In the category “Follow up” I am going to research what happened to the protagonists of stories I published over the past years.
You may never have heard of the term sovereign wealth fund. But you certainly have read about it in the news: Qatar buying Greek islands (“Qatar royal family buys Greek island of Oxia for knockdown 5 million euros”) or Abu Dhabi buying Manchester City (“Manchester City? The real Premier League winner is Abu Dhabi”). All of this (and much more) was financed through sovereign wealth funds (Definition: Pools of money derived from a country’s reserves, which are set aside for investment purposes that will benefit the country’s economy and citizens.) Lots of big economic players rely on such funds: China, France, Saudi Arabia.
But the biggest one of all of them: Norway´s.
With assets worth more than 700 billion US Dollars, it is seven times bigger than Qatar´s fund which is constantly making headlines.
Surprising? Not really, Norway has long been aware of its decreasing oil resources and tried to sustain its future through investments abroad. In August 2011 I wrote a CNN.com article about a major oil strike that was discovered in the North Sea. On April 17, 2013, Øyvind Hernes, the First Secretary of the Parisian Embassy of Norway came to Sciences Po Paris´ Euro-American campus to talk about the world´s biggest sovereign wealth fund – and how Norway´s oil strikes of the future might be accomplished in conference rooms rather than offshore.
Four points to remember:
1) Out of the six largest funds, four have their origins in oil-resources (e.g. Kuwait, Saudi Arabia, Abu Dhabi, Norway). But with the United States´ decreasing dependence on foreign oil, and deminishing resources on the long-term, it will become more and more difficult for countries such as Abu Dhabi to maintain their lifestyle and revenues.
Why oil prices keep falling – and what that means for countries such as S. Arabia, Iran, Russia: on.ft.com/10DPJt2
— Rick Noack (@rick_n) April 7, 2013
Even Norway´s 2011 oil strike – the largest for 30 years – will reach its limit. “Although it is great on the short run, it will not be a long-term resource”, according to Øyvind Hernes from the Norwegian Embassy in Paris.
2) While all funds aim to establish future revenue, their nature is fundamentally distinct from each other. Although Qatar´s wealth fund is comparably small, its influence on the economy is big thanks to its aggressive strategy. Unlike Norway´s wealth fund (which barely owns more than two or three percent of a company), Qatar wants to gain political and economic influence. This BBC-report from March illustrates its strategy:
The small Gulf state’s influence in the UK, and London in particular, is becoming more evident. It is a joint owner of London’s newest landmark, the Shard, it stepped in to provide funds for Barclays back in 2008 which helped the bank avoid being semi-nationalised, and has bought a 20% stake in the company that owns Heathrow airport.
Further investments have also been made or are planned in Greece, France, several African states as well as China. The advantages are easy to explain: While most of Europe deals with its own crisis, a fast way to get liquid funding is through wealth funds such as Qatar´s. That explains why it is making headlines when Qatar´s sovereign wealth fund claims German real estate is “good opportunity” (April 15th).
3) Sovereign wealth funds are volatile. Especially during the 2008 crisis, Norway´s investments lost about 20 percent of their value. Oil fund chief executive Yngve Slyngstad warned of increased volatility as well. If the fund experienced another year like 2008, its market value could be reduced by as much as 174 billion US Dollars from one year to the next.
4) Two Conclusions: In times of economic crisis, sovereign wealth funds can serve as tools to boost prestige of the funds´ owners – and liquidity of companies. While this kind of “governmental funding” seems to be a win-win situation for both sides, one should be cautious: The calculations are based on the assumptions, that the value of these funds will constantly rise (Norway expects a 4 percent rise annually which is part of the governmental budget plan). But nobody knows whether value will rise forever.