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65-444: RAKIA supports developments that include industrial parks, education, technology, real estate, transportation, manufacturing and energy, as well as offshore operations and other investments. Contrary to popular opinion, RAKIA is not a sovereign wealth fund (SWF) that would rely for example on steady income from oil or gas. Instead, RAKIA is an industrial licensing and promotion agency to attract investments into Ras Al-Khaimah. Funding

130-530: A 2014 study, SWFs are not created for reasons related to reserve accumulation and commodity-export specialization. Rather, the diffusion of SWF can best be understood as a fad whereby certain governments consider it fashionable to create SWFs and are influenced by what their peers are doing. As market participants, SWFs influence other institutional investors, who may see investments made alongside SWFs as inherently safer. This effect can be seen with increasing frequency, especially with regard to investments made by

195-734: A central bank, which accumulates the funds in the course of its management of a nation's banking system; this type of fund is usually of major economic and fiscal importance. Other sovereign wealth funds are simply the state savings that are invested by various entities for investment return, and that may not have a significant role in fiscal management. The accumulated funds may have their origin in, or may represent, foreign currency deposits, gold, special drawing rights (SDRs) and International Monetary Fund (IMF) reserve positions held by central banks and monetary authorities, along with other national assets such as pension investments, oil funds, or other industrial and financial holdings. These are assets of

260-634: A chairman of the People's Bank of China, Zhou Xiaochuan , drew media attention, and the IMF showed some support for China's stance. It produced a paper exploring ways the substance and function of the XDR could be increased. China has also suggested the creation of a substitution account to allow exchange of U.S. dollars into XDRs. When substitution was proposed before, in 1978, the United States appeared reluctant to allow such

325-400: A country is allotted, to better represent the economic strength of emerging markets . During this time China, a country with large holdings of U.S. dollar foreign exchange reserves, voiced its displeasure at the current international monetary system, and promoted measures that would allow the XDR to "fully satisfy the member countries' demand for a reserve currency." These comments, made by

390-489: A mechanism to become operational. In 2001, the UN suggested allocating XDRs to developing countries for use by them as cost-free alternatives to building foreign exchange reserves through borrowing or running current account surpluses. In 2009, an XDR allocation was made to countries that had joined the IMF after the 1979–1981 round of allocations was complete (and so had never been allocated any). First proposed in 1997, many of

455-500: A new allocation, then declines until the next allocation. In the early 1970s, the percentage of non-gold reserves in XDRs reached a peak of 8.4%. In January 2011, this amount was less than 4%. In April 2020 prior to the large allocation regarding the COVID-19 pandemic, this amount was under 3%; by comparison, over half (of non-gold reserves) were in the United States dollar. The IMF calculates

520-497: A notable exception to this more typical model. Stabilization SWFs are created to reduce the volatility of government revenues, to counter the boom-bust cycles' adverse effect on government spending and the national economy. Savings SWFs build up savings for future generations. One such fund is the Government Pension Fund of Norway . It is believed that SWFs in resource-rich countries can help avoid resource curse , but

585-445: A period of four years. Concomitant with the financial crisis of 2007–08 , the third round of XDR allocations occurred in the years 2009 and 2011. The IMF recognized the financial crisis as the cause for distributing the large majority of these third-round allotments, but some allocations were couched as distributing XDRs to countries that had never received any and others as a re-balancing of IMF quotas, which determine how many XDRs

650-427: A weekly interest rate, which is based on "a weighted average of representative interest rates on short-term debt in the money markets of the XDR basket currencies". No interest is payable on the XDRs allocated to a country by the IMF. However, interest is payable by an IMF member country that has exchanged (sold) some or all of the XDRs it was allocated, and interest is paid to a member country that holds more XDRs than it

715-419: Is a state-owned investment fund that invests in real and financial assets such as stocks , bonds , real estate, precious metals , or in alternative investments such as private equity funds or hedge funds . Sovereign wealth funds invest globally. Most SWFs are funded by revenues from commodity exports or from foreign exchange reserves held by the central bank . Some sovereign wealth funds may be held by

