Alexander Mirtchev Hails Selection of Senator Chuck Hagel as Chairman of the Atlantic Council

Dr. Alexander Mirtchev, president and founder of the Krull Corporation, today congratulated former Senator Chuck Hagel (R-Neb.) on his appointment as Chairman of the Atlantic Council. Senator Hagel, who served two terms representing Nebraska from 1997 to 2009, succeeds General James L. Jones, who stepped down to serve as National Security Advisor to President Barack Obama.

Dr. Mirtchev also is a member of the Strategic Advisors Group with The Atlantic Council and serves as a senior advisor to the council's president.

Sovereign funds join forces for strategic investments

LONDON: An increasing number of sovereign wealth funds are working in concert to make joint strategic investments in order to reduce risks and maximise returns, which could provide a stabilising force in financial markets.

The Economist: “The Fed's have-it-both-ways policy”

R.A., regarding Bernanke’s Jackson Hole speech, your column notes that you “found the tone on monetary policy to be confusing and timid.” Expectations now turn to what President Obama will say next week and what the Fed will do (or not do) when they next meet. Uncertainty again prevails.

Alexander Mirtchev

The Global Inflation Wave: Waiting for Constantine?

Source: The Globalist

Alexander Mirtchev and Norman Bailey

In the wake of the global economic crisis, the world is trying to chart an economic path to the future and find a "new normal." As Alexander Mirtchev and Norman A. Bailey explain in the first installment in their series "The Search for a New Global Equilibrium," inflation as a factor of global economic security has the innate capacity to upend carefully laid plans and further upset the equilibrium.

Sovereign Debt and Beyond: Toward a New Magna Carta?

Source: The Globalist

Alexander Mirtchev and Norman Bailey

The global debt burden appears to have gathered an unstoppable momentum, prompting divergent reactions. The world economy cannot count on growth to solve the global debt problem — and stimulus measures are not a sustainable solution. In the second installment in the series “The Search for a New Global Equilibrium,” Dr. Alexander Mirtchev and Dr. Norman Bailey explain why the solutions currently being offered are wholly inadequate to the scale of the problem, and argue the time is ripe for a “new Magna Carta” — a redefinition of the social contract among the government, Main Street and Wall Street.

Will G-20 Counter Power of Uncertainty?

By Alexander Mirtchev 

In 2009, G-20 leaders met in Pittsburgh and emerged with a mandate ‘to be the premier forum for international economic cooperation,' endowing the G-20 with a leading economic role on the global stage. It appeared at the time that the leaders of the G-20 had successfully defeated pessimism. However, the rising tide of global economic turmoil and problems ranging from sovereign indebtedness to consumption and saving imbalances have created a ‘perfect storm' that is far from abating.

We Are All Europeans Now

Alexander Mirtchev, Contributor

 The broadening cracks in the European economic framework now appear to be undermining the whole European structure, as if a ‘contagion’ is spreading from the Southern European economies outwards.

Gold Prices Struggle to Stay Near $1, 700

Gold prices fell Wednesday on negative economic news from China and Europe plus concerns that the world's No. 1 economy is barely advancing.

SWFs Can Aid Global Economic Recovery According to Alexander Mirtchev

Washington, DC (WiredPRNews.com) Sovereign wealth funds (SWFs) in their new guise of established market players can contribute to the economic recovery strategies of the developed economies, considers Dr. Alexander Mirtchev.

Soaring debt, anemic growth, intransigent unemployment, social unrest…these are the fundamental challenges that America could be facing as Congress gears up to consider President Obama’s new jobs plan. One proposal that is unlikely to surface during the debate is a greater openness to sovereign wealth funds. Why? Among others, SWFs’ past ‘trophy asset’ sprees have not played well in the U.S., reinforcing concerns about the balance between their political and economic objectives. SWFs are, after all, the investment arms of resource-rich or export-oriented countries and if they choose to use these funds more to achieve political goals rather than for pure business purposes, they are seen in some quarters as undermining confidence and distorting global capital flows.

