The demise of sovereign wealth funds

Abstract

Sovereign wealth funds (SWFs) embody the state’s growing insertion in the global financial system. While the bulk of the SWF literature has centred around the dynamics behind their establishment and geopolitical utility, there is very little research on the factors behind SWF exhaustion. Drawing from conventional political and economic explanations, this article finds that SWFs are almost always depleted in highly unstable political environments, while economic crises rarely impact SWFs to the point of exhaustion. The article presents a theoretical foundation for SWF exhaustions by examining political instability in different regime types. In weakly institutionalized regimes, SWFs are more prone to exhaustion as incumbents govern in recurrently uncertain environments and prioritize short-term goals, which are typically incompatible with funds’ objectives. Conversely, highly institutionalized regimes enjoy greater stability and certainty, which sustain the long-term nature of SWFs. The argument is substantiated through a comparative analysis contrasting the effects of (in)stability in Venezuela’s exhausted FIEM and FONDEN and Azerbaijan’s resilient SOFAZ.

Keywords:

• Sovereign wealth funds
• domestic politics
• political instability
• regime vulnerability

Correction Statement

This article has been corrected with minor changes. These changes do not impact the academic content of the article.

Acknowledgments

I want to thank Kurt Weyland for invaluable comments and suggestions on earlier versions of this manuscript. I am also grateful to Javier Capapé, Jörg Friedrichs, Wang Li, Rachel Wellhausen, the editors, and the anonymous reviewers for insightful inputs and helpful comments.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1 Katz et al emphasize that ‘in fuzzy-set analysis, correlations among independent variables simply increase the likelihood that one will reach similar conclusions about the causal relevance of the correlated independent variables’ (2005, pp. 568–569). Hence, if political instability and economic crises were highly correlated, then they would both have a similar (high) likelihood of being necessary and/or sufficient for the outcome. However, as the analysis in the next section shows, economic crises are neither necessary nor sufficient for the outcome, dismissing the claims that both could be intercorrelated. Specifically, in Online Appendix 6, it is tested indeed whether both conditions are each other complementary (e.g., ‘inter-correlated’), or different (e.g., ‘independent’), with the latter providing the most significant results and thus confirming the statement that they are not intercorrelated—even though it is not a problem in fuzzy-set approaches anyways.

2 While having only two conditions may seem low, the expansive theoretical and empirical background of these well-developed factors in the literature are in fact positive for the goal of the fuzzy sets which is to clarify complex situations in a diverse universe of cases. Moreover, having two ‘macrovariables,’ or higher orders, prevents the disadvantage that comes with adding too many variables on the model, as the evidence would lose theoretical interpretation and make our simplification efforts utterly complex (see Schneider & Wagemann, 2006, p. 7).

3 It is important to understand that if a country has more than one SWF, the analysis does not differentiate between types of funds. It takes the combined assets of the funds during the periods they are operational. The example of Colombia’s FAEP (1995–2013) and FAE (2013–present) analyzes Colombia as if it had just one SWF from 1995 until the present. Between 2008 and 2017, when the RF was depleted, Russia had legally three separate funds (RF, NWF, and RDIF), but the analysis takes the combined AUM for the three funds to assess whether there has been SWF exhaustion. Separating the funds would be misguided as, for example, it would have counted Colombia in 2013 and Russia in 2017 as cases of exhaustion, even though they still had SWFs with even a larger number of capital available to them.

4 More information about the cases and data can be found on the online appendix.

5 Countries with a 0 in the ‘SWF exhaustion’ condition are not included for methodological reasons as they could inflate the number of cases and result in biased estimates. These ‘negative cases’ require a separate analysis of their own (see Ragin, 2000, pp. 275–278).

6 The tests also show results for other probability benchmarks if they fail to pass the 0.8 benchmark. However, only those conditions and combinations that pass the probability assessment at the 0.8 benchmark and a significance .05 alpha level are considered significant (‘almost always’ necessary/sufficient) and valid for further explanation.

7 See Online Appendix 6 for additional test that confirms this. There, the reader will find that political instability and economic crises are in fact not complementary and instead only the presence of one of them will be necessary and/or sufficient for the outcome to occur—evaporating the multicollinearity problem (see Katz et al., 2005).

Additional information

Notes on contributors

Leonardo Di Bonaventura Altuve

Leonardo Di Bonaventura-Altuve is a graduate student at the Oxford Department of International Development (ODID) and Hertford College, University of Oxford. Di Bonaventura-Altuve is from Guanare, Portuguesa State (Venezuela).