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780-668: Is derived by the Government of Ras Al Khaimah as the owner or RAKIA by raising funds from financial markets and passing this borrowed money on to RAKIA. RAKIA was constituted in 2005 by Emiri Decree No. (2)/2005 issued by Sheikh Saqr Bin Muhammad Al Qasimi with the aim of reinforcing the investment climate of the Emirate of Ras Al Khaimah within the United Arab Emirates and promoting various economic sectors. Its establishment

845-727: Is due to political instability, while economic determinants generally play a less important role. SWFs in unstable countries may provoke risks for recipient states of SWF investments, given that the instability in SWF-sponsor countries makes those investments uncertain and likely to be disinvested to weather political risk in the short-term. Highly stable countries, such as Denmark, Qatar, China, or Australia are less likely to experience SWF depletion precisely because of their political stability. Special drawing rights Special drawing rights ( SDRs , code XDR ) are supplementary foreign exchange reserve assets defined and maintained by

910-538: Is not always possible or desirable to hold this excess liquidity as money or to channel it into immediate consumption. This is especially the case when a nation depends on raw material exports like oil, copper or diamonds. In such countries, the main reason for creating a SWF is because of the properties of resource revenue: high volatility of resource prices, unpredictability of extraction, and exhaustibility of resources. SWFs are primarily commodity-based and many have been established by oil-rich states. SWFs of China are

975-637: Is not only international organizations that use the XDR in this way. JETRO uses XDRs to price foreign aid . In addition, charges, liabilities, and fees prescribed by some international treaties are denominated in XDRs. In 2003, the Bank for International Settlements ceased to use the gold franc as their currency , in favour of XDR. Some bonds are also denominated in XDR, like the IBRD 2016 XDR denominated bonds. In some international treaties and agreements, XDRs are used to value penalties, charges or prices. For example,

1040-673: Is now worth $ 853 billion. Another early registered SWFs is the Revenue Equalization Reserve Fund of Kiribati . Created in 1956, when the British administration of the Gilbert Islands in Micronesia put a levy on the export of phosphates used in fertilizer , the fund has since then grown to $ 520 million. SWFs are typically created when governments have budgetary surpluses and have little or no international debt. It

1105-478: Is obligated to contribute to the fund, determines its allotment of XDRs. Creating a new allocation requires 85% of the votes in the SDR Department of the IMF. All IMF member countries are represented in the SDR Department, but this is not a one country, one vote system; voting power is determined by a member country's IMF quota. For example, the United States has 16.7% of the vote as of March 2, 2011. This means

1170-527: Is that they must be exchanged into a currency before use. This is due in part to the fact private parties do not hold XDRs: they are only used and held by IMF member countries, the IMF itself, and a select few organizations licensed to do so by the IMF. Basic functions of foreign exchange reserves, such as market intervention and liquidity provision, as well as some less prosaic ones, such as maintaining export competitiveness via favorable exchange rates, cannot be accomplished directly using XDRs. This fact has led

1235-554: Is widely believed most have diversified hugely into assets other than short-term, highly liquid monetary ones, though almost no data is publicly available to back up this assertion. The term "sovereign wealth fund" was first used in 2005 by Andrew Rozanov in an article entitled, "Who holds the wealth of nations?" in the Central Banking Journal . The previous edition of the journal described the shift from traditional reserve management to sovereign wealth management; subsequently

1300-510: The Convention on Limitation of Liability for Maritime Claims caps personal liability for damages to ships at XDR 330,000. The Montreal Convention and other treaties also use XDRs in this way, capping damages at XDR 128,821. According to the IMF, "the SDR may not be any country’s optimal basket ", but a few countries do peg their currencies to the XDR. One possible benefit to nations with XDR pegs

1365-479: The ISO 4217 currency code for special drawing rights is XDR , they are often referred to by their acronym SDR . The name was chosen as a compromise between parties who wanted an international currency and those who wanted a credit facility. Member countries receiving XDR allocations were required by the reconstitution provision of the XDR articles to hold a prescribed number of XDRs. If a state used any of its allotment, it

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1430-477: The International Monetary Fund (IMF). SDRs are units of account for the IMF, and not a currency per se . They represent a claim to currency held by IMF member countries for which they may be exchanged. SDRs were created in 1969 to supplement a shortfall of preferred foreign exchange reserve assets, namely gold and U.S. dollars. The ISO 4217 currency code for special drawing rights is XDR and