Samruk-Kazyna plans to acquire up to 25% in Alliance Bank, BTA Bank, Narodny Bank and Kazkommertsbank, advisor to Kazakhstan prime minister says

Samruk-Kazyna, a Kazakhstan state-owned fund, is planning to acquire up to 25% of the ordinary voting shares in the four largest banks in Kazakhstan, said Alexander Mirtchev, one of the directors of Kazyna Fund and advisor to the prime minister of Kazakhstan.

Securing global economic security

Inflation is a significant factor of global economic security and has the innate capacity to upend carefully laid plans

FRONTIERS-Sovereign wealth rewrites old-world rules

By Natsuko Waki

(Reuters journalists have produced a special multimedia package on frontier markets including stories, video reports, pictures, research and graphics. To see the full package click here)

* SWFs often enormous, established fish in small ponds
* Their need for discretion suits many "frontier" targets
* Declining rich-world power weakens push for transparency

LONDON, May 27 (Reuters) - Sovereign wealth funds -- national vehicles created to grow state wealth for the future -- have long experience investing in exotic and lesser-known lands. To these funds, many of which originate in what the West calls the "frontier" region, it's a local market.

This year alone, countries including China, Singapore, South Korea, Kazakhstan, Azerbaijan and Abu Dhabi have invested easily more than $1 billion in frontier markets, in such projects as mines in Mongolia and companies in Africa, the Caribbean and Latin America.

The often secretive heavyweights of the financial world, sovereign funds control around $3-4 trillion in assets and include some established players on tricky terrain. Because their investments are so influential, their presence can be manipulated to wrong-foot other investors.
So the sovereign wealth funds' tendency to be opaque adds to the challenge for investors in frontier markets. But beyond this, they are also having a broader influence, bringing a "frontier factor" to the rest of the world.

"Most SWFs are themselves a creation that should be looked at in the context of frontier markets," said Alexander Mirtchev, independent director of a sovereign wealth fund from the "frontier" region and a member of the board of trustees on the Kissinger Institute on China and the United States.

"The frontier is part of their DNA, and this 'frontier make-up' to a large extent determines their competitive advantages, as well as in some cases the problems that SWFs sometimes face."
Backed by leverage-free reserves beyond the dreams of most indebted rich-world countries, the funds' "south-south" investment is more than a sideshow: it's reinforcing their role as powerbrokers of global markets.

HISTORY LESSON

To get the picture it's worth considering that in a sense, sovereign funds have been actively investing on the frontiers for at least 400 years.

The East India Company -- an English trading company in the 17-19th centuries backed by the state -- functioned loosely like a modern sovereign wealth fund. It pursued trade in commodities including spice, cotton, tea and opium in the then-frontier markets of China and India, creating regional markets and helping develop local economies.

Other European corporations including the 17th-century Dutch East India Company, VOC, served as tools of colonial power -- an extension of states -- just as do some sovereign funds today.

The difference between the pioneers of the past and the present is that today, much of the wealth and influence come not from the modern rich world, but from resource-rich countries with very different values.

SOUTH-SOUTH TIES

Concrete figures are hard to come by, but experts estimate the allocation of sovereign wealth fund assets to frontier markets is less than 5 percent.

That would translate into $150 billion, which eclipses the total market capitalization of the benchmark MSCI Frontier Markets equity index at $120 billion.

What for the funds is small exposure makes a huge difference to recipients. Their presence brings mutual benefits.

The funds and their targets in poor countries often have shared experience on the economic margins, which fosters a cultural affinity.

Countries on the investment frontiers desperately need long-term capital, which sovereign wealth funds can provide.

Recent economic ructions in the West add to the incentive for stronger ties: the risk in developed-market investments has increased, but the prospect of commensurate rewards has not.

Sovereign funds are keen to diversify into illiquid but higher-yielding assets in frontier economies in the hope of providing returns for future generations. And unlike the quarter-to-quarter reporting required from companies in the West, these funds can wait a long time before showing returns.

