Coins of the Realm

By Stephanie Flanders Economics Editor, Newsnight

Dubai traders - UAE has the world's largest Sovereign Wealth Fund

Sovereign Wealth Funds are not the kind of institutions where you can rock up unannounced and expect to get an interview.

But then, polite emails and phone calls to the press office don't get you very far either. Many of these massive state-owned investment funds don't even have one.

All of this is highly inconvenient to the dedicated reporter. Because the so-called SWFs are the new heavyweights of the global economy and people want to know what makes them tick.

Such is their aversion to publicity, we don't even know for sure how much money the funds have, but Stephen Jen, an expert at Morgan Stanley, monitors about 29 SWFs which he reckons have combined assets of about $2.8 trillion (£1.44 trillion).

That's a bit more than British GDP and rather more than either the world's hedge funds or private equity funds can boast.

Headline purchases

So it's serious money. And they've been doing serious things with it: pouring $70 billion into major US banks in the last 9 months alone.

Other headline purchases have been P&O, a large chunk of Standard Chartered Bank, large chunks of New York and London high-end commercial real estate (like Madison Avenue), and the QE2.

State-owned Dubai Funds also came close to buying Sainsbury's last year - and lately had them circling the wagons at Liverpool FC.

Where do they come from? And what are they going to do with all that cash? These are the questions any reasonable Newsnight viewer wants to answer. But the first is a lot easier to answer than the second.

Largest fund

ESTIMATED ASSESTS OF SWFs UNITED ARAB EMIRATES Fund name: Abu Dhabi Investment Authority (started 1976) - Assets $875bn NORWAY Govt Pension Fund (1996) - $380bn (not estimated) SINGAPORE GIC (1981) - $330bn SAUDI ARABIA Various: $300bn KUWAIT Reserve Fund for Future Generations (1953) - $250bn CHINA China Investment Corp (2007) - $200bn Estimated total assets of all SWFs (including above): $2.8trillion SOURCE: Morgan Stanley

The most traditional kind of SWF is a rainy day fund that countries set up when they've got spare cash for some reason that they don't want to fritter away.

About three-quarters of the SWFs' money comes from oil. The Abu Dhabi Investment Authority is by far the largest fund, with more than $800bn in assets (or so we guess).

The second biggest is the Norwegian Government Pension Fund, again thanks to oil. But funds from other countries with massive trade surpluses to recycle are also on the list: Singapore has two of the most longstanding funds, and China made its debut last year with its $200bn China Investment Corporation.

Undemocratic

People don't blink an eye when the Norwegians go on an investment spree. Why would they? But when the Chinese - or Emiratis - open their cheque books, they get nervous.

After all, these are foreign governments buying up large chunks of key Western companies - most of them undemocratic, to boot.

Gordon Brown doesn't seem to mind. He's made a point of welcoming sovereign wealth fund investments to the UK (even in key strategic sectors like football).

In fact, he went all the way to China recently to extend a personal invitation to Chinese funds.

But he's pretty much alone.

Many US Congressmen and Senators rose up in outrage in 2005 when Dubai World, a government-owned ports company, tried to take over several key US ports as part of its takeover of P&O. In the end Dubai had to give up.

Gordon Brown courted Chinese investment on a recent trip

With Wall Street so short of cash, the complaints about the tens of billions of dollars bailing out US banks have been somewhat muffled.

But the Bush Administration and the International Monetary Fund have both talked about the need for special codes of conduct for SWFs to keep governments in their place.

The French and German governments have urged the European Commission to come up with the same kind of thing.

Common fears

So what, exactly, are they all so worried about? That gets us into the second big question, of what they're going to do with their money. With oil at $100 a barrel that's going to be a big question for the funds themselves.

The McKinsey Global Institute reckons that the Gulf countries alone will net extra revenues of about $3.8 trillion.

They can't possibly invest all that money at home. Abu Dhabi has 10% of the world's known oil reserves and a population of 420,000 (each conservatively worth $17m).

The most common fear - expressed recently at a seminar in Davos by former US Treasury Secretary Larry Summers - is that sooner or later, the governments behind these funds will stop treating them like pension funds and start considering them tools of international diplomacy.

I suspect that sooner or later the SWFs are going to have to sign up to some form of code of conduct promising never to let politics get in the way. Stephanie Flanders's film on Sovereign Wealth Funds can be seen on Newsnight, 20 February, at 2230GMT on BBC Two and Online

He posed the following example: "the fund of country A makes an investment in a major bank in country B. The bank gets in big trouble. Is there any control in the world that can assert, that with billions of dollars on the line, their head of state and foreign minister are not going to get involved in the negotiations?"

At this point the funds' defenders protested that no fund had ever treated its investments as anything but a way of creating future wealth for the country, or developing its economy.

That may be true (although Summers pointed out that the Norwegian fund had recently been shorting the shares of Icelandic banks, which could well have political implications.)

Codes of conduct

I suspect the economic problem with these funds will not be that they are too active in their investments but that they are not active enough. Companies love passive investors in search of a quiet life, because they don't get in the way.

But from an economic standpoint you want institutional investors to be keeping managers on their toes. However, that's not the problem worrying George Bush or the European Commission.

If they want to get the rest of the world off their backs I suspect that sooner or later the SWFs are going to have to sign up to some form of code of conduct promising never to let politics get in the way.

Though given the way the US and European economies are going, it will probably be later.

As Kristin Halvorsen, Norway's minister of finance said in response to Summers: "It seems you don't like us, but you need our money."

That pretty much sums it up for now.