1495-727: The Kuwait Investment Authority during the Gulf War managed excess reserves above the level needed for currency reserves (although many central banks do that now). The Government of Singapore Investment Corporation , Temasek Holdings , or Mubadala are partially the expression of a desire to bolster their countries' standing as an international financial centre. The Korea Investment Corporation has since been similarly managed. Sovereign wealth funds invest in all types of companies and assets, including startups like Xiaomi and renewable energy companies like Bloom Energy. According to

1560-828: The Ras Al Khaimah Economic Zone (RAKEZ). As per the Emiri Decree No. (32) of 2012 issued by Sheikh Saud Bin Saqr Al-Qasimi , the scope of services offered by RAKIA includes: RAKIA investments abroad include operations in Georgia , notably shares in Poti Sea Port (directly through RAKIA in the UAE), in the Sheraton Metechi Palace Hotel in the capital Tbilisi (through its subsidiary RAKIA Georgia LLC ), and

1625-754: The United States dollar , the Deutsche mark , the French franc , the British pound , and the Japanese yen . When the euro was introduced in January 1999, it replaced the German mark and French franc and the basket consisted of four currencies. In November 2010, the IMF determined that China's renminbi met the export requirement but failed to meet the "freely usable" requirement and thus

1690-442: The unit of account for the IMF has been its primary purpose since 1972. The IMF itself calls the current role of the XDR "insignificant". Developed countries , who hold the greatest number of XDRs, are unlikely to use them for any purpose. The only actual users of XDRs may be those developing countries that see them as "a rather cheap line of credit ". One reason XDRs may not see much use as foreign exchange reserve assets

1755-525: The Government Pension Fund of Norway, Abu Dhabi Investment Authority , and Temasek Holdings, and China Investment Corporation. SLFs help facilitate a state's ability to use its selective equity investments to promote its industrial policies and strategic interests. The growth of sovereign wealth funds is attracting close attention because: The governments of SWFs commit to follow certain rules: A number of transparency indices sprang up before

1820-410: The IMF to label the XDR as an "imperfect reserve asset". Another reason they may see little use is that the number of XDRs in existence is relatively few compared to the total amount of foreign exchange reserves . To function well a foreign exchange reserve asset must have sufficient liquidity , but XDRs, because of their small number, may be perceived to be an illiquid asset. The IMF says, "expanding

1885-631: The Poti Port Free Industrial Zone (through the subsidiary RAKIA Georgia FIZ LLC ). In both Georgian entities, 15 percent of RAKIA shares were alienated in 2011 to the UK based Manline Projects LLP owned by Georgian businessman Gela ("Zaza") Mikadze . RAKIA's Sheraton Metechi Palace Hotel in the capital Tbilisi was sold to an Iranian investor in December 2011 but payments for this transaction have not yet been completed as of July 2013. In June 2013,

1950-867: The Principles, representing collectively 80% of the assets managed by sovereign funds globally or US$ 5.5 trillion. Assets under management of SWFs amounted to $ 7.94 trillion as of 24 December 2020. Countries with SWFs funded by oil and gas exports, totaled $ 5.4 trillion as of 2020. Non-commodity SWFs are typically funded by transfer of assets from official foreign exchange reserves, and in some cases from government budget surpluses and privatization revenues. Middle Eastern and Asian countries account for 77% of all SWFs. Numerous SWFs have gone bust throughout history. The most notable ones have been Algeria's FRR, Brazil's FSB , Ecuador's numerous SWF arrangements, Papua New Guinea's MRSF, and Venezuela's FIEM and FONDEN. The main reason why these funds have been exhausted

2015-640: The Santiago Principles, some more stringent than others. To address these concerns, some of the world's main SWFs came together in a summit in Santiago , Chile, on 2–3 September 2008. Under the leadership of the IMF, they formed a temporary International Working Group of Sovereign Wealth Funds. This working group then drafted the 24 Santiago Principles , to set out a common global set of international standards regarding transparency, independence, and accountability in

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2080-462: The United States has a de facto veto on all new XDR allocations, it is currently the only country that does. Allocations are not made on a regular basis and have only occurred on rare occasions. The first round took place because of a situation that was soon reversed, the possibility of an insufficient amount of U.S. dollars because of U.S. reluctance to run the deficit necessary to supply future demand. Extraordinary circumstances have, likewise, led to

