In a move that will send tremors through the world’s investment markets, a big UK company has frozen the shares and a dividend owned by the Libyan Investment Authority, the putative Sovereign Wealth Fund of the Gaddafi regime.

The move follows the UN resolution that ordered all member states to freeze the assets of Muammar Gaddafi and five members of his family, and the UK government’s financial sanctions order freezing the Libyan leader’s assets in the UK.

Australia will have to follow the UN order, but so far there doesn’t seem to be much in the way of direct Libyan investment, although there’s some talk of some investment in shares via hedge funds and other investors. Some of those managers would not be aware of the ownership of the funds being invested, from from head offices offshore or other accounts.

According to the Department of Foreign Affairs and Trade, there is no Australian investment in Libya, and no Libyan investment here.

The move by Pearson, owner of the investment bible, the Financial Times, and a major educational publisher, is the first public acknowledgement of a company being forced to act contrary to normal investment practice because of a freeze order from a national government for something other than war. From memory there’s been nothing as public as a result of the sanctions on Iran or North Korea.

In a short statement to the markets in London, Pearson said the Libyan Investment Authority’s shares in the group were “effectively frozen” and it would not pay a dividend to the sovereign wealth fund until further notice.

Pearson CEO Marjorie Scardino was quoted as saying on Monday that Pearson was “uncomfortable” about the LIA’s holding as tensions in Libya escalated.

But market commentary suggests this is a highly important decision because it is the first time that a sovereign wealth fund’s investment have been frozen because of a dispute inside the country controlling the fund.

The move by Pearson will have to be followed by other companies and or governments, specifically Italy where the fund has investments in banks, oil companies and property, plus Canada, and holdings of US Treasury bills.

The LIA announced in February 2009, that the fund has $US65 billion. That is now reported to be about $US70 billion. There are two other investment funds as well totalling a reported $US20 billion.

The LIA is reported to have invested 22% of that amount, with the rest (a reported $US40 billion or so) in cash or short-term financial instruments.

The LIA has invested around $US8 billion into stocks of 107 companies, mostly in the UK, Europe and Italy.

But the move raises questions about who owns the assets in the growing number of sovereign wealth funds; is it the government, or the people in the country. The argument usually is that its the people of the country via the government of the day.

(Australia’s Future Fund is not a sovereign wealth fund, it is a specific purpose fund designed to meet the future superannuation payments of Commonwealth public servants).

But there are many funds that were started and are run by autocratic governments and dictatorships (secular or religious), especially in the Middle East.

In the circumstance of one of these big funds owner in Bahrain, Qatar, Abu Dhabi, Kuwait, the UAE or even Saudi Arabia, following Libya and Gaddafi in cracking down on their people and facing international pressure and bans. Would the huge holdings in countries such as the US, Australia, Japan, China and Europe be affected or frozen? The level of unrest in Bahrain would seem to make that country a candidate to follow Libya.

We may soon find out if the unrest in the region spreads and worsens.

And what of China and its Chinese Investment Corporation (CIC)  sovereign wealth fund with its $US300 billion of funds, some of which is invested in Australia, the US, UK, Singapore and Europe?

What would have the world done when China earned the ire of the world by crushing the protests in Beijing in 1989 in a way similar to those being used by Gaddafi?

If that happens again, it will test the moral rectitude of the world. Gaddafi’s $US70 billion or so can be frozen because no one much likes him or Libya, or has strong commercial ties with the country. China is a very different case.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey