Responsible Finance: Why Political Systems Should Matter to Investors

As a human rights organization, we see economic freedom as inseparable from political and civil freedoms. The freer world we live in today owes much to the expansion of international trade and capital flows. But while economic openness has lifted millions out of poverty, authoritarian regimes have learned to use these systems for their own benefit, attracting the capital and business of free societies to strengthen their rule. This cannot continue unchecked. Change does not require blunt, top-down controls, but it does require greater awareness and better tools for investors. The political system of a country must matter—not only because investment can help enable human rights abuses, but because democracies offer stronger long-term stability, transparency, and returns. This blog series explains why—and how—aligning financial decisions with freedom is both a moral and practical imperative.

International trade and investment reshaped the world for the better. Since the fall of the Berlin Wall, economic openness has reduced poverty on a global scale, brought prosperity to nations from Poland to South Korea, and improved quality of life for hundreds of millions. These gains are not ideological talking points—they are well-documented outcomes. As countries opened up to trade and attracted foreign investment, prosperity expanded. In many cases, political liberalization followed, as authoritarian structures crumbled in the face of larger middle classes and democratic governments replaced aging autocrats. However, this has not been inevitable.

The assumption that economic liberalization would automatically lead to democratization has proven deeply flawed. China is the most powerful example. Far from opening its political system, the Chinese Communist Party (CCP) has used access to international capital and markets to entrench its control and expand and export the repressive apparatus of its massive state. And it’s not alone. Other authoritarian regimes—from Saudi Arabia and Russia to Venezuela and Egypt—have adopted versions of this strategy, learning to benefit from global financial integration without loosening their grip on power.

The role of democratic countries in this dynamic is significant. Capital originating in the world’s freest societies continues to fund and sustain some of the most repressive regimes on the planet. These investments are not always obvious. They don’t always take the form of visible, direct monetary transfers to dictatorships. But whether through foreign direct investment (FDI), exchange-traded funds (ETFs), or sovereign bonds, money flows into autocracies—often with little scrutiny or transparency.

Foreign Direct Investment and the Consolidation of Authoritarian Power

Foreign direct investment, where companies or individuals build businesses or acquire assets abroad, is perhaps the most visible form of economic engagement. It is also widely misunderstood. A new factory in China, a hotel in Cuba, or a joint oil venture in Venezuela may appear as standard apolitical business practice. But in authoritarian regimes, there is rarely a clean separation between the public and private sectors. State-owned enterprises dominate entire industries. Licensing, legal security, and labor depend on government goodwill. The more repressive the regime, the greater the likelihood that investments directly strengthen the state.

China has been one of the top recipients of FDI for years, consistently drawing capital from American, European, and Japanese firms. In 2021, China even surpassed the United States as the world’s largest FDI destination, attracting $163 billion in new investments. The appeal of its industrial base and market size is undeniable—but so is the reality that many sectors are deeply tied to CCP interests.

This is not unique to China. In Saudi Arabia and Egypt, strategic industries like defense, energy, and infrastructure are state-controlled. Western investment in these areas effectively means partnership with authoritarian regimes. In Latin America, until very recently, Chevron and Repsol maintained joint ventures with Venezuela’s state-owned oil company, PDVSA, despite the Maduro regime’s long track record of repression and electoral fraud. Repsol even expanded its joint venture in December 2023—just months before Maduro’s latest manipulation of elections in July 2024.

Passive Investment Vehicles and Unintentional Support for Repressive Regimes

The rise of exchange-traded funds (ETFs) has revolutionized investing. These baskets of securities meant to “copy” an existing index or industry offer broad exposure to global markets with low fees and minimal management to the masses. By the end of 2023, ETFs controlled $11.63 trillion in assets—more than double what is managed by hedge funds. But with that convenience comes a cost: investors often have no idea where their money is going.

Emerging market ETFs, for example, commonly allocate around 30% of their holdings to Chinese companies. The simple reason for this lies mainly in the massive size of China’s economy, often representing around a third of the universe of emerging markets.  Many of these Chinese companies are either closely aligned with the CCP or completely beholden to it. Even investors who want to avoid exposure to China can find themselves indirectly supporting authoritarian regimes through other holdings. ETFs that track indexes designed by major institutions—like MSCI or FTSE—often include state-owned enterprises from countries like Russia, Saudi Arabia, Turkey, and the UAE.

Sovereign Debt as a Financial Lifeline for Dictatorships

Perhaps the most direct channel for funding autocrats is through sovereign bonds and quasi-sovereign debt issued by state-owned enterprises. These instruments provide cash that governments use to finance their budgets—money that can support surveillance, security forces, or corrupt infrastructure projects. Many Western banks have played a role in facilitating these transactions.

The 2016 Goldman Sachs purchase of PDVSA bonds is one infamous example. Goldman bought bonds with a face value of $2.8 billion for just $865 million, providing the Maduro regime with desperately needed funds. Economist Ricardo Hausmann called them “hunger bonds”—a stark reference to the humanitarian disaster in Venezuela. These bonds later appeared in the portfolios of several major Wall Street firms.

In 2021, Turkey’s government raised $2.5 billion through a green bond, issued just months after mass arrests of journalists and political opponents. Banks like Bank of America and J.P. Morgan helped underwrite the deal. ESG branding was used to attract investors—despite the regime’s authoritarian behavior.

At the heart of all this is the quiet power of financial indexes. These benchmarks, created by institutions like Bloomberg and JPMorgan, determine what gets included in ETFs and mutual funds. They are designed around financial metrics—yield, size, liquidity—and largely ignore governance or human rights. This leads to the inclusion of stocks and bonds from authoritarian regimes.

Because ETFs and other passive funds track these indexes automatically, capital flows into the companies and governments included in them. When JPMorgan added Venezuelan debt to its EMBI+ index, funds followed—even though the regime was deeply repressive. The inclusion of Chinese and Saudi companies in ESG indexes compounds the problem, making it appear that these investments meet ethical criteria when they do not.

While capital flows and trade can improve material well-being for billions, the political systems of our trading and investment partners cannot be ignored. As dictators and budding autocrats learn to use the free market system to their advantage, civil liberties—and long-term growth and prosperity—will continue to be denied to billions. Unless the democratic world begins to distinguish between regimes that respect rights and those that abuse them, and use this knowledge to rethink our business and investment strategies, the so-called global democratic recession will continue.