2145-454: The United States reversed its former policy and provided sufficient liquidity. In the process a potential role for the XDR was removed. During this first round of allocations, 9.3 billion XDRs were distributed to IMF member countries. The XDR resurfaced in 1978 when many countries were wary of taking on more foreign exchange reserve assets denominated in U.S. dollars. This suspicion of the dollar precipitated an allocation of 12 billion XDRs over

2210-595: The United States. While the PSF was first funded by an appropriation from the state legislature, it also received public lands at the same time that the PUF was created. The first SWF established for a sovereign state is the Kuwait Investment Authority , a commodity SWF created in 1953 from oil revenues before Kuwait gained independence from the United Kingdom. As of July 2023, Kuwait's Sovereign Wealth Fund, or locally known as Ajyal Fund,

2275-616: The XDR as a unit of account . The IMF says using the XDR in this way "help[s] cope with exchange rate volatility." As of 2001, organizations that use the XDR as a unit of account, besides the IMF itself, include: Universal Postal Union , African Development Bank , Arab Monetary Fund , Asian Development Bank , Bank for International Settlements , Common Fund for Commodities , East African Development Bank , Economic Community of West African States , International Center for Settlement of Investment Disputes , International Fund for Agricultural Development , and Islamic Development Bank . It

2340-426: The amount of its XDR allocation. As of 2023, XDRs may only be exchanged for euros, Japanese yen, UK pounds, US dollars or Chinese yuan. The IMF says exchanging XDRs can take "several days." It is not, however, the IMF that pays out foreign currency in exchange for XDRs: the claim to currency that XDRs represent is not a claim on the IMF. The percentage of foreign exchange reserves in XDRs increases sharply after

2405-422: The beneficiaries of this 2009 allocation were developing countries. On August 23, 2021, the IMF allocated $ 650 billion worth of XDRs to all 190 members of the IMF in proportion to member quotas in response to COVID-19 related balance of payments concerns. This allocation of XDRs represents roughly 2/3rds of all XDRs currently in circulation, and was by far the largest ever single allocation of XDRs. To determine

2470-468: The collapse of the Bretton Woods system between 1971 and 1973, the XDR initially remained at 1 US dollar (even as its value relative to gold dropped to 1/38 troy ounce in 1972 and 1/42.22 troy ounce in 1973). On July 1, 1974, the XDR instead became defined by a currency basket of 16 currencies. On January 1, 1981, the five-year schedule was introduced and the XDR basket was reduced to five currencies:

2535-506: The composition of the XDR, the IMF takes into account several currencies important to the world's trading and financial systems. A currency's importance is currently measured by two factors: the amount of exports sold in that currency, and whether that currency is considered "freely usable" (determined by its use as a foreign exchange reserve asset and how widely it is used in international transactions). An XDR basket definition remains valid for five years. Approximately one to two months before

2600-423: The currency. To sell a part or all its XDRs, the country must find a willing party to buy them. The IMF acts as an intermediary in this voluntary exchange. The IMF also has the authority under the designation mechanism to ask member countries with strong foreign exchange reserves to purchase XDRs from those with weak reserves. The maximum obligation any country has under this mechanism is currently equal to twice

2665-534: The end of this time period, the IMF Executive Board will re-evaluate the XDR basket; the currencies included as well as their weights can then change. Changing the XDR's value definition requires at least 70% of the votes among the IMF members. The changes take effect at the end of the five-year period (one to two months after the board review). One business day before taking effect, the newly defined weights are converted to currency amounts based on an average of

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2730-455: The exchange rate over the past three months, such that the value of the XDR in U.S. dollars remains the same before and after the change. The currency amounts then remain fixed throughout the five-year period. The IMF reserves the right to perform a re-evaluation after less than five years if it decides that the current basket no longer reflects "the relative importance of currencies in the world’s trading and financial systems"; it also reserves

2795-462: The financial deficiencies, the project had come under criticism in international sports circles, as Real Madrid was required by Ras Al Khaimah to remove the Christian symbol of the little cross from the crown atop their logo on all the project's promotional materials to conform with Muslim beliefs. Sovereign wealth fund A sovereign wealth fund ( SWF ), or sovereign investment fund

