Ukraine's sovereign wealth fund: How it will operate, lessons from Santiago Principles

Already this year, Ukraine may start its own Sovereign Wealth Fund. It will include all strategically important state enterprises, which will not be subject to privatization. Currently, consultations are being held with the Verkhovna Rada, the Cabinet of Ministers, the Office of the President, the anti-corruption community, businesses and foreign partners.

The Sovereign Wealth Fund will be a holding company that will have from six to 11 branch subholdings. For example, energy or infrastructure. It will undertake the task of implementing development strategies not only of individual enterprises, but of entire industries. As of the beginning of September, the State Property Fund team, together with experts, prepared the Sovereign Fund's work strategy and its mandate. Work is also continuing on a draft law that will outline the basic principles of the fund's work. The same document will define the criteria by which state assets will be included in the Sovereign Fund.

The goal of SWF is to increase the capitalization of Ukrainian state assets from $40-50 billion to $150-200 billion in a few years. This is a very realistic prospect, since the Sovereign Wealth Fund will work according to the "Santiago Principles". What are these principles?

First steps

In the spring of 2008, on the initiative of the International Monetary Fund and the countries that already had such holdings at that time, the International Working Group of Sovereign Wealth Funds (IWG) was formed. The purpose of the IWG was to identify the generally accepted principles and practices (GAPP), the most successful investment approaches and the main principles of operation for the SWFs of the world. The result of the third meeting of the working group, which took place in Chile, was the so-called 24 " Santiago Principles" (after the name of the city where they were approved).

They should ensure the support of a stable global financial system and the free flow of investments, compliance with domestic and international legal norms, transparency of management, etc. The principles are grouped into three areas. How they are implemented in practice can be seen on the example of one of the largest and most successful sovereign wealth funds – the Singaporean GIC. Founded in 1981, it ranks sixth among all funds in the world by SWF rating and manages $770 billion in assets.

Legal framework and coordination with macroeconomic policy

Sovereign wealth funds must operate according to a reliable legal framework. The legal basis and structure of the fund, as well as the legal relationship between the fund and other state bodies, must be made public, as well as the purpose of the work. For example, GIC is governed by the Singapore Companies Act. The goals of the GIC's work, coordinated with other government agencies, are to preserve and increase the international purchasing power of Singapore's foreign exchange reserves.

Institutional framework and management structure

Another Santiago principle indicates that the fund's governance structure should establish a clear and effective division of roles and responsibilities. The Singapore authorities have set clear terms for the appointment of management, investment objectives, risk parameters and guidelines for managing GIC's portfolio. The Ministry of Finance, which is responsible for coordinating the fund, does not manage or interfere in its investment decisions. GIC's board is responsible for overall strategy, portfolio performance and individual operations. It has a special permit document for decision-making — the Investment Mandate.

Investments and risk management

Sovereign wealth funds must adhere to clear investment plans and operate according to established risks. This principle is also followed by GIC. The fund has a strategic asset allocation to achieve investment returns. At the same time, identifying risks and skillfully managing them is an inseparable part of the responsibility of the fund's management at all levels. In addition to the board and a separate committee on these issues, other structural units are responsible for identifying, analyzing, monitoring, reporting and managing risks on the ground.