Sovereign Wealth Funds – what to do with it?

Norway is about to debate what to do with their US$ 840 billion oil fund – that is, to continue investing in oil, gas and coal companies or to think about using the third largest sovereign wealth fund in the world towards sustainable energy transition.

Mr. Petter Jonssen, Norway’s fund manager in equity markets who control US$ 530 billion worth of assets or 63.6 percent of the oil fund, makes the strategic decisions on how to invest the oil fund’s equity units. His strategy is to divide the equity units into four teams, three of which are dedicated to specific industries, special projects, and general investments whilst the fourth part is diverted towards trading. Notwithstanding the technical language of financial investments, the key point here is that Norwegians are now raising vital questions about the guiding principles of how managers make decisions on their petroleum wealth. Perhaps the challenge is whether it is even possible to strategically generate profit whilst following some code of morality and ethics in financial markets. As it stands, we see a contradiction here. On the one hand, Norway invests the largest oil funds towards energy companies. It generates wealth for the Norwegians who own the fund. On the other hand, Norway is one of the leading countries pushing for climate compatible development. They are funding important R&D initiatives related to carbon capture, renewable energy, and new forms of non-fossil fuel based energy sources. At the heart of this dilemma is the ethics of capitalism. It challenges, above all, human understandings of what is considered valuable, what we would be willing to pay for growth – environmental impacts are clearly a cost but in other oil-rich countries they are torn by civil wars and resource conflicts as well – and what we see as the role of mineral wealth for social development. In other words, what do these multimillion sums of money really mean for ordinary people?

SWFs all over the world

A quick look at the sovereign wealth funds, most oil-rich countries have decided to ‘save their money for the rainy day’. Oil empires like the United Arab Emirates have set up seven different SWFs and Saudi Arabia two. According to the recent rankings of SWFs by the Sovereign Wealth Institute, US$ 3,807 billion worth of assets or 59 percent of the total SWFs globally are from the oil and gas industries. The only few non-commodity based assets are owned by resource poor but newly industrialising countries like Singapore, South Korea, and Vietnam.

What does this tell us about natural resource governance? Firstly, it appears that despite the amoral nature of venture capitalism and the depoliticised financial markets, these are becoming spaces (and instruments) for oil-rich states to channel their petroleum revenues in a way that could potentially avert another crisis similar to the 1970s. Rather than spending them domestically (which generates other problems associated with exchange rate fluctuations and Dutch disease effects), these countries seemed to have gone further than what the IMF and World Bank would have recommended as regards ‘prudent fiscal spending’. Even Venezuela which spends some proportion of oil wealth towards anti-poverty programmes directly under Chavez has had an SWF to provide financial security given its dependence on a single commodity for exports and revenues. In one paper with my colleagues Håvard Haarstad and Andrew Lawrence we presented in a resource politics workshop, we suggested that we are witnessing some dramatic changes in the ways natural resource governance is understood by middle-income, resource-rich countries. Managing natural resource wealth is not as simple as making a decision whether to spend or save the rents. Its increasing linkages to highly opaque financial markets means that resource economies are now exposed to risk and uncertainty that characterises our current global financial system. At worse, they could be vulnerable from shocks that could take place in the future if countries have not designed complementary policies to cushion the effects of a possible financial meltdown.

Secondly, these experiments notably show that oil is not a curse. For the large Middle Eastern countries, whilst the wider developing world was experiencing crisis and economic contraction in the 1980s, there was growth in this region, at least to those with substantial oil wealth. Managing SWFs, however, requires careful balancing market forces that drive super profits for the state and regulating the market due to its volatile, uncertain, and risky nature. Complex corporate governance reforms have been in place since 1990s to restructure state ownership of state enterprises. Now, fund managers are being sought by oil governments to manage their investments. In a nutshell, it might be the case that oil is a curse for some countries. But for those which have benefitted from the enormous rents that poured into state coffers, this argument resonates less. Even in Nigeria – a classic example of the political effects of the resource curse – the state has invested US$ 1.5 billion worth of assets consisting of a Future Generations Fund, infrastructure fund, and a stabilisation fund. Of these three assets, the stabilisation fund is worth explaining. Its objective is to provide financial support to the federal government in times of economic stress. Most middle-income resource rich states have now set up this kind of financial safety net, which would prevent their economies from crashing should a price downturn take place in the near future.

Finally, natural resource governance – as any development policy – requires us to think about the ethics and morality of how we generate profits. It really underpins our dilemmas as human beings. What is growth for? Who benefits from these funds? And what is it for if it cannot generate employment or lift the poor from poverty? So whilst financial markets are complex, ultimately, their function is simple. It is to deliver for the poor. It is to alleviate the most vulnerable from deprivation and the worst forms of impoverishment. It is to provide the people with dignity in their living despite being poor. So when Norwegians debate the future of their oil fund, they are not only discussing what will be the future of sustainable development. Nor is this also only about whether Norwegians are happy with the way fund managers are running the equity funds. They are in fact setting a precedent here. It will be a watershed moment if (or when) Norway decides that oil wealth is not for growth’s sake. Policy makers will be watching the debate very closely. Oil governments will likely follow Norway, if it leads us to the right path towards a more sustainable future.