Slide 1

Report
The Politics of Sovereign Wealth:
An Overview
ISTANBUL FORUM 2008:
A NEW ERA AND NEW HORIZONS:
“TURKEY’S STABILITY AND GROWTH
DRIVE”
Alastair Newton
Senior Political Analyst
Lehman Brothers International
Lehman Brothers does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the
objectivity of this report.
Customers of Lehman Brothers in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them, where such research is
available. Customers can access this independent research at www.lehmanlive.com or can call 1-800-2LEHMAN to request a copy of this research.
Investors should consider this report as only a single factor in making their investment decision.
This research report has been prepared in whole or in part by research analysts that are not registered/qualified as research analysts with FINRA.
PLEASE SEE ANALYST(S) CERTIFICATION(S) ON PAGE 40 AND IMPORTANT DISCLOSURES INCLUDING FOREIGN AFFILIATE DISCLOSURES BEGINNING ON PAGE 41
Acknowledgements
This presentation draws on the work of Lehman Brothers International staff
in many countries and across several divisions of the firm. But special thanks
are due to the firm’s Senior Relationship Management team, in particular
Jonathan Fox.
Alastair Newton
Senior Political Analyst
Lehman Brothers International
Tel: +44 7769 963457
Email: [email protected]
23 April 2008
[All charts and tables sourced from Company data, Lehman Brothers estimates, unless otherwise stated.]
A European Commissioner Speaks (1)…
“There is, as far as I know, no instance of sovereign wealth funds
acting in any manner other than responsibly up until now.”
Charlie McCreevy, European Commissioner for Internal Market and Services
(27 February 2008)
Table of Contents
I
Growth and Investment Activity
II
European Political and Policy Response
III
US Political and Policy Response
IV
The SWF Response
V
Endnote
I Growth and Investment Activity
Where is it all coming from?
Growth and Investment Activity
Oil/gas and export surpluses are the main drivers
Sources &
Drivers
Commodities Export
High prices for oil and other
commodities have pushed revenues in
excess of current budget requirements
External Surplus
For export economies of Asia, FX
reserve accumulation has far exceed
what is needed for stabilisation
Current account balances/excess reserves
Investment
Vehicles
Sovereign Wealth Funds1
Government (country-level)
investment vehicles that invest state
savings, often derived from
commodity export or exchange rate
intervention, and are separate from
the official reserves of the Central
Bank or other monetary authority
___________________________
1. Lehman Brothers’ definition is an adaptation of a definition used by the US Treasury.
Diversified Monetary
Authorities (DMAs)
Central Banks/Monetary
Authorities that have significantly
diversified their investment
portfolio without (or in addition to)
a separate SWF vehicle
Pension Liabilities
Some countries have set up large,
sovereign pension funds to cover
the future liabilities of their
pension schemes
Budget allocations
Sovereign Pension Funds
Several have been recently
established with very significant
flows from budget allocations
Who are they and how big are they?
Growth and Investment Activity
Select Sovereign Wealth Funds1
Country
Fund Name
Established
Source of Funds
UAE
Abu Dhabi Investment Authority (ADIA)
1976
Oil
$500-900
Norway
Gov't Pension Fund - Norges Bank Invest Mgmt (NBIM)
1990
Oil
$350
Kuwait
Kuwait Investment Authority (KIA) / Kuwait Invest. Office (KIO)
1952
Oil
$215
Singapore
Government of Singapore Investment Corp (GIC)
1981
External surplus
$200-250
China
China Investment Corp (CIC) + Central Huijin Investment Corp
2007
External surplus
$200
Singapore
Temasek Holdings
1974
External surplus
$110
China
China - Other state vehicle direct investments (CDB, Citic, etc.)
Various
External surplus
$50
Qatar
Qatar Investment Authority (QIA)
2000
Oil and gas
$50
Russia
National Welfare Fund (spin-off from Stabilization Fund)
2008
Oil
$32
Brunei
Brunei Investment Agency (BIA)
1983
Oil
$30
UAE
Dubai Holding (Dubai Intl Capital, Dubai Invest Group, Jumeirah)
2004
Oil and other
$25
Korea
Korea Investment Corp (KIC)
2005
External surplus
$20
Kazakhstan
Kazakhstan National Fund
2000
Oil and gas
$18
Malaysia
Khazanah Nasional
1993
External surplus
$18
UAE
Abu Dhabi Investment Company (ADIC)
1977
Oil
Oman
State General Reserve Fund and others
1980
Oil and gas
$10
UAE
Dubai World (Istithmar, Dubai Ports)
2006
Oil and other
$10
UAE
Mubadala
2002
Oil
$10
Total
Est. Assets ($bn)
2
$10-50
$2,103
___________________________
1.
Current assets are based on official statements and public information where available. Where official figures are unavailable (e.g., ADIA) or believed to understate true asset levels (e.g., GIC), asset levels
are estimates. Some funds (e.g., Dubai) may have access to more capital as needed.
2.
Reuters reported on February 19, 2008 that Korea Investment Corporation will receive an additional $10bn for a "more opportunistic, alternative investment” strategy.
Who are they and how big are they?
Growth and Investment Activity
Select Diversified Monetary Authorities (DMAs)1
Established
Source of Funds
Est. Excess Reserves
($bn)
Country
Fund Name
Saudi Arabia
Saudi Arabian Monetary Agency (SAMA) and others
1952
Oil
Singapore
Monetary Authority of Singapore
1971
External surplus
$84
China
Hong Kong Monetary Authority (HKMA)
1993
External surplus
$78
Total
$270
$432
Total Assets of SWFs and DMAs = ~ $2.5T
Other Select Sovereign Wealth Funds (not included in analysis)2
Fund
Libyan Investment Authority
Algeria Revenue Regulation Fund
Venezuela National Development Fund
Taiwan National Stablization Fund
Iran Oil Stablization Fund
Economic and Social Stabilization Fund (Chile)
Botswana Pula Fund
Azerbaijan State Oil Fund
Heritage and Stabilization Fund (Trinidad & Tobago)
Kirbati Stablization Fund
Mauritania Hydrocarbon Fund
Assets ($bn)
$40
$40
$15
$15
$10
$10
$5
$2
$1
<$1
<$1
Notes
Recently Announced
Commodities
Commodities
External Surplus
Commodities
Commodities
Diamond exports
Commodities
Commodities
Commodities
Commodities
___________________________
1.
Excess reserves are an estimate of the portion of foreign reserves that could be eligible for diversified asset allocation and/or be invested through an SWF.
2.
Sources: “Libya starts to deploy $40bn fund”, Financial Times, October 17 th, 2007; Zawya.com quoting Governor of Central Bank of Iran, January 10, 2008; IMF Global Financial Stability Report,
September 2007; “State Capitalism: The rise of sovereign wealth funds”, Dr Gerard Lyons, Standard Chartered, October, 15, 2007; “A few sovereigns more”, Will Devlin and Bill Brummit of the
Australian Treasury Macroeconomic Group
Who are they and how big are they?
Growth and Investment Activity
Asset Comparisons
Large groups dominate
O thers
18%
ADIA
28%
Top 7 account
for 82% of the
assets
Temasek
4%
CIC
8%
Norges
14%
GIC
9%
KIA/KIO
8%
___________________________
1. State Administration for Foreign Exchange (SAFE), the reserve manager for the People’s Bank of China
SAMA
11%
How big will they grow?
Growth and Investment Activity
SWFs and similar diversified reserves are already at $2.5T and growing rapidly
Major Global Asset Pools 2008 ($Ts)1
Pension Funds
Sovereign Wealth Funds and DMAs now represent
1.5% of the $167T in global financial assets 2

