The Abu Dhabi Investment Authority, an Arab sovereign wealth fund (SWF), recently purchased German car manufacturer Daimler in one of the largest Arab SWF investments in Europe to date. Sven Behrendt argues that as sources of valuable investment capital, Europe will need to work with SWFs to create a regulatory framework that can support transparent and continued investment.
Sven Behrendt, a Visiting Scholar at the Carnegie Middle East Center spoke about the risks and benefits of creating a strategic European partnership with Arab SWFs at a German Arab Friendship Society (DAFG) Expert Discussion in Berlin.
The role of SWFs in diversifying Arab economies
Behrendt explained that the rise of SWFs as global financial players is largely the result of Arab efforts to diversify their own economies. Their current dependency on oil export revenue makes them vulnerable to the increasingly volatile fluctuations in the energy market. Becausethere has been little development in other sectors of Arab economies, SWF investment strategies have shifted in recent years away from high-risk, short-term and high-return investments to those that can facilitate the transfer of knowledge and technology between Arab states and Europe.
Behrendt argued that fear among the European public over Arab investment is at least partially due to reluctance on the part of SWFs to disclose information about their activities and investment capacity. This lack of transparency has impeded Western efforts to assess the overall value of SWFs, their long term investment strategies, and the influence and control that their governments exert.
Finding New Regulatory Principles
SWF investments in sensitive industries like energy have raised national and international calls for reforms to increase transparency. Domestic political pressure against SWFs in many countries in Europe have resulted in a patchwork of regulations that instead of encouraging transparency create confusion and make Arab SWF’s more inclined to invest in countries with limited regulation.
According to Behrendt, the International Monetary Fund’s voluntary code of conduct developed by its International Working Group of SWFs is the most promising reform effort to date. This voluntary code defined universally acceptable regulations for SWF investment based on both the receiving country’s need for transparency and the interests and sovereignty of the states providing investment capital.