"Most SWFs are seeking new and untapped sources of diversification and alpha generation," said Cynthia Sweeny Barnes, global head of sovereigns and supranationals at HSBC Global Asset Management.

"Frontier markets offer interesting risk-reward dynamics, particularly for investors with permanent capital. The low level of information in frontier markets creates often significant pricing inefficiencies, which active investors can exploit."

SHHHH

Modern sovereign funds have been thrust further into the global economic limelight since the credit crisis cut funding for the hedge funds and private equity groups that had been cocks of the walk.

Only a few years ago, Western politicians were making headlines with attacks on sovereign funds for their secretive ways: behind this were fears their motives were political, rather than commercial.

Keen to be accepted, many did make an effort to open up. But since the credit crisis, political calls for greater transparency from the funds have quietened.

"Once regarded as subversive agents of state capitalism, they are now sought-after providers of capital," Sven Behrendt, a visiting scholar at the Carnegie Middle East Center, said in a study for the centre this month.

"Their growth dynamic suggests that their investment and policy behavior will resonate across the global economy."

These funds need a degree of secrecy to function.

Already, their investment decisions are closely followed by the wider investment community, as the global importance of the industry grows. It is forecast by Deutsche Bank to more than double in less than 10 years.

In a fiercely competitive investment environment, others in the market sniff about for deals that anticipate the moves sovereign funds will make. A practise known as front-running, that risks pushing up prices before the funds invest.

"Because we are generally large institutional investors, there is the whole community of investment banks, brokers, analysts and others who want to front-run our investments in the market," David Murray, chairman of the board of guardians at Australia's Future Fund, told a news conference last October.

"In doing so they would use all sorts of techniques to find out from us exactly where we are in the market in terms of timing. It is not in the interest of the funds nor our community to be involved in that game because it would be detrimental to our investment returns."

Corporate Finance: Sovereign Wealth Funds Prepare To Take More Active Role In M&A

By Gordon Platt
Global Finance Magazine
1 October 2009

Sovereign wealth funds could play a big supporting role as global mergers and acquisitions try to get back on track following a dramatic slowdown in M&A activity during the credit crisis and global recession. While they are not about to become swashbuckling barbarians at corporate gates, SWFs are joining together in “clubs” to cooperate on strategic investments and takeovers.

Qatar Holding, the investment arm of Qatar Investment Authority, joined China’s SWF, China Investment Corporation (CIC), in late August to purchase a $448 million issue of preference shares in UK-based property firm Songbird Estates, the owner of much of London’s Canary Wharf. Qatar aims to become the largest shareholder in Songbird.

“This transaction represents an important step in our drive to build up a diversified portfolio globally of the highest-quality assets across a broad spectrum of asset classes,” Ahmad Al-Sayed, CEO of Qatar Holding, said in a statement.

In June, SWFs from China, Kuwait and Singapore emerged as the deep-pocket backers who enabled BlackRock’s acquisition of Barclays Global Investors for about $13.5 billion. SWFs are increasingly working together to achieve their commercial objectives, according to a survey released in July by UK-based University of Oxford. The operations and strategies of SWFs remain, in many cases, guarded secrets, it said.

China’s foreign exchange reserves have passed $2.1 trillion, and CIC could seek more capital to deploy in lower-cost acquisitions in the wake of the global financial crisis. As central banks amass reserves that are more than sufficient to meet their near-term needs, they are seeking higher returns than are available on US treasury securities.

Second-Quarter Rebound

Global corporate M&A activity involving SWFs rebounded sharply in the second quarter of 2009 to more than $3.6 billion after falling to $1 billion in the first quarter, according to Thomson Reuters. However, the total remained well below the $19 billion recorded in the fourth quarter of 2008. SWFs’ financial investments in troubled US financial services firms were welcomed at the height of the crisis, but issues of disclosure and intent could become more controversial as M&A activity accelerates and broadens in the future.