In terms of assets, they are approximately the same
size as the global hedge fund and private equity
industries combined (although without the leverage
and high turnover)

Significant portions of global FX reserves are
candidates for further funding of SWFs
22.7
20.8
Mutual Funds
Insurance Assets
20.5
Global FX Reserves
6.2
SWFs/DMAs
2.5
Hedge Fund Industry
Private Equity

1.8
Up to $6T buying power with leverage2
0.8
SWF Five Year Growth Scenarios
Actual SWF growth will depend on:

Oil/gas prices

Economic growth in Asia

Global economy and exchange rates

Political reaction/regulation

Investment returns

Pace of reserve accumulation and
diversification
$11.4T
$7.7T
$2.5T
$5.1T
$3.2T
2008
2013
Aggressive: 35% CAGR (massive inflows)
High: 25% CAGR (high returns/inflows, similar
to recent growth)
Conservative (Base Case): 15% CAGR
Weak: 5% CAGR (low returns/inflows)
___________________________
1. Estimates are for 2008 average assets. Sources include: “The New Power Brokers”, McKinsey Global Institute; CIA; IMF; Lehman Brothers Analysis
2. “The New Power Brokers”, McKinsey Global Institute
Who is next?
Growth and Investment Activity
There is much speculation about new funds, often sparking internal debates
Saudi Arabia, the world's biggest oil producer, plans to
start its first sovereign wealth fund with about $6
billion, channeling surplus crude-oil revenue into
investments in foreign companies.
"We still have no plans for a sovereign wealth
Bloomberg, Jan 23, 2008
fund," [Indian Finance Minister Palaniappan
Chidambaram] told reporters at the World
Brazil will create a sovereign wealth fund with
Economic Forum in Davos, Switzerland.
the primary aim of intervening in foreign
exchange markets to counter the appreciation of
Dow Jones, Jan 25, 2008
Brazil’s currency, according to Guido Mantega,
The government is planning to create a multifinance minister.
billion-dollar sovereign wealth fund, a first of
Financial Times, December 9, 2007
its kind in India, which aims to invest in
energy assets such as oil, gas and coal across
Japan's ruling Liberal Democratic Party will set up a
the world.
task force this week to study the creation of a sovereign
Economic Times, Feb 19, 2008
wealth fund for Asia's largest economy, a party official
said Tuesday.
Idea of Japanese wealth fund rebuffed
AFP, Feb 18, 2008
Financial Times, Feb 1, 2008
What about the sovereign pension funds?
Growth and Investment Activity
While overshadowed by the attention given to the commodity and external surplus
SWFs, sovereign pension funds are extremely large and also diversifying1
Pension Fund (selected)
Country
Assets ($bn) Comments
Government Pension Fund
Japan
$936
World's largest pension fund
ABP
Netherlands
$270
Pension fund for Dutch government workers
National Pension Corporation
Korea
$203
Much larger than Korea's SWF
Future Fund
Australia
$50
The Fonds de Réserve Pour Les
France
Retraites (FRR)
National Pensions Reserve Fund
Ireland
(NPRF)
New Zealand Superannuation
New Zealand
Fund (NZSF)
$45
$27
$13
To offset the superannuation liability by 2010
To reduce future burden of occupational pension
schemes
To fund social welfare and public service
pensions (allocated 1% of GDP p.a.)
To meet future liabilities of superannuation (avg.
contribution of 1.5% of GDP p.a.)
Additional $300B+ in
inflows expected into
three funds alone
New sovereign pension funds are growing very rapidly through budget allocations 1
$Billions
$200
Current Size
$122
Target Size
$50
$109
$45
$13
Australia Future Fund
The Fonds de Réserve Pour Les Retraites
(FRR)
New Zealand Superannuation Fund (NZSF)
___________________________
1.
