Keiretsu State Capitalism? SWFs Buy Into SOEs

Yesterday it was announced that Norway, Qatar and Azerbaijan’s SWFs were buying shares of Russian state-controlled bank VTB.  From Fox Business:

VTB said in a statement it received “firm and binding commitments” from existing and new shareholders, including bids from Norges Bank Investment Management, Qatar Holding LLC and the State Oil Fund of Azerbaijan.

VTB is planning to issue 2.5 trillion of new ordinary shares worth 102.5 billion rubles ($3.23 billion) to meet capital adequacy targets and provide funding for the continued growth of the business.

Demand for VTB shares from all the three sovereign funds could be driven by the commodity-focused nature of these economies along with interest in liquid shares of major issuers, said Natalia Orlova, chief economist at Alfa Bank.

“They understand the oil environment, it creates a rather comfortable situation for them,” Ms. Orlova said, referring to Russia’s focus and dependence on commodity markets.

I find these types of investments fascinating.  Effectively, states are acting like Keiretsu companies in Japan.  As The Economist explains,

Keiretsu is a Japanese word which, translated literally, means headless combine. It is the name given to a form of corporate structure in which a number of organisations link together, usually by taking small stakes in each other and usually as a result of having a close business relationship, often as suppliers to each other. The structure, frequently likened to a spider’s web, was much admired in the 1990s as a way to defuse the traditionally adversarial relationship between buyer and supplier. If you own a bit of your supplier, reinforced sometimes by your supplier owning a bit of you, the theory says that you are more likely to reach a way of working that is of mutual benefit to you both than if your relationship is at arm’s length.

However, Keiretsus were often seen as restraining trade with other firms (such as U.S. firms that wanted access to Japanese markets):

Jeffrey Garten, once under-secretary of commerce in charge of international trade and then dean of Yale School of Management, said that a keiretsu restrains trade “because there is a very strong preference to do business only with someone in that family”.

Similar concerns arise, no doubt, if states engage in similar behavior.  I’m not sure that is what this is about, however.  As the Alfa Bank economist stated, these investments may be merely about “comfort.”

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