2860-645: The highly advertised plans to build a US$ 1 billion Real Madrid resort island in Ras Al Khaimah had to be cancelled due to the lack of funding. The project, announced only in March 2012, was supposed to be a joint venture between the Spanish football team, the government of Ras Al Khaimah and the Luxembourg -based RAK Marjan Island Football Investment Fund. RAKIA confirmed that the resort stood no chance of opening. In addition to

2925-484: The last half of 2012. In the first half of 2014, global sovereign wealth fund direct deals amounted to $ 50.02 billion according to the SWFI. Sovereign wealth funds have existed for more than a century, but since 2000, the number of sovereign wealth funds has increased dramatically. The first SWFs were non-federal U.S. state funds established in the mid-19th century to fund specific public services. The U.S. state of Texas

2990-478: The literature on this question is controversial. Governments may be able to spend the money immediately, but risk causing the economy to overheat, e.g., in Hugo Chávez 's Venezuela or Shah -era Iran. In such circumstances, saving money to spend during a period of low inflation is often desirable. Other reasons for creating SWFs may be economic, or strategic, such as war chests for uncertain times. For example,

3055-632: The market. SWFs grew rapidly between 2008 and 2021, with global assets under management by these funds increasing from approximately $ 4 trillion to more than $ 10 trillion. SWFs invest in a variety of asset classes such as stocks, bonds, real estate, private equity and hedge funds. Many sovereign funds are directly investing in institutional real estate. According to the Sovereign Wealth Fund Institute's transaction database around US$ 9.26 billion in direct sovereign wealth fund transactions were recorded in institutional real estate for

3120-550: The number of SDRs in existence was XDR 204 billion. Due to economic stress caused by the COVID-19 pandemic , several finance ministers of poorer countries called for a new allocation to support member economies as they seek ways to recover, and some economists called for the allocation to be as high as $ 4T. In March 2021 the G24 and others proposed an allocation of $ 500B for this purpose. In response, XDR 456.5 billion (about US$ 650B)

3185-479: The numeric code is 960 . SDRs are allocated by the IMF to countries, and cannot be held or used by private parties. The number of SDRs in existence was around XDR 21.4 billion in August 2009. During the global financial crisis of 2009, an additional XDR 182.6 billion was allocated to "provide liquidity to the global economic system and supplement member countries' official reserves". By October 2014,

3250-568: The other XDR allocation events. For example, during the global financial crisis of 2009, XDR 182.6 billion was allocated to "provide liquidity to the global economic system and supplement member countries’ official reserves". The 2011 allocations were to low-income member countries. After being split among the IMF member countries, the 2021 allocation gave Liberia and South Sudan each an amount equal to 9-10% of their GDP. An IMF member country that requires actual foreign currency may sell its XDRs to another member country in exchange for

3315-403: The renminbi was added to the basket with a 10.9% weighting. In March 2021, the IMF announced that the next re-evaluation, normally scheduled for October 1, 2021, would be postponed to August 1, 2022, in order to prevent the basket's definition from changing during the COVID-19 pandemic . Because of fluctuating exchange rates , the relative value of each currency varies continuously, as does

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3380-471: The right to postpone re-evaluations. If either occurs (causing the old definition to be valid for less or more than five years), the new definition will still be valid for a full five years. At the time of the XDR's creation in 1969, the United States dollar was backed by the gold standard and the XDR was fixed at 1/35 troy ounce of gold or exactly 1 US dollar. After the Nixon Shock of 1971 and during

3445-735: The sovereign nations that are typically held in domestic and different reserve currencies (such as the dollar , euro , pound , and yen ). Such investment management entities may be set up as official investment companies, state pension funds, or sovereign funds, among others. There have been attempts to distinguish funds held by sovereign entities from foreign-exchange reserves held by central banks. Sovereign wealth funds can be characterized as maximizing long-term return , with foreign exchange reserves serving short-term "currency stabilization", and liquidity management. Many central banks in recent years possess reserves massively in excess of needs for liquidity or foreign exchange management. Moreover, it

3510-510: The term gained widespread use as the spending power of global officialdom has rocketed upward. China's sovereign wealth funds entered global markets in 2007. Since then, their scale and scope have expanded significantly. SWFs were the first institutions to use sovereign capital in an effort to contain the financial damage in the early stages of the 2007-2008 global financial crisis . SWFs are able to react quickly in such circumstances because unlike regulators, SWFs actively participate in

