Norway’s Government Pension Fund Global (GPFG) is one of the largest sovereign wealth funds in the world. Established in 1990 to diversify Norway’s oil wealth and minimize negative consequences associated with fluctuations in commodities markets, GPFG has amassed close to $1.3 trillion in assets. In keeping with Norway’s sterling reputation for integrity, GPFG has embraced anticorruption as one of the fund’s guiding principles. In fact, GPFG requires the companies in which it invests “to identify and manage corruption risk, and to report publicly on their anti-corruption efforts.” The fund’s Council of Ethics has also declared that the fund will keep “gross corruption” out of its portfolio, and GPFG has been widely praised for its social responsibility (see here and here).
Yet despite all this, GPFG has not avoided corruption-related scandals, particularly with respect to its investments in Russia. Understanding how things went wrong offers more general lessons for how sovereign wealth funds can strengthen their safeguards against investing in corrupt companies and supporting corrupt regimes.
The trouble for GPFG began in 2012, when it invested $300 million in Delta Topco, then the parent of the Formula 1 international auto racing league. The investment posed a significant corruption risk from the start. At the time of investment, Formula 1’s president, Bernie Ecclestone, was being prosecuted for allegedly paying a German banker a $44 million bribe. Moreover, two years before Norway’s investment, the Formula 1 Group awarded Russia the role of host for the 2014 Grand Prix, after an opaque process with no apparent ethical restrictions or oversight. Yet despite these red flags, GPFG went ahead with its investment, which indirectly helped fund the 2014 Grand Prix. That event, as many had predicted, appeared replete with corruption (though no cases have been conclusively proved). For example, a construction company owned by cronies of Vladimir Putin served as the Russian Grand Prix’s general contractor, and also constructed the racetrack’s gas pipeline, airport, and electrical station. In addition to the apparent corruption within the event itself, the Grand Prix also served to bolster the global reputation of the Putin regime: Formula 1 has a world viewership that reached 1.5 billion in 2021, making it a global PR coup for Russia. GPFG had to be aware of this when it decided to invest.
Although GPFG eventually withdrew its investment in Delta Topco, it continued to invest roughly $3 billion in a number of Russian companies, many of which have significant corruption risk. As of 2021, two-thirds of GPFG’s Russian equity holdings were concentrated in three Russian companies: Sberbank, Gazprom, and Lukoil. All three companies have close ties to the Russian state, and all three have been tainted with a variety of corruption scandals. In 2019, for example, the Organized Crime and Corruption Reporting Project revealed that Sberbank’s subsidiary, Troika Dialog, was running an extremely sophisticated money laundering scheme with transactions totaling around $470 billion. Gazprom has similarly been the subject of numerous corruption allegations. As for Lukoil, back in 2015, the Romanian government seized $2 billion of the company’s assets for alleged tax evasion and money laundering.
In the aftermath of Russia’s full-scale invasion of Ukraine, GPFG is now scrambling to rid its portfolio of these Russian investments. While many have rightly praised the recent divestment efforts, less attention has been given to how GPFG ended up with $3 billion invested in Russian firms in the first place, especially given GPFG’s strong anticorruption commitments. The two most likely explanations are as follows:
- First, GPFG’s $3 billion in Russian investments represented less than 1% of GPFG’s $1.3 trillion in assets. Given that these investments were such a small part of GPFG’s portfolio, perhaps the portfolio managers simply failed to conduct adequate due diligence. While that may be an explanation, it is not an excuse. Indeed, the size of GPFG’s portfolio imposes a heightened responsibility to ensure the adequacy of its anticorruption safeguards. While a $3 billion investment may represent a relatively small sum for GPFG, this amount of capital can provide meaningful power and influence, especially if concentrated in the hands of a select number of kleptocrats or oligarchs. GPFG must rethink its existing safeguards and risk management systems in order to ensure that all of its investments, both large and small, receive adequate due diligence related to corruption risk.
- Second, although the financial management of GPFG is clearly distinct from spending by the government of Norway, some have suggested that the Norwegian government may sometimes influence the deployment of GPFG capital to advance foreign policy goals. This suggests at least the possibility that Norway’s desire to help thaw its icy relationship with Russia may have loosened GPFG’s otherwise strict prohibition against corrupt investments. To be clear, there is no direct evidence that this took place. Yet GPFG may need to consider whether, notwithstanding its formal political neutrality, it has improperly allowed governmental objectives to distort its investment decisions.