Sources: “World’s Largest Pension Funds” Pensions & Investments (pionline.com), September 3 rd, 2007; The Future Fund Research Note no. 43 2004-05, Parliamentary Library, Parliament of Australia;
Sovereign Wealth Management, Central Banking Publications, 2007
What are they investing in?
Growth and Investment Activity
Rapid growth of excess reserves and wealth is prompting more aggressive investment
Traditional official
reserves
Risk Return Appetite
Government bonds
FX
HG Credit
HY Credit
ABS
Often managed both in-house and
with external managers with the
advice of consultants
Rapid Growth
Equities
FoHF
Hedge Funds Major Direct Stakes
FoPE
PE Funds (Private and Public)
Real Estate
Alternatives: generally outsourced to
external managers (increasing interest
in GP stakes)
+ Diversification
=
Significant money
in motion
Direct Stakes/M&A: Who are the targets?
Growth and Investment Activity
Ten Largest SWF Transactions 2007 - 2008
Announcement
Dec-07
Mar-07
Nov-07
Jan-08
Jan-08
Apr-07
Dec-07
Jan-08
Dec-07
Aug-07
Acquiror
Government of Singapore Investment
Dubai Holding
Abu Dhabi Investment Authority
Government of Singapore Investment
Korea Investment Corp, Kuwait Investment
Authority, Mizuho Corporate Bank, TPG-Axon,
NJ Division of Investments and others
Target
UBS
Emaar Properties
Citigroup
Citigroup
Merrill Lynch
Saad Group
Temasek Holdings, Davis Selected Advisors
Kuwait Investment Authority, Prince Alwaleed bin
Talal, Sandy Weill and others
China Investment Corp.
Istithmar
HSBC
Merrill Lynch
Citigroup
Financial Institution
Financial Institution
Financial Institution
Morgan Stanley
MGM Mirage
Financial Institution
Consumer-Retail
Sector Distribution – Deal Volume
Communication
5%
ConsumerRetail
11% Technology
Sector
Financial Institution
Real Estate
Financial Institution
Financial Institution
Financial Institution
Acquired Stake
9.0%
28.0%
4.9%
4.4%
15.0%
6,600
3.1%
15.0%
6,553
6,2001
3.3%
9.9%
9.5%
Total
5,620
5,000
5,0002
66,700
Sector Distribution – Deal Value
Communication
2%
ConsumerRetail
10%
3%
Financial
Institution
37%
Financial
Sponsor
7%
Financial
Sponsor
12%
Healthcare
Industrial
___________________________
4%
11%
Source: Dealogic
1.
Includes an option to invest an additional $600mm by 28 March 2008
2.
Total transaction amount; includes a $2.7bn investment in CityCentre
Technology
2%
Real Estate
11%
Real Estate
10%
Natural
Resources
4%
Media
3%
Deal Value ($mm)
9,750
7,597
7,500
6,880
Financial
Institution
63%
Media
0%
Healthcare
1%
Industrial
4%
Natural
Resources
0%
The Loudest Splash?
It is in real estate that Gulf money is making the loudest splash.
Dubai’s flagship property company, Emaar, claims to be engaged in
some $65 billion-worth of foreign projects. These include four resorts
in Morocco and upmarket housing projects in Cairo, Damascus,
Hyderabad, Istanbul and Karachi. A rival firm, Damac, recently
launched what it calls a resort city on Egypt's Red Sea coast costing
$16 billion, while another Emirati developer, Al Maabar, has pledged
$10 billion to create a fancy suburb for Tunis. Qatari Diar, the same
state-owned company that jointly bought Chelsea Barracks, is also
building office towers in Cairo and Khartoum, resorts in Syria,
Morocco and the Seychelles, and a gated community in Yemen's
capital, Sana'a.”
“Cash is going to the poor, too”: The Economist, 23 February 2008, page 67.
II European Political and Policy Response
Potential Political Concerns
Political and Policy Response
Examples of concerns voiced around the growth of sovereign wealth funds1

Blurring the line between public and private sector – This runs contrary to longstanding precepts of promoting a
private sector, market-based global financial system.

