Our resumé, translated by the paper on "Sovereign Funds" in the GNOSIS review, the official periodical from AISI (former SISDE) the Internal Secret and Security Service of the Ministry of Interior in Italy has been printed with the permission of the Author. Because of the relevance of the matter and the specific insight permitted by the Author's work, we would like to invite all the officials, security professionals, intelligence operators, bankers, financial analysts, assets market experts and all the people with some knowledge on this and related topics to join our mitigated, secure, effective and information-rich BLOG. We guarantee all the anonimity rules and all the webgalateo's needs which can be enforced and/or effectively noted. , SO, LET THE ANALYSES BEGIN

Marco Giaconi 

This article in English comes from  the official magazine "GNOSIS" edited by the AISI, the Intelligence Service of the Interior Ministry of Italy, the former SISDE.  Full version of the article is available at http://www.sisde.it/Gnosis/Rivista14.nsf/ServNavig/11?OpenDocument.
 

Sovereign Funds and National Sovereignty 

In recent years, some Governments, particularly those of Emerging Countries, have progressively played the role of the investor in international financial markets using their own assets, built up as Sovereign Wealth Funds (SWF), administered separately from the State Budget, often through private fund managers and financed by revenues from natural resources management, fiscal surplus and international reserves.

This “sovereign” asset management raises doubts concerning both the national interest and the national security of the countries where investments are made.

The increasing foreign stake in some domestic economic sectors is undoubtedly of concern for national interest. The risk that SWFs investments could be used as a means of concealing plans to assume control of technologies (in industrial, financial or military fields) of the country, where SWFs make the investments, is a matter that requires great attention. The same could be said with regards to the acquisition of “dominant positions” in patent holding firms in order to use it for “hostile purposes” namely in areas of critical infrastructure (i.e. telecommunications, energy or ports) and in order to gain access to natural resources as well, considered strategic as “command levers” of national economy.

The question that needs to be underlined is that a Government entity, acting outside its national boundaries, is no longer “sovereign” and should therefore necessarily consider to “cooperate” with environments in which it intends to operate.

In such a case, “national sovereignty” has to be “negotiated” and SWFs’ freedom of manoeuvre (also in terms of portfolio choices) depends on the factors that are to be negotiated.

It is important to understand if, beyond competitive aspects that demand protection of the national interest, the asset management of a Sovereign State could result in a possible interference in the future public choices of the target-Country. Therefore, the problem is how to control interference at a national level.

As to the relation between SWFs and national sovereignty, the alternatives to control interference, within a global and national governance perspective, include a number of international best practices (the “soft” solution) or the enhancement of the existing national regulations (the “hard” solution). The “soft” solution would require to share with Emerging Countries the best practices (which they have voluntarily adopted), as defined by the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD). On the other hand, the “hard” solution would be at the unilateral level, carried out through an internal action aimed at “adjusting” the existing regulations to the new dynamics of financial globalization. Such an adjustment would have nothing to do with the “financial protectionism” so strongly (and rightly) banned.

By this article we intend to highlight the “agency mechanism” between the agent (external private fund managers) and the principal (SWFs administrators) related to the asset allocation choices. In particular, we have stressed the risk of conflict of interests when managers deal with both SWFs’ asset management and national/foreign individual/institutional portfolios at the same time. It is important to notice the multiple risks stemming from outsourcing in the asset management, such as inefficient choices due to “adverse selection” or “moral hazard”; higher transaction costs due to an excessive fragmentation of consulting functions; shortage of experts due to an ever-increasing operational complexity; corruption and “insider trading”.

The two solutions (“soft” and “hard”) are adopted to control different kind of risks and have therefore a different impact: the “soft” solution deals with an exogenous risk to the investment (the foreign intention to interfere in sensitive economic sectors of the State-investor), whereas the “hard” solution deals with an endogenous risk to the investment (the conflict of interests inherent to the deterioration of the “agency mechanism”).

It is important to seriously determine how to limit interference risks of SWFs, without resorting to protectionism. This will enable to cope only with the medium-long term effects of this phenomenon. A remarkable share of “national economy” of industrialized Countries have been moving towards companies and governments of emerging Countries. This “transfer of economic power” would result, in the future, in a “transfer of political and diplomatic power”, with which we should inevitably deal with.