29 November 2007

Daily Telegraph: EC to rule on sovereign wealth funds

The European Commission is exploring plans for an EU-wide law to regulate sovereign wealth funds, a move that could vastly complicate the City of London's ability to serve as hub for the investment flows from Asia, the Middle East, and Russia.

Joaquin Almunia, the EU's economic commissioner, said Brussels would soon submit proposals to EU governments and Euro-MPs, a use of wording that hints at a legally-binding directive.

Germany has led the campaign to clamp down on state-funds wielding $3 trillion, afraid that "giant locusts" may buy stakes in strategic industries to gain technology secrets.

German Chancellor Angela Merkel stopped Russia's Mischkonzerns Sistema from taking a bite of Deutsche Telekom last year, and put her foot down when Russia's VTB bank began nibbling at EADS, the Airbus and defence group. Berlin is now drafting a law enabling it to vet non-EU takeovers, and to create a superfund to defend German crown jewels. Both Austria and Hungary have erected barriers.

However, any go-it-alone effort to restrict the funds would be unworkable under EU single market laws, since a predator could use a stalking horse based in London, say, or Riga, to circumvent the German ban. Mr Almunia said Brussels would have to step in.

There are situations that are quite striking when the investor is a sovereign fund, a foreign state. This requires transparency. We need to set out European principles because we can't fulfil the internal market and its roles if each member state has different principles," he said. "In coming weeks, the Commission will contribute a set of principles and guidelines. We hope that they will be adopted by member states and the parliament," he told MEPs.

EU sources say Brussels is examining options stretching from an IMF-style code to a full directive giving Brussels the power to dictate policy. While Britain has a veto on financial laws, it can be out-voted on single market laws governed by qualified majority voting (QMV).

Key commissioners have scheduled a meeting next week to weigh up the options. "We don't think this is an issue that requires regulation at an EU level," said a British official. An EU spokesman said there was no danger of running roughshod over the City. "We don't want a fortress Europe, but we have funds with unprecedented sums of money and political objectives. We have begun to make it difficult for them in the energy sector. This could be a model," he said.

The issue is highly sensitive since London is a clearing house for the mammoth funds rapidly changing the investment universe. Morgan Stanley expects these sovereign funds to quadruple their holdings to $12 trillion over seven years, with China and East-Asian exporters eclipsing the petrodollar states. Abu Dhabi's giant ADIA fund ($875bn) has helped restore confidence to Wall Street this week by taking a 4.9pc stake in Citigroup for $7.9bn, while Dubai has just bought a "substantial" share of Sony.

Sovereign funds have burst on the global scene over the last five years, buying everything from stocks, to office towers, copper futures, and fine art. Nobody seems too worried about Norway's Petroleum/Pension Fund ($341bn), which spreads itself thinly across a wide array of assets and Singapore's Temasek ($159bn) moved below radar until receiving a bloody nose in Indonesia this week, accused of abusing monopoly laws through its 41pc holding in Indosat.

What worries Berlin, Paris, and Brussels are mega-funds under the control of Russia and China. Beijing's new State FX Investment Corp is kicking off with $200bn but will be world leader nearing $1 trillion within two years, according to Morgan Stanley.

Beijing has learned to move carefully, working through private equity proxies such as

Blackstone. But a round trillion cannot easily be hidden. Chinese firms are locking up strategic farmland and mineral reserves in Africa and are ubiquitous in Central Asia, pinning down energy and uranium supplies.

But it is Russia that worries Europe most of all. As long as Vladimir Putin keeps his iron-grip on Moscow, all Russian investments will be deemed suspect.

© Daily Telegraph