Lack of transparency and secrecy – While SWFs have little incentive to disrupt markets, it is feared that their lack of
transparency and extreme secrecy will create competitive difficulties for other market participants.

Concerns about motivations – The worry is that SWFs will make investment decisions based on political agendas
rather than strictly economic and financial reasoning.

Weight of the money – the sheer size and scope of the funds raise concerns about their weight in the market and
potential effect on asset prices.

“Reverse Globalization” – Having reserve-rich countries become owners of financial or real assets in developed
countries could lead to political tensions and pressures for protectionism.

Strategic industries – Could inflame nationalistic sentiments, especially if they are seen to be targeting national
champions or strategic assets (e.g. defence, financial services, media).
Domestic concerns – SWFs may draw suspicion from segments of their own societies who feel less likely to benefit
from their growth or who would prefer to see re-investment in domestic industries and development.
___________________________

1. Potential issues listed are provided for information purposes only and are not intended to represent the views of Lehman Brothers or the authors of this presentation.
What is the international political reaction?
Political and Policy Response
US Reaction

In addition to the EU’s existing rules, the European Commission
has called for SWFs to sign up to the proposed IMF code of
conduct (see below) and set out criteria it expects that to
incorporate.

France has expressed the need for caution, although in practice
there may be more flexibility.

Germany has a draft law on foreign investment aimed at least in
part at SWFs.

On 20 March, the US Treasury and the governments of Abu
Dhabi and Singapore issued a joint statement which included a
number of “policy principles for both SWFs and host economies.
In Italy, GIC and ING Real Estate recently announced a €400m
JV for the acquisition of the new Roma Est shopping centre.

UK Prime Minister Gordon Brown has declared Britain “open for
business” to SWFs.
In April, the US Treasury floated a proposal to “clarify” CFIUS’s
right to vet investments below 10%.

The debate in Europe primarily revolves around Russia and its
potential acquisitiveness through sovereign wealth or stateowned enterprises.

Senior US Treasury and SEC officials have recognised the need
for monitoring and transparency but have warned against
protectionist policies.

US Director of National Intelligence, Mike McConnell, recently
testified to the Senate Select Committee on Intelligence that US
intelligence agencies have “concerns about the financial
capabilities of Russia, China, and OPEC countries”.



European Reaction
Senator Charles Schumer has supported some deals but warned
SWFs to increase transparency and accept codes of conduct.
International Organisations
SWF Reaction

They point out that hedge funds lack transparency and are well
accepted.
The IMF is working towards a “technical” code of “good
practice” with the SWFs themselves, which it hopes to launch in
the autumn; however, the extent of “political” buy-in by either the
SWFs or the G7 remains unclear.

Some funds have stated their desire to work with international
organisations on best practices.
The OECD is looking to reconcile differences of perspective on
SWFs among countries receiving investment.

On 2 April, World Bank president Robert Zoellick urged SWFs to
invest 1% of their assets in Africa, stressing both the investment
and “public image” case for doing so.

SWFs have complained that political concerns are unfounded and
that they act purely as long-term, financial investors.



China and the GCC are involved in high-level bilateral talks on
investment in one another’s economies.
A European Commissioner Speaks (2)…
“Europe must remain open to inward investments. Sovereign wealth
funds are not a big bad wolf at the door.”
José Manuel Barroso, President of the European Commission
(27 February 2008)
What are the current EU rules?

Article 56:
Within the framework of the provisions set out in this Chapter, all
restrictions on the movement of capital between Member States and
between Member States and third countries shall be prohibited.
A European Commissioner Speaks (3)…
“Some people are afraid of what might happen in the future…. We are
open for business. But…business…should follow some common
principles on transparency and governance.”
Charlie McCreevy, European Commissioner for Internal Market and Services
(27 February 2008)
What are the current EU rules?

Article 57:
1. The provisions of Article 56 shall be without prejudice to the application
to third countries of any restrictions which exist on 31 December 1993
under national or Community law adopted in respect of the movement of
capital to or from third countries involving direct investment – including in
real estate – establishment, the provision of financial services or the
admission of securities to capital markets.
2. Whist endeavouring to achieve the objective of free movement of capital
between Member States and third countries to the greatest extent possible
and without prejudice to the other Chapters of the Treaty, the Council may,
acting by a qualified majority on a proposal from the Commission, adopt
measures on the movement of capital to or from third countries involving
direct investment – including investment in real estate – establishment, the
provision of financial services or the admission of securities to capital
markets. Unanimity shall be required for measures under this paragraph
which constitute a step back in Community law as regards the liberalisation
of the movement of capital to or from third countries.
What are the current EU rules?

