(SINGAPORE) The 1980s were challenging times for world leaders. The Cold War was escalating, and talk of conflict was rife. But the power play was quite straightforward; allies were on the same side of the Iron Curtain, and international influence was determined largely by the number of missiles held and boasted to the world.

Global influence today is increasingly measured in dollars and cents. Flush with current account or fiscal surpluses or commodity revenues, a growing number of countries (particularly in Asia and the Middle East) have set up sovereign wealth funds (SWFs) to invest their excess foreign reserves.

The International Monetary Fund (IMF) estimates that these funds are worth up to US$3 trillion today. While the size is small compared to the US$190 trillion global financial market, SWFs have the potential to create ripples in the capital markets of North America or the European Union.

Huge as they are, SWFs have managed to stay under the radar since Kuwait created the first one in 1953, until recent high-profile investments threw them into the spotlight.

The sub-prime crisis opened the doors of UBS and Citi to around US$27 billion of injections from SWFs in Abu Dhabi, Singapore and Kuwait. Even before the market turmoil, SWFs' stake purchases in large Western firms such as Blackstone Group had started to make heads turn.

But some groups in recipient countries are worried. Most SWFs reveal little about their exact sizes, asset management activities and reporting channels, and there is concern that sudden turns in their investment policies may create market volatility.

Some also fear that governments will direct SWFs' investment decisions to pursue political objectives. To rebut such talk, SWFs have come out flying flags of peace, reiterating that they simply wish to earn higher returns on excess reserves.

The China Investment Company, for instance, declared that commercial considerations, not politics, would drive its investments. Its president Gao Xiqing also said that 'it is our policy not to control anything'.

Nevertheless, SWFs are not without friends. The Organisation for Economic Cooperation and Development (OECD) said in April SWFs 'help to recycle savings internationally and generally have a good track record as long-term investors'. The IMF also found scant evidence that SWF investments are politically driven, although it recognised that 'SWF governments are typically involved in determining the overall objectives of the funds'.

Efforts are afoot to build bridges of understanding between SWFs and recipient countries. The IMF is focusing on best practices for SWFs, while the OECD is working on guidelines for recipient countries. Ongoing policy discussions will help shape the rules of the game - a useful development as new SWFs emerge to add to the club's influence; JPMorgan Research foresees these funds sitting on assets worth US$5 trillion to US$9.3 trillion by 2012. It is hoped the new guidelines will bring some predictability to the playing field, and reduce the current stir to nothing more than a speck in history books.

This article was first published in The Business Times on May 28, 2008

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