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Understanding and Managing Political Risks of Sovereign Wealth Funds

by Sandro Grünenfelder


Abstract

Sovereign wealth funds (SWFs) have been around since the 1950s. It was only in the last decade, however, that the public became aware of the size and particular features of these financial market participants. The heightened profile has led to increasing political scrutiny of the funds both domestically and abroad and has resulted in a re-emergence of political risk. While SWF investments in ailing Western banks have brought some relief from political pressure, structural changes are likely to keep political risk at the forefront of SWF business considerations.

As one of the first academic papers on the subject, this thesis aims at analysing the various aspects of sovereign wealth fund political risk and proposing a blueprint of how to manage it. A thorough mapping and categorization of sovereign funds and an in-depth review of political risk provide the basis for systematically describing public concerns, SWF stakeholders and manifestations of SWF political risk on three levels. The thesis then draws up a model which conceptualizes the funds' political risk as a result of legitimacy gaps and identifies three clusters of SWF political risk factors. The model is then applied to two case studies before serving as the basis for a political risk management framework tailored to the needs and peculiarities of sovereign wealth funds. In addition to drawing on core monitoring and assessment techniques, this thesis suggests a three-tiered advocacy approach involving individual, partnership and collective strategies to deal with political risk.

This thesis finds that SWF political risk is complex, comes in various forms and is bound to constant change. Therefore, a structured advocacy approach, both reactive and proactive and based on a thorough analysis of a SWFs' political risk factors, is of the essence. Various environmental and structural economic changes suggest that political risk for SWFs will become more prevalent in the future.


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