Article 58:
1. The provisions of Article 56 shall be without prejudice to the right of
Member States:
(a) […]
(b) To take all requisite measures to prevent infringements of national law
and regulations, in particular in the field of taxation and the prudential
supervision of financial institutions, or to lay down procedures for the
declaration of capital movements for purposes of administrative or
statistical information, or to take measures which are justified on the
grounds of public policy or public security.
2. The provisions of this Chapter shall be without prejudice to the
applicability of restrictions on the right of establishment which are
compatible with this Treaty.
3. The measures and procedures referred to in paragraphs 1 and 2 shall not
constitute a means of arbitrary discrimination or a disguised restriction on
the free movement of capital and payments as defined in Article 56.
What are the current EU rules?

Article 60:
1. If, in the cases envisaged in Article 301, action by the Community is
deemed necessary, the Council may, in accordance with the procedure
provided for in Article 301, take the necessary urgent measures on the
movement of capital and on payments as regards the third countries
concerned.
2. Without prejudice to Article 297 and as long as the Council has not taken
measures pursuant to paragraph 1, a Member State may, for serious
political reasons and on grounds of urgency, take unilateral measures
against a third country with regard to capital movements and payments.
The Commission and other Member States shall be informed of such
measures by the date of their entry into force at the latest. The Council may,
acting by a qualified majority on a proposal from the Commission, decide
that the Member State concerned shall amend or abolish such measures.
The President of the Council shall inform the European Parliament of any
such decision taken by the Council.
What are the current EU rules?
Source: 'Capital movements in the legal framework of the Community' - Annex to Chapter 5 on Determinants of international capital flows (European Economy Nr. 6,
2003, p. 322)
A European Commissioner Speaks (4)…
“The big difference we see in the case of sovereign wealth funds is
[that] they are owned by the state, not by private firms, and their
investment criteria and management are characterised in some cases,
in some cases, by a high level of opacity.”
Joaquin Almunia, European Commissioner for Economic & Monetary Affairs
(27 February 2008)
New EU “rules of the game”?


On 27 February, Europe’s Internal Market Commissioner Charlie McCreevy
and Economics Commissioner Joaquin Almunia jointly called for SWFs to
agree this year to the draft code of conduct being drawn up under the auspices
of the IMF. They added that EU heads of government would be asked at their
13/14 March meeting to back the Commission in “…its policy to help shape
the IMF code and press funds to sign up to it”.
Specifically, the Commission called for SWFs to make public:
- The size and source of their assets;
- The currency composition of their investments;
- The regulation and oversight under which they operate in their home
country;
- “An investment policy that defines the overall objectives of SWF
investment”; and
-“The general principles of an SWF’s relationship with government
authorities”.
New German “rules of the game”?





The German Economics Ministry has published for consultation a proposed
amendment to the existing Foreign Business Act which commentators believe
is intended to defuse domestic political pressures over SWFs and reassure the
Funds themselves.
If passed, the new legislation would:
-Permit the Ministry to vet any investment from outside the EU involving a
stake of 25% or greater in a German firm;
-Give the Ministry a maximum of three months to conduct its enquiries from
the date of the investment’s announcement;
-Place the onus on the Ministry to identify such cases and initiate action;
-Ensure full German compliance with relevant EC Treaty articles.
However, Labour Minister Olaf Scholz is reportedly pressing for his ministry
to be included in the vetting process and to be given the right to block
investments, which could result in significant job losses.
On the other hand, the länder are reportedly keen to avoid any new hurdles
which could discourage inward investment and related job creation.
Timing for the new legislation to be introduced to the Bundestag could be
determined by efforts to reach agreement at ministerial level beforehand.
But no new UK “rules of the game”?



Visiting China in January 2008, British Prime Minister Gordon Brown
said:
“We want Britain to be the number one destination for Chinese
business as it chooses to invest in the rest of the world. Tens of
thousands of jobs in Britain can be created from cooperation between
our two countries.”
According to senior officials accompanying Mr Brown, this statement
was intended to underline that the British government has:
“…no difficulty with sovereign wealth funds investing in the UK…as
long as [they] operate on a commercial basis and are committed to
the general principles of transparency and corporate governance that
operate in the UK…. We will welcome sovereign wealth funds to
London.”
British ministers are currently actively encouraging CIC to open an
office in London.
France: Total Welcomes Chinese Investment




In early April, the press reported that China’s State Administration of
Foreign Exchange (SAFE), which manages the bulk of China’s foreign
exchange reserves, had acquired a €1.8bn stake in the French oil major
Total.
Although there has been speculation that this move may revive the
debate in France over “economic patriotism”, Total is quoted as saying
that it is used to having state funds as investors and welcomes them,
noting: “These funds are no different from other shareholders”.
French President Nicolas Sarkozy has said that state-owned funds are
welcome to invest in France as long as they are transparent and there is
reciprocity in terms of openness to inward investment.
Following confirmation in mid-April of the acquisition of a £1bn/1
percent stake in BP by “a Chinese state-owned company”, neither BP
nor SAFE has confirmed speculation that the latter is involved.
Russia – The principal focus of Europe’s attention?



