The sovereign wealth funds dilemma

LONDON, England (CNN) -- In a week where oil hit a new high and the dollar hit a new low, sovereign wealth funds -- and their motives for investing in the West -- have once again come under the spotlight.

Amid calls from the EU and the U.S. government for greater transparency, support for state-run investment funds came from a surprising source -- billionaire U.S. investor Warren Buffett who is now the world's richest man.

Foreign investors are attracted to the United States by the weak dollar, according to Buffett, who also said the United States and other governments shouldn't overreact to the rise of the funds.

"This is our doing, not some nefarious plot by foreign governments," added the man whose legendary success with investments has led him to be nicknamed the "sage of Omaha." The comments came in Buffett's annual letter to shareholders of his Berkshire Hathaway investment firm.

Buffett criticized U.S. politicians and Wall Street for what he describes as a protectionist stance against funds from the Middle East and Asia investing in American business.

In January this year, U.S. President George W Bush issued an executive order tightening controls over the influx of money from funds amid concerns that they could have political agendas.

Since November, Wall Street multinationals like UBS, Morgan Stanley, Merrill Lynch and Citigroup received total cash injections of about $35 billion -- investment that was desperately needed to plug the multi-billion dollar losses caused by the sub-prime mortgage crisis.

These deals represent some of the first significant foreign investments in key U.S. banks and other companies, and while the government might be worried, some on Wall Street are less so.

"These are among the most professional investors in the world. In our experience, there is virtually no difference between going to a sovereign fund [for investment capital] and going to a state pension fund in the U.S.," Stephen A. Schwarzman, Chairman and Chief Executive Officer, The Blackstone Group said of state-owned funds at Davos in January.

Although they have been around for much longer, sovereign wealth funds first became significant on the global financial scene about five years ago. Today, assets in sovereign wealth funds total $3,145 billion, according to the U.S.-based SWF Institute, which studies state-owned funds.

The biggest funds are Abu Dhabi's ADIA ($875bn), Norway's Pension Fund ($380bn), Singapore's GIC ($330bn), and Saudi Arabia's various holdings which total $300bn. The China Investment Corporation is not far behind with $200bn in assets, and Russia's Stabilization Fund, which was set up in 2004, has $100bn, but is growing fast.

The global credit squeeze and the ever-rising price of oil means that Wall Street investment houses will probably continue to need cash from state-run funds flush with petrodollars and the bounty of other soaring commodities. Global assets in sovereign wealth funds are estimated to reach $12 trillion by 2015, according to Morgan Stanley.

Concerns that some state-run funds might be investing in the West for reasons other than the purely commercial are not restricted to the U.S.. In November last year, German Chancellor Angela Merkel stopped Russia's Mischkonzerns Sistema from investing in Deutsche Telekom, the largest communications company in Europe.

Berlin wants to stop strategic assets -- telecoms, banks, post, logistics and energy -- falling into the hands of what they describe as "giant locust funds" controlled by Russia, China and Middle East governments. There are fears that some state-run funds could be buying stakes in important industries to get hold of technology secrets.

Against the backdrop of these issues, Berlin has spearheaded the campaign to clamp down on state-run investment funds in Europe. The German government is now drafting a law that will allow it to scrutinize non-EU takeovers and both Austria and Hungary have erected barriers. France has also been vocal in its concern about the growing appetite of resource-rich countries with sovereign investment funds for European industrial and financial companies.

Last week the EU proposed a voluntary code of conduct for governing the investment activities of sovereign wealth funds. The EU has a tough goal -- to encourage investment but also establish rules for a level playing field. The code of conduct would set basic standards of governance and transparency for funds and marks the first attempt to address the funds' activities at EU level.

"Our approach of trying to push forward the debate in a balanced manner and reaching some accommodation via a code of conduct with some guiding principles is the best way forward for both the funds and the member states," Charlie McCreevy, EU Commissioner for Internal Market and Services told CNN.

McCreevy is keen to emphasise the European Union's wish for continuing investment from all over the world. "We are open for investment wherever it may come from but we have to recognize some of the political difficulties... I think it's in everybody's interest to try and reach accommodations here," he said.

European Trade Commissioner, Peter Mandelson echoed McCreevy when he said the emphasis on sovereign wealth funds' investments would have to be based on commercial motivations, not national or strategic ones -- but he underlined the need to be open to the funds. "We need to be positive, not paranoid, about the operations of sovereign wealth funds," Mandelson told the Financial Times. EU Finance ministers are set to discuss the proposals next week.

The U.S. Treasury is also drafting a voluntary code of conduct that state-owned funds will be expected to follow otherwise they could face questions about the factors that motivate their decisions. "Our view is that the sovereign wealth funds are a force for good in the world economy. Vigilance is required because of their number and their size. And there are responsibilities on both sides -- the sovereign wealth funds and the recipient nations," Robert Kimmitt, U.S. deputy Treasury secretary told CNN at Davos. The secretary will travel to Europe to discuss the issue this week. E-mail to a friend