore, they are awash with petrodollars. The OPEC’s recent decision to leave its output unchanged — thereby tacitly suggesting that the ruling price of nearly $100 a barrel will stay — is a further shot in the arm for the sovereign wealth funds of oil producing countries. In India there is a growing clamour to deploy the burgeoning foreign exchange reserves more profitably, but the idea has, so far, not found favour with the monetary authorities. However, India will certainly attract a portion of investments by these wealth funds as foreign direct investment.

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