Jan Macháček

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Czech Business Weekly

Is the SWF wolf really at the back door?

28. 04. 2008
Sovereign wealth funds (SWFs) are a relatively new phenomenon and, quite logically, new phenomena usually prompt degrees of fear and uncertainty.

One thing that can constitute a degree of fear is the rules of the common market, which in Europe translates to the rules of the common European market. This market—unless there are critical circumstances to address with the approval of the European Commission (EC)—does not approve any state aid or state interventions for private companies. So ask yourself the question: if we permit SWFs, comprised of pure external state capital and external state influence, to come in and buy or financially assist companies within the common market are we not violating the common market’s liberal rules?

On the other hand, the creation of these funds (not called sovereign during their beginnings) is something that has been recommended by all the international institutions—including the Organization for Economic Cooperation and Development (OECD), the World Bank and the International Monetary Fund (IMF)—to many emerging markets, especially those that earn heaps of money from exporting natural resources. Save the money from these resources for a rainy day because gas and oil, for instance, will not be here forever, runs the advice.

But look at the starkly different reactions that greeted Norway’s creation of its rainy day fund and Russia’s equivalent move. It’s no surprise that everyone applauded Norway for it is an example of a civilized, democratic country. And it’s no surprise that everyone frowned at Russia because the Russian regime is sort of scary. Let’s not forget, however, that the Russians have done just what the international institutions proposed, and that it suits their national interest rather well.
Every Western country connects its fear of outside SWF money with something else, usually according to the territory of origin of such capital. One contentious stance amid all this anxiety is the Germans’ consternation toward the Chinese. Apparently, Berlin is not at all fond of the idea that Chinese money could take over German banks. This is certainly not a case of dreading some kind of export of Chinese communism. Rather, it is based on nervousness that Beijing is trying to get hold of sophisticated German engineering technologies. The recent German experience is that the Chinese often refuse to buy German engineering equipment on the grounds that they will be able to produce it themselves. This puts the Germans on the defensive, as they are intent on maintaining their position as world technology leaders.

In the U.S., meanwhile, there is paranoia in the air not only in relation to the influx of Chinese capital but above all in reaction to money arriving from the Arabian Gulf states. Dire warnings are heard about how regime changes in certain of these states could see the finance misused for fundamentalist or Pan-Arabic purposes.

Here in the Czech Republic we remain afraid, above all, of Russian state money. Worries about the potential threats that could be generated by Middle Eastern or Chinese SWFs are hardly heard of.

Market manipulators

So just what are the potential threats to our interests that can be posed by SWFs?

1. In an ideal market system, it does not make sense for one private company to buy another private company only to close it down. If someone has paid the market price, they should theoretically have no reason to do such a thing. The market price is reflected in the future profit potential and such an expensive move, perhaps involving an overpayment, should not be agreed to by private shareholders guarding against any waste of money.

But where an SWF is concerned, things might be different. These funds are not accountable to private shareholders and the chances of taxpayers controlling the state funds are very limited. They might be inclined to deploy overpayments simply to demonstrate national pride, dominance and so on.

2. SWFs surely might be able to send back home any top technologies and know-how they gain access to.

3. SWFs and state-controlled companies might be used to dominate energy production and distribution, especially in countries already particularly dependent on imports of (in our case, Russian) gas and oil.

For us, it’s all about energy

It is surely logical, especially for us in the Czech Republic, to see the SWF dilemma as an energy security dilemma. Do we really want Russian energy companies to increase their influence in the Czech Republic by buying themselves into the distribution and storage of gas and oil? Can we tolerate Russian capital controlling more strategic companies? Do we want Russians to buy Czech airlines or airports? And if we sell these assets to Czech buyers, how can we guarantee that they will not quickly resell them to the Russians.

It is indeed improbable that Moscow will ever again be exporting some kind of communist utopia, so why should we remain afraid of Russian ownership of Czech assets? One clear answer is that Russia’s state-owned companies and semi-state-owned companies are dominated by structures of the former KGB and their mafia links.

Russia would export its peculiar kind of business and political culture. Invisible links, chaotic ownership structures, a lack of transparency, special relationships, corruption on all levels … In such an environment, the Russians would feel at home and would thus expand their area of interest. Our concerns should be more about this than about radar facilities or ballistic missiles.

The main question is how to arrange a legal and practical approach to restricting and controlling Russian ownership and influence. It is clear that without strong cooperation on the European Union level, nothing can be arranged at all.

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