Russia formally set up its new sovereign wealth fund – the National
Welfare Fund (NWF) – on 1 February, the day after now presidentelect Dmitry Medvedev had stated that the Kremlin would support
Russian companies looking to acquire foreign companies in order to
strengthen Russia’s economy and gain access to new technology and
markets.
The NWF, which is controlled by the finance ministry, has initial
capitalisation of $32bn; but, according to analysts, this could swell to
as much as $200bn this year based on projected oil and gas revenues.
Under current legislation the NWF can only invest in Russian and
other sovereign bonds. But the Russian finance ministry has hinted that
diversification could be approved as early as this year, albeit possibly
following Norway’s strategy of limiting its stake in any one company
to no more than 3 percent of the stock.
III US Political and Policy Response
New US “rules of the game”?


On 20 March, senior US Treasury officials met with officials from the
Governments of Singapore and Abu Dhabi and from GIC and ADIA to
discuss SWFs.
The meeting led to a joint statement which included the following:
“The United States, Abu Dhabi, and Singapore, being a group of
nations with SWFs and a country receiving investments from SWFs,
have a common interest in an open and stable international financial
system. We support the process under way in the…IMF and
the…OECD to develop voluntary best practices for SWFs and inward
investment regimes for government-controlled investment in recipient
countries, respectively. International agreement on a set of voluntary
best practices will create a strong incentive among SWFs and
investment-recipient countries to hold themselves to high
standards…”
New US “rules of the game”?

The statement went on to propose the following “policy principles” for SWFs:
“1. SWF investment decisions should be based solely on commercial
grounds, rather than to advance, directly or indirectly, the geopolitical goals
of the controlling government. SWFs should make this statement formally as
part of their basic investment management policies.
2. Greater information disclosure by SWFs, in areas such as purpose,
investment objectives, institutional arrangements, and financial information
– particularly asset allocation, benchmarks, and rates of return over
appropriate historical periods – can help reduce uncertainty in financial
markets and build trust in recipient countries.
3. SWFs should have in place strong governance structures, internal
controls, and operational and risk management systems.
4. SWFs and the private sector should compete fairly.
5. SWFs should respect host-country rules by complying with all applicable
regulatory and disclosure requirements of the countries in which they
invest.”
New US “rules of the game”?

And the following “policy principles” for SWF investment host countries:
“1. Countries receiving SWF investment should not erect protectionist
barriers to portfolio or foreign direct investment.
2. Recipient countries should ensure predictable investment frameworks.
Inward investment rules should be publicly available, clearly articulated,
predictable, and supported by strong and consistent rule of law.
3. Recipient countries should not discriminate among investors. Inward
investment policies should treat like-situated investors equally.
4. Recipient countries should respect investor decisions by being as
unintrusive as possible, rather seeking to direct SWF investment. Any
restrictions imposed on investments for national security reasons should be
proportional to genuine national security risks raised by the transaction.”
New US “rules of the game”?



In early April, the US Treasury floated for consultation a
proposal that examination of investments below a 10% threshold
should in future be open to CFIUS.
According to legal experts, this option has always been available;
but 10% had long been considered a de facto threshold for
CFIUS’s involvement.
The move is believed to have been in response to pressure from
Congress and may, in part at least, be aimed at defusing such
pressure by clarifying the existing rules.
IV The SWF Response
A “Level Playing Field”


High-level delegations from Saudi Arabia, Kuwait, Qatar and the UAE
(including Vice President Sheikh Mohammed bin Rashid al Maktoun) are in
regular discussions with senior Chinese (including President Hu Jintao) about
increasing investments in one another’s economies.
Speaking at a conference in Luxembourg on 9 April, the head of the KIA,
Bader al-Sa’ad, criticised the EU proposals for a voluntary code of conduct,
stating:
“Recipient countries are placing handcuffs on sovereign wealth funds in the
form of regulations termed – in the best traditions of George Orwell’s
Newspeak – ‘codes of conduct’ or ‘principles of operation’ or ‘best
practices’. These regulations will not solve or prevent any future financial
crises… There should be a common level playing field for all… There is no
evidence over the past many decades of any wrongdoing by any sovereign
wealth fund… The consequences of imposing regulations on sovereign
wealth funds will result in an adverse impact on global capital flows, which
is not in our common interest. Regulating sovereign wealth funds will not
stimulate the global economy.”
To Regulate Or To “Improve”?
“The underlying concern in the debate about sovereign wealth funds
seems to be the fear that some governments might use their financial
power to build strategic advantages. However, a far more challenging
issue is how the huge increase in financial assets managed by
potentially non-economic agents will affect the efficiency of the global
capital market and the allocation of risk and resources.
Particular regulations for SWFs would be a step in the wrong direction.
Instead, we should discuss what conditions are needed for the
professional management of publicly owned financial assets. The free
flow of capital contributes to efficient allocation of risk and resources.
Regulation of SWFs risks creating inefficiency by curbing market
forces at a time when we need to strengthen both the power and the
professionalism of capital owners.”
“Do not regulate wealth finds, improve them” by Knut Kjaer, Chief Executive of
Norges Bank Investment Management (Financial Times, 14 April 2008)
China: Outsourcing Investment



