U.S. Rep. Jim Moran, a Democrat from Virginia, is urging fellow lawmakers to do something that may go against their first instincts: to think carefully before trying to constrain sovereign wealth funds (SWFs) from foreign governments.
Moran, who is co-chairman of a House task force on SWFs, told The Washington Diplomat that most U.S. lawmakers are genuinely interested in learning more about SWFs and that he sees no immediate threat of punitive legislation toward investment funds from abroad. But he added that SWF proponents should be aware of shifting congressional moods toward international investment and trade, and consequently, fund managers need to be very clear and open about their mission.
Moran’s task force — which he co-chairs with Congressman Tom Davis, a Republican from a neighboring district in Virginia — was set up earlier this year to study the various issues surrounding sovereign wealth funds and to better understand the benefits and challenges they pose for the U.S. economy.
“The emergence of sovereign wealth funds is a major development,” Moran said. “The U.S. is sending 0 billion a year offshore to purchase oil, plus all the money we’re sending to China for the goods they can make more cheaply than we can. It’s a major shift of wealth. We need to facilitate that money being reinvested in our capital assets in the United States.”
Moran said lawmakers’ instinctive reaction to SWFs often hinges on the simple question of whether they see the global economy as a threat or an opportunity.
“This is money we should not be afraid of. It’s an opportunity for us to get reinvestment in the U.S., particularly in those areas that are hurting the most, like the financial services sector,” he argued. “I’d be far more afraid if we turned our back on this and they put their money into Russia or China or totalitarian nations.”
SWFs are investment funds owned and managed by national governments that generally have budget surpluses and little or no international debt. They were first created in the 1950s by oil- and resource-producing nations to help stabilize their economies and provide a source of wealth for future generations. SWFs currently manage between trillion and trillion in assets and are expected to oversee about trillion in assets by 2012, according to an often-cited study by Morgan Stanley.
SWFs are designed to engage primarily in foreign portfolio investment. They are distinct from other sovereign assets such as central bank reserves, state-owned enterprises and banks, and government pension funds because of their emphasis on cross-border equity purchases. But their enormous size and rate of growth, as well as their national origins, have raised concerns about how SWF investments impact the U.S. economy and foreign policy.
Experts agree that SWFs are not recent innovations. Kuwait created the first modern sovereign wealth fund in 1953. And the state governments of both Alaska and Texas have sovereign funds that are used to manage the revenues that have arisen from their energy boons.
Over the past three years, SWFs have experienced their own boon, growing at an annual rate of 24 percent. In 2007, these funds invested .5 billion worldwide, becoming involved in high-profile equity investments in firms such as Blackstone, Credit Suisse, UBS, Merrill Lynch, Morgan Stanley, Visa and Citibank.
As a result, Congress has become increasingly interested in SWFs, with lawmakers concerned about three main areas: the domestic and international financial impact of SWF investments; transparency and governance-related issues; and possible politicization of SWFs.
“A lot of the interest has come from people who are opponents of sovereign wealth fund investment, but it has given us an opportunity to bring them in the tent, to educate them, and to show them that this is not something as threatening as many of their constituents may think it is,” Moran said, noting that his task force, which now has about a dozen members, includes both supporters and critics of SWFs and is almost evenly divided between Democrats and Republicans.
“It’s largely an educational effort. But it involves a certain amount of advocacy for a sane policy,” he added. “If we can engage the wealth funds to put together a code of best practices, that would be a win-win situation.”Moran’s task force has visited the United Arab Emirates to learn about the Abu Dhabi Investment Authority, which has assets of about 5 billion. The group also plans to travel in the fall to Norway, Russia, China and Saudi Arabia.
In addition, the House task force received a detailed briefing about these funds from U.S. Deputy Treasury Secretary Robert Kimmitt, and Moran expects additional briefings from U.S. government officials, SWF executives, and representatives of firms that have benefited from infusions of their capital. Moran is convinced that SWFs are positive for U.S. economic and national security interests. They not only inject money into the country’s economy with a long-term investment perspective, he argues, but funds based in the Middle East and East Asia can play a moderating role in the Arab-Muslim world.
Moran also contends that SWFs serve a positive role in knitting the world economy together. “Global interdependence is a good thing from a national security standpoint. Where goods and services cross borders, armies don’t,” he said.
Moran, who was first elected in 1990, is often described as a moderate Democrat who has supported trade liberalization legislation. Affable yet combative, Moran has often collaborated with his Republican counterpart Tom Davis, yet he’s also been known to mix it up with other lawmakers, usually just rhetorically. (A former amateur boxer, Moran once had an exhibition match against former heavyweight champion Joe Frazier.)
In addition to Moran’s task force, various congressional panels have explored the issue of SWFs in the past year. In a mid-June hearing of the Senate Foreign Relations Committee, certain key senators agreed with Moran that these funds have served a largely positive function, although they cautioned that SWFs should be monitored to make sure their focus is exclusively commercial and not political.
Sen. Joseph Biden (D-Del.), chairman of the foreign relations panel, attributed the growth of SWFs largely to the “historical shift of wealth” from the United States to oil-producing nations, ranging from Russia to those in the Persian Gulf. He said that although international investment is for the most part beneficial to the United States, he noted that these funds have become particularly concentrated in U.S. financial institutions, totaling .9 billion in 2007 alone.
“There is growing concern among U.S. analysts and members of Congress that foreign countries will use their SWFs to secure political influence by taking strategic stakes around the world in critical markets,” he warned.
To that end, it is important to develop a strategy to assess which SWFs use their assets for political gain, Biden said, citing evidence that Russia is using its SWF to promote strategic objectives, such as its recent interest in acquiring a large stake in Airbus’s parent corporation.
But Biden added that the United States must also strike “an appropriate balance between protecting against threats and remaining open to economic opportunities,” and that “punitive, defensive regulation could be self-defeating, depriving us of potential benefits out of fear of potential harm.”
Moreover, U.S. policymakers should not confuse the “symptom with the cause,” Biden said. “These funds exist and are growing because, in my view, we have no national energy policy, no coherent trade policy,” he charged.
Meanwhile, Sen. Richard Lugar (R-Ind.), the ranking minority member on the foreign relations panel, called the expansion of SWFs “one of the most consequential international economic developments in recent years.”
Although he said their growth “is not an inherently negative development,” Lugar also pointed out that SWFs are not ordinary investors. “Their ties to foreign governments create the potential that they will be used to apply political pressure, manipulate markets, gain access to sensitive technologies, or undermine economic rivals,” he said.
Thus Lugar recommends that the United States work with other nations to promote transparency in SWFs to reduce concerns about political and economic manipulation.
Moran said his task force will do just that, monitoring the evolution of SWFs and responding to any legislation that affects these funds. “Sovereign wealth funds are not the problem. They are a reflection of the dynamic we have brought on ourselves,” he insisted. “The benefits at this point far outweigh any negative considerations. The benefits are we can get hundreds of billions of dollars reinvested in our economy if it’s done in a way that is monitored, purely for commercial purposes, and hopefully reciprocal.”
About the Author
John Shaw is a contributing writer for The Washington Diplomat.