“From the times when kings invested in building pyramids, raising armies and bankrolling explorers, sovereign wealth attracted political controversy,” says Alexander Mirtchev, president of Krull, an advisory and project management firm based in Washington, DC. “But sovereigns have changed with the times and today represent internationally legitimate public authorities,” according to Mirtchev, who is an independent director of Kazakhstan’s SWF, Samruk-Kazyna.

“Cooperation among SWFs and their managers on different projects represents a sign of their maturity as investors who have become more aware of the market opportunities,” Mirtchev says. “On certain occasions, it could help funds to become market leaders in specific sectors,” he says.

The primary advantage of forming clubs is to spread the risk while increasing potential profits, Mirtchev says. Meanwhile, the co-financing is welcome at a time when lack of financing is the biggest impediment to dealmaking.

Perceptions Change

The investment and political environment in which SWFs are operating has changed dramatically as a result of the global financial crisis, according to a report released in August by State Street, Boston-based provider of financial services to institutional investors. “The unprecedented events within the financial marketplace have significantly changed both the public perception of sovereign wealth funds and the way the funds perceive their own role as very large institutional investors,” says Jay Hooley, president and chief operating officer of State Street. SWFs are facing sizable challenges and opportunities, he says.

The post-crisis reality has created an excellent basis upon which SWFs and the rest of the global financial community can further their cooperation and forge a mutually beneficial coexistence, the State Street report says. “Given the vast pool of assets they represent, SWFs will be important participants in shaping the future of global finance,” it says.

With nearly $3 trillion in financial resources, SWFs are playing a growing role as cross-border investors, and this has provoked considerable debate across the industrialized world, according to State Street. “The rapid growth of these funds, and their status as sovereign-owned asset pools that are neither pension funds nor traditional reserve assets, has ignited a spirited discussion about their governance, accountability and transparency, as well as the appropriateness of government control in investment decision-making,” it says. “These funds raise many issues of international economic policy, but critical to maintaining global prosperity and market efficiencies is maintaining the openness of host and recipient economies and financial systems to cross-border trade and investment,” the report says.

Best Practices Evolve

The International Monetary Fund and the Organization for Economic Cooperation and Development are examining these issues and are developing voluntary best practices for both SWFs and the countries receiving their investments. By providing liquidity and capital to world markets, SWFs can enhance the operation of markets, lower equity financing costs and provide support to equity valuations, State Street says.

Much of last year’s deal activity in the financial services sector involved SWFs taking minority interests in banks seeking capital injections. However, the appetite of SWFs to invest in the US banking sector has diminished significantly because of losses taken on the investments made in 2007 and early 2008, according to a report by PricewaterhouseCoopers. Inbound deal activity in the US financial services industry is likely to come from the stronger Asian strategic buyers, while the European financial services companies continue to focus on addressing their own issues, it says.

The largest M&A deal worldwide in August was the Qatar Investment Authority’s purchase of an additional 17% stake in Volkswagen, and Qatar Holding’s concurrent purchase of a 10% stake in Porsche. The transactions had a combined ranked value of $9.6 billion, according to Thomson Reuters. As a result of the deal, Porsche will set up research and development and testing facilities in Qatar.

Abu Dhabi’s state-owned investment fund, Advanced Technology Investment Company (ATIC), became a major participant in the global microchip industry on September 7 with its cash purchase of Singapore-based Chartered Semiconductor Manufacturing for $1.8 billion. Chartered’s largest shareholder was Temasek Holdings, an investment company owned by the government of Singapore. ATIC is also the main shareholder in Globalfoundries, a US-based joint venture with Advanced Micro Devices. Globalfoundries and Chartered together will create a manufacturer of next-generation chips that will be big enough to compete with Taiwan’s customized chipmakers, which now control about two-thirds of the global contract chip market. Doug Grose, CEO of Globalfoundries, will run the combined operations with Chartered, which makes chips that run the Microsoft Xbox 360 game consoles. ATIC will assume $3.1 billion in debt and covertible shares of Chartered, which posted a loss of $39 million in the second quarter, its fourth quarterly loss in a row.