According to press reports, China’s three sovereign wealth funds
are planning over the next three years to outsource a combined
total of $320bn to foreign asset managers with a view to
accelerating outsourcing thereafter.
The move is believed to be in response to capacity constraints
within the SWFs – China Investment Corporation (CIC),
National Social Security Fund (NSSF) and China-Africa
Development Fund (CAD).
According to CIC, the fund has received over 200 submissions
for equity mandates and another 100 for fixed income.
V Endnote
The City and “that ancient enemy”
“The City of London appears to be at the mercy of sovereign wealth.
Its electricity is supplied by a company controlled by a government of
that ancient enemy, France. Perhaps… President Nicolas Sarkozy
could order the lights to flicker. That would remind everyone that the
source of power is in Paris.”
“Sovereign wealth investment is a force for stability” by John Kay (Financial Times,
27 February 2008)
Analyst Certification:
I, Alastair Newton, hereby certify (1) that the views expressed in this research email accurately reflect my personal views about any or all of the subject securities or
issuers referred to in this email and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in
this presentation.
Important Disclosures
Lehman Brothers does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict
of interest that could affect the objectivity of this email communication.
Investors should consider this communication as only a single factor in making their investment decision.
The analysts responsible for preparing this report have received compensation based upon various factors including the Firm’s total revenues, a portion of which is
generated by investment banking activities.
This research report has been prepared in whole or in part by research analysts that are not registered/qualified as research analysts with FINRA.
With the exception of analysts who publish for either LBI or a branch of LBI, research analysts may not be associated persons of the member and therefore may not be
subject to Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
For current important disclosures regarding companies that are the subject of this research report, please send a written request to: Lehman Brothers Control Room, 1271
Avenue of the Americas, 42nd Floor, New York, NY 10020 or refer to the firm's disclosure website at www.lehman.com/disclosures.
Guide to Lehman Brothers Equity Research Rating System
Our coverage analysts use a relative rating system in which they rate stocks as 1-Overweight, 2- Equal weight or 3-Underweight (see definitions below) relative to other
companies covered by the analyst or a team of analysts that are deemed to be in the same industry sector (“the sector coverage universe”). To see a list of companies that
comprise a particular sector coverage universe, please go to www.lehman.com/disclosures.
In addition to the stock rating, we provide sector views which rate the outlook for the sector coverage universe as 1-Positive, 2-Neutral or 3-Negative (see definitions
below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investors should carefully read the entire research report
including the definitions of all ratings and not infer its contents from ratings alone.
Stock Rating
1-Overweight - The stock is expected to outperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.
2-Equal weight - The stock is expected to perform in line with the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.
3-Underweight - The stock is expected to underperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.
RS-Rating Suspended - The rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances
including when Lehman Brothers is acting in an advisory capacity on a merger or strategic transaction involving the company.
Sector View
1-Positive - sector coverage universe fundamentals are improving.
2-Neutral - sector coverage universe fundamentals are steady, neither improving nor deteriorating.
3-Negative - sector coverage universe fundamentals are deteriorating.
Distribution of Ratings:
Lehman Brothers Equity Research has 2125 companies under coverage.
39% have been assigned a 1-Overweight rating which, for purposes of mandatory disclosures, is classified as a Buy rating, 31% of companies with this rating are
investment banking clients of the Firm.
47% have been assigned a 2-Equal weight rating which, for purposes of mandatory disclosures, is classified as a Hold rating, 34% of companies with this rating are
investment banking clients of the Firm.
11% have been assigned a 3-Underweight rating which, for purposes of mandatory disclosures, is classified as a Sell rating, 21% of companies with this rating are
investment banking clients of the Firm.
Lehman Brothers Inc. and Its Foreign Affiliates Involved in the Production of Equity Research
New York
Lehman Brothers Inc.
(LBI, New York)
745 Seventh Avenue
New York, New York 10019
Member, FINRA
London
Lehman Brothers International (Europe) Ltd.
(LBIE, London)
25 Bank Street
London, E14 5LE, United Kingdom
Regulated by FSA
Tokyo
Lehman Brothers Japan Inc.
(LBJ, Tokyo)
Roppongi Hills Mori Tower, 31st Floor
6-10-1 Roppongi, Minato-ku, Tokyo 106-6131, Japan
Regulated by FSA
Taipei
Lehman Brothers Securities Taiwan Limited
(LBSTL, Taiwan)
Cathay Financial Center 12F
7 Sungren Road - Shin-Yi District
Taipei, Taiwan
Regulated by FSC
Seoul
Lehman Brothers International (Europe) Seoul Branch
(LBIE, Seoul)
Hanwha Building, 12th Floor