Regardless of whether GPFG’s decision to invest in high corruption-risk assets was based on political considerations, or whether it was merely a careless mistake, the consequences of that decision are far-reaching. When a sovereign wealth fund like GPFG makes a significant investment in a corrupt regime, its economic interests can become uncomfortably intertwined with that regime. To see other examples of this, one need look no further than Abu Dhabi and Qatar, whose muted response to Russia’s invasion of Ukraine has been partially attributed to the fact that these countries sovereign wealth funds have significant investments in Russia. Going forward, GPFG should prioritize corruption risk assessment to address the shortcomings that fueled its Russian investments, especially given that GPFG’s ethical and governance structures set an example that influences other sovereign wealth funds around the world.
Something that strikes me about this is the fact that a government could be liable to make a “careless mistake” as you describe. This got me very interested in the potential for global risk assessment standard for nations. I did a little research but could not find anything geared specifically towards state investments. I was wondering whether you know if any such systematizing efforts are underway, and if not, whether you think that is a potential global governance gap that needs addressing.
Great post! You mention that some of GPFG’s investments in Russian-related assets may have been a mistake, given the size of the investment relative to the size of their portfolio. I agree that this doesn’t excuse those investments. But I’m wondering if you have any thoughts on how such mistakes might be avoided.
I’m speculating here, but it seems to me that a fund of that size will inevitably run the risk of performing less-than-optimal due diligence, especially with smaller investments. Are there any examples of internal risk protocols that might help to reduce this risk? I would think it’s difficult for such protocols to cover every case where there is potential corruption—especially where, like in the Delta Topco situation, the investment isn’t directly in the assets of a corrupt regime but which nonetheless indirectly benefits those regimes.
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Nice work, Katherine!
Picking up from Logan’s point concerning the internal controls: From my quick review, it appears from the Fund’s guidelines that there is an internal risk protocol in place in terms of which the Council of Ethics is tasked to evaluate if the investments made are adverse to the Fund’s ethical guidelines. The Council is empowered to monitor the investments and would then select the cases (at its own initiative) to thoroughly investigate followed by recommendations it would make to the Fund whether it should exclude or place a company under observation ‘if there is an unacceptable risk that the company contributes or is responsible for’ conduct such as ‘gross corruption or other serious financial crimes’. Whilst there seems to be a protocol in place, the guidelines do not envisage an investigation of every case where there is potential for corruption. Whilst an investigation / risk assessment of all cases could reduce the risk, it would be difficult to cover every case of potential corruption – as Logan points out, and also it may be impracticable to do so because – and I’m speculating – of the number of investments, companies at play and available resources within the Council in order to be in the position to undertake a thorough investigation / assessment in each case which could very well impede the operations of the Fund.
The link to the guidelines is included here for ease of reference and your thoughts are, of course, welcome: https://www.regjeringen.no/contentassets/9d68c55c272c41e99f0bf45d24397d8c/2022.09.05_gpfg_guidelines_observation_exclusion.pdf
Really interesting post here–I think international audiences (lawyers, investors, sports teams, etc.) are only just beginning to grapple with the extensive reach of Russian corruption and how pervasive Russia’s influence has been in creating financial incentives to look the other way and tolerate corrupt and anti-democratic behavior, culminating in the invasion of Ukraine. You mention the size of the investment in Russian assets being less than 1% of GPFP’s holdings, and perhaps it was an oversight. However, Sberbank, Lukoil and Gazprom are massive companies with such obvious ties to the Russian government that I find it hard to believe that any fund manager would miss that upon even the most cursory review. 1% of an investment portfolio of that size is also a pretty significant investment. Do you think perhaps it’s a case of either willful blindness or one where fund managers made efforts to actively justify the investment because the returns were so sizable? We will likely never know the rationale behind some of these investment decisions, but this certainly should be a warning to all western investors when the day eventually comes when investors look to find a way to justify getting back into the Russian market. Great post!