On a purely portfolio risk management basis, there are legitimate grounds for asset-rich countries to seek real assets through SWFs, according to State Street. These countries holding large foreign exchange reserves need to avoid the risk that official-sector debtors from the industrialized countries will seek to reduce their nominal liabilities through a policy of inflation, it says.

Gulf funds may rescue the West

by Tom Arnold

The deep pockets of Gulf sovereign wealth funds (SWFs) could be an increasingly important source of funding for western economies facing spending cuts in the new era of austerity.

Projects in Europe may become more financially attractive for the region’s government investment vehicles as austerity measures by EU governments depress market valuations, said Dr Alexander Mirtchev, the founder and chairman of the US economic consultancy Krull.

“These SWFs are starting to look increasingly as the premier source of available financing for a cash-starved international financial system,” said Dr Mirtchev, who is also an independent director of the Kazakhstan SWF Samruk-Kazyna.

“The Gulf SWFs can underwrite the autonomy of states by acting as an insurer of last resort – in other words, a buffer against global crises and cyclical development.”

SWFs could become increasingly accepted as investors in the US and Europe, as the spending capacity of western governments remains constrained by the need to cut bulging budget deficits, he said.

Policymakers in the UK, Japan, Greece and Ireland are already cutting their spending to reduce public debt.

Globally, the wealth of SWFs is expected to grow to more than US$6 trillion (Dh22.03tn) next year from nearly $4tn now, with signs of increased activity already emerging after the global financial downturn.

The Abu Dhabi company Aabar Investments’s purchase of a 4.9 per cent stake in UniCredit, Italy’s largest bank, and Qatar Holding’s £1.5 billion (Dh8.3bn) purchase of the luxury London department store Harrods are recent examples of investment funds from the region buying European assets.

But barriers to the investment vehicles having their pick of projects in the US and EU remain. A tendency towards protectionism and concerns about foreign ownership of domestic assets are likely to be among the hurdles SWFs face, Dr Mirtchev said. More significant, perhaps, were lingering suspicions about the role and intentions of the investment vehicles, he said.

Suspicions arose in 2006 when plans by then-US president George W Bush to allow Dubai’s DP World to operate some US ports was met with opposition from many US politicians.

“Gulf and other SWFs continue to be subject to uncertainty and even outright suspicion, and considered as policy tools for their own governments,” Dr Mirtchev said.

“The new, mature Gulf SWFs are better positioned to counter such arguments.”

The region’s SWFs have made significant strides to improve their transparency and accountability practices in recent years.

In addition to subscribing to the Santiago Principles – a voluntary code of practices agreed to in 2008 by global SWFs including those from Abu Dhabi and Kuwait – the Abu Dhabi Investment Authority and Mubadala Development have won plaudits for their efforts to increase transparency and disclosure.

There was also a need for Gulf investment vehicles to improve their awareness of the political risks sometimes inherent in investments.

A global investment survey by the World Bank’s Multilateral Investment Guarantee Agency (MIGA) last year found an inadequate anticipation of political risk among investors from the Arab world, with a common problem being the absence of insurance schemes to manage this category of risk.

Regulatory restrictions, breaches of contract, terrorism, war and civil disturbances are deemed political risks by the World Bank.

“This points to the fact that work still needs to be done to address the knowledge gap that exists on the investor side when it comes to risk mitigation insurance,” said Stephan Dreyhaupt, the head of the research and knowledge group at MIGA. The pitfalls Gulf investors could face abroad were illustrated last week when a judge in the UK ruled in favour of the UK developer CPC Group in its court action against Qatari Diar Real Estate Investment. CPC sued the property investment arm of Qatar’s sovereign wealth fund over an aborted agreement to build luxury apartments in London.