110 Sokong-dong Chung-Ku Seoul 100-755, Korea
Regulated by FSC
Hong Kong
Lehman Brothers Asia Limited - Hong Kong
(LBAL, Hong Kong)
Two International Finance Centre
8 Finance Street, 26th Floor
Central, Hong Kong
Regulated by SFC
Mumbai
Lehman Brothers Inc. India Branch
(LBI, India)
Winchester, Off High Street, 9th floor
Hiranandani Business Park
Powai, Mumbai 400 076, India
Mumbai
Lehman Brothers Securities Private Limited
(LBSPL, India)
Ceejay House, 11th Level, Plot F
Shivsagar Estate, Dr. Annie Besant Road
Worli, Mumbai 400 018, India
Regulated by SEBI
Sydney
Lehman Brothers Australia Securities Pty Ltd.
(LBAUL, Sydney)
Level 33, 264 George Street
Sydney NSW 2000 , Australia
Regulated by ASIC
This material has been prepared and/or issued by Lehman Brothers Inc., member SIPC, and/or one of its affiliates (“Lehman Brothers”) and has been approved by
Lehman Brothers International (Europe), authorized and regulated by the Financial Services Authority, in connection with its distribution in the European Economic
Area. This material is distributed in Japan by Lehman Brothers Japan Inc., and in Hong Kong by Lehman Brothers Asia Limited. This material is distributed in Australia
by Lehman Brothers Australia Pty Limited, and in Singapore by Lehman Brothers Singapore Pte Ltd. Where this material is distributed by Lehman Brothers Singapore
Pte Ltd, please note that it is intended for general circulation only and the recommendations contained herein does not take into account the specific investment
objectives, financial situation or particular needs of any particular person. An investor should consult his Lehman Brothers’ representative regarding the suitability of the
product and take into account his specific investment objectives, financial situation or particular needs before he makes a commitment to purchase the investment
product. This material is distributed in Korea by Lehman Brothers International (Europe) Seoul Branch, and in Taiwan by Lehman Brothers Securities Taiwan Limited.
Where this material is distributed by Lehman Brothers Securities Taiwan Limited, please note that recommendations expressed herein are for reference only. Investors
should carefully evaluate the investment risks and are reminded that they are solely responsible for their investment decisions. This document is for information purposes
only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other instruments mentioned in it. No part of this document
may be reproduced in any manner without the written permission of Lehman Brothers. With the exception of disclosures relating to Lehman Brothers, this research
report is based on current public information that Lehman Brothers considers reliable, but we make no representation that it is accurate or complete, and it should not be
relied on as such. In the case of any disclosure to the effect that Lehman Brothers Inc. or its affiliates beneficially own 1% or more of any class of common equity
securities of the subject company, the computation of beneficial ownership of securities is based upon the methodology used to compute ownership under Section 13(d)
of the United States' Securities Exchange Act of 1934. In the case of any disclosure to the effect that Lehman Brothers Inc. and/or its affiliates hold a short position of at
least 1% of the outstanding share capital of a particular company, such disclosure relates solely to the ordinary share capital of the company. Accordingly, while such
calculation represents Lehman Brothers’ holdings net of any long position in the ordinary share capital of the company, such calculation excludes any rights or
obligations that Lehman Brothers may otherwise have, or which may accrue in the future, with respect to such ordinary share capital. Similarly such calculation does not
include any shares held or owned by Lehman Brothers where such shares are held under a wider agreement or arrangement (be it with a client or a counterparty)
concerning the shares of such company (e.g. prime broking and/or stock lending activity). Any such disclosure represents the position of Lehman Brothers as of the last
business day of the calendar month preceding the date of this report.
This material is provided with the understanding that Lehman Brothers is not acting in a fiduciary capacity. Opinions expressed herein reflect the opinion of Lehman
Brothers and are subject to change without notice. The products mentioned in this document may not be eligible for sale in some states or countries, and they may not be
suitable for all types of investors. If an investor has any doubts about product suitability, he should consult his Lehman Brothers representative. The value of and the
income produced by products may fluctuate, so that an investor may get back less than he invested. Value and income may be adversely affected by exchange rates,
interest rates, or other factors. Past performance is not necessarily indicative of future results. If a product is income producing, part of the capital invested may be used
to pay that income. © 2008 Lehman Brothers. All rights reserved. Additional information is available on request. Please contact a Lehman Brothers entity in your home
jurisdiction.
Lehman Brothers policy for managing conflicts of interest in connection with investment research is available at www.lehman.com/researchconflictspolicy. Ratings,
earnings per share forecasts and price targets contained in the Firm's equity research reports covering U.S. companies are available at www.lehman.com/disclosures.

similar documents