exits

This page considers disinvestment by sovereign wealth funds and incidents of mismanagement.

It covers -

• introduction
• precursors
• departures
• disasters

     introduction

Much of the literature regarding SWFs, particularly those of autocratic states, implies that sovereign wealth investment is irresistible - even inevitable - and that the investors will relentlessly acquire both trophy buildings and the 'commanding heights' of liberal democratic economies.

That writing is reminiscent of jeremiads about national declinism, discussed elsewhere on this site, with a succession of forecasts about the inevitable supersession of particular countries as peers (eg Wilhelmine Germany, Stalin's USSR, 1980's Japan and contemporary China) become 'number one'.

Reality with sovereign investment is more complex and it is worth taking an historical view rather than relying solely on the sometimes fevered statistics of financial institutions.

Some nations have disinvested offshore holdings, for reasons that include demands at home and pressure by host nations or third parties.

Some have discovered that shipping capital offshore may involve loss and, possibly more unwelcome, negative publicity regarding corruption among the elite. That exposure may involve petrocrats from states such as Brunei, Kuwait and Saudi Arabia. It may instead involve humbler folk, such as Nauru.

     precursors

Two illustrations that the sovereign investment sun also sets are Iran and Libya.

Iran acquired 25% of German industrial conglomerate Friedrich Krupp in 1976, a stake reduced to 7.8% through Krupp's merger with Thyssen as Thyssen-Krupp in 1999. The US government, unhappy with the Ayatollah's regime, reportedly encouraged the Thyssen-Krupp board in 2003 to dilute Iran's holdings to 4.5%, reflected in a buback of shares in 2004 that saw Iran's representative leave the group's supervisory board. Iran had earlier taken major stakes in Daimler-Benz

Libya acquired 9.8% of Italy's FIAT conglomerate for US$400 million in 1976. That stake increased over time, before Libya sold its 14% to the Agnelli family and associates for US$3 billion in 1986.

     departures

Examples are -

• China's state oil company CNOOC abandons US$18.5 billion takeover of Unocal in the face of US political pressure in 2005
• US congressional pressure forces Dubai Ports World to sell five US shipping terminals acquired through £3.88bn takeover of P&O.

     disasters

The opacity of most sovereign investment by autocratic states means that it is difficult to make a comprehensive assessment of mismanagement and corruption in spending by advisers, executives and members of the ruling elite. Some incidents are, however, embarrassingly public and illustrate concerns regarding governance of SWFs.

One example is the near-collapse and expensive rescue of Grupo Torras, a sprawling Spanish conglomerate controlled by the Kuwait Investment Office (KIO). From 1986 to 1992 Kuwait injected an estimated US$5 billion into Torras, which included dominant holdings in Spain's largest chemical group (Ercros), largest paper producer (Torras-Papel) and major property group Prima. A Kuwait spokesperson lamented that "Our best estimate is that about $950 million was simply stolen and is in the pocket of somebody", with several billion being lost through "colossal mismanagement".

Venezuelan demagogue Hugo Chávez has "repositioned" that nation's US$6 billion NRF fund, now depleted to a mere US$700 million despite record oil revenue during his presidency. That has been criticised on the basis that the 'Bolivarian Revolution' is not putting money into economic development or attempting to offset the Dutch Diseas, leaving Venezuela's poor worse off when oil revenues decline.

As highlighted later in this note, a member of the Brunei royal family and senior managers were accused of appropriating and losing several billion dollars from that state's NRF.

   next page  (Australia)