3575-405: The value of the XDR. The IMF sets the value of the XDR in terms of U.S. dollars every day. The latest U.S. dollar valuation of the XDR is published on the IMF website. For example, on January 31, 2021, the value was US$ 1.44080, and on June 22, 2021, the value was US$ 1.426480. XDRs are allocated to member countries by the IMF. A country's IMF quota, the maximum amount of financial resources that it

3640-439: The volume of official XDRs is a prerequisite for them to play a more meaningful role as a substitute reserve asset." The XDR comes to prominence when the U.S. dollar is weak or otherwise unsuitable to be a foreign exchange reserve asset. This usually manifests itself as an allocation of XDRs to IMF member countries. Distrust of the U.S. dollar is not the only stated reason allocations have been made, however. One of its first roles

3705-595: The way that SWFs operate. These were published after being presented to the IMF International Monetary Financial Committee on 11 October 2008. They also considered a standing committee to represent them, and so a new organisation, the International Forum of Sovereign Wealth Funds was set up to maintain the new standards going forward and represent them in international policy debates. As of 2016, 30 funds have formally signed up to

3770-464: Was allocated (i.e., the country that bought XDRs from another member). In April 2020, the interest rate was 0.05%. The XDR is used in international transactions, including export quotas in the IMF members and the number of official reserve assets which were in their own currencies. It is traded on the main foreign exchange market, including foreign exchange trading volume, whether there are forward exchange markets. Some international organizations use

3835-565: Was allocated on August 23, 2021. The value of a SDR is based on a basket of key international currencies reviewed by IMF every five years. The weights assigned to the currencies in the XDR basket are adjusted to take into account their current prominence in terms of international trade and national foreign exchange reserves. As of August 2023 , the XDR basket consists of the following five currencies: U.S. dollar  43.38%, euro  29.31%, Chinese yuan  12.28%, Japanese yen  7.59%, British pound sterling  7.44%. While

3900-424: Was expected to rebuild its XDR holdings. As the reconstitution provisions were abrogated in 1981, the XDR now functions less like credit than previously. Countries are still expected to maintain their XDR holdings at a certain level, but penalties for holding fewer than the allocated amount are now less onerous. The name may actually derive from an early proposal for IMF "reserve drawing rights". The word "reserve"

3965-421: Was later replaced with "special" because the idea that the IMF was creating a foreign exchange reserve asset was contentious. Special drawing rights were created by the IMF in 1969 and were intended to be an asset held in foreign exchange reserves under the Bretton Woods system of fixed exchange rates. After the collapse of that system in the early 1970s, the XDR has taken on a less important role. Acting as

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4030-564: Was linked to a World Bank study and investment promotion event in May 2005 ("Invest and Live in Ras Al Khaimah") initiated and pursued by the Swiss-Lebanese engineer Khater Massaad who was a long-time adviser to Sheikh Saud Bin Saqr Al-Qasimi , the creator of RAK Ceramics and the longtime CEO of RAKIA. In 2017, Ras Al Khaimah Free Trade Zone (RAK FTZ) and RAKIA became part of a larger group,

4095-401: Was not included in the XDR basket taking effect on January 1, 2011. In November 2015, the IMF announced that the renminbi now met the "freely usable" requirement and would be included in the next basket definition, changing its size back to five currencies. The effective date of the re-evaluation was postponed to October 1, 2016, in order to "allow users sufficient lead time to adjust". In 2016,

4160-527: Was thus the first to establish such a scheme, to fund public education. The Permanent School Fund (PSF) was created in 1854 to benefit primary and secondary schools, with the Permanent University Fund (PUF) following in 1876 to benefit universities. The PUF was endowed with public lands, the ownership of which the state retained by terms of the 1845 annexation treaty between the Republic of Texas and

4225-457: Was to alleviate an expected shortfall of U.S. dollars c.  1970 . At this time, the United States had a conservative monetary policy and did not want to increase the total amount of U.S. dollars in existence. If the United States had continued down this path, the dollar would have become a less attractive foreign exchange reserve asset: it would not have had the necessary liquidity to serve this function. Soon after XDR allocations began,

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