Russia Pension Cuts Risk Long-Term Funding, Aganbegyan Says

Russia’s planned cuts to state pension investments threaten to reduce domestic capital and hamper efforts to lure foreign funds, according to Ruben Aganbegyan, chief executive officer of Otkritie Financial Corp.

“What you do is you kill pretty much the only source of long money institutionalized in the country,” Aganbegyan, who ran the Moscow stock exchange until September, said in an interview in London yesterday. “For Russia as a country and for its economy, it’s much more important to concentrate on long money.”

President Vladimir Putin has backed plans to divert tax revenue from funding future retirement plans in order to meet current pension payments and narrow the state system’s deficit. The law should be ready by mid-2013 so it can come into force at the start of 2014, Dmitry Peskov, Putin’s spokesman, said by phone on Nov. 14. Investment from Russia’s pension, insurance and mutual funds is equivalent to 8 percent of gross domestic product, compared with a global average of 120 percent, Finance Minister Anton Siluanov said at a Nov. 20 conference in Moscow.

The pension changes coincide with government efforts to attract more foreign capital by allowing Euroclear Bank SA to begin processing some Russian securities in January. The Moscow Exchange, the bourse formed from the merger of the Micex and RTS, will move to settling transactions over two days by the end of 2013 from the current immediate settlement, to bring procedures into line with international norms, Sergey Sinkevich, the head of primary markets at the bourse said at a conference in London on Nov. 13.

‘Magnet’

Aganbegyan, who oversaw the merger of the two exchanges, said the pension changes risk limiting the foreign inflows that should come from the opening up of the markets.

“You need to remove the obstacles so the capital can fly freely but this will not necessarily mean that the capital will switch from London to Moscow because you then have to create a magnet,” said Aganbegyan. “The magnet is the internal long capital.”

Money is leaving Russia even as the price of Urals crude, the nation’s chief revenue earner, has climbed to an average $110.47 a barrel this year from $109.47 a barrel in 2011, data compiled by Bloomberg show. Investors withdrew $61 billion this year through October and total net capital outflows may exceed the $67 billion estimated for this year, Bank Rossii First Deputy Chairman Alexei Ulyukayev said in Moscow on Nov. 23.

“The exchange can resolve the obstacles to trade, the exchange cannot resolve the investment climate,” Aganbegyan said.

Trillion Deficit

Otkritie is 15.92 percent-owned by state-run VTB Group. Moscow-based Otkritie holds 19.9 percent of OAO Nomos Bank, Russia’s second-largest non-state lender, and plans to increase its stake to 100 percent within two years.

Aganbegyan will replace Igor Vayn as head of Otkritie Capital brokerage, while retaining his position as CEO of the entire corporation, Otkritie said in an e-mailed statement today. Investment banking remains “a key” business for the financial group, Aganbegyan said in the statement.

The government is seeking to limit costs as the State Pension Fund deficit is set to exceed 1 trillion rubles ($32.4 billion) this year, equivalent to 1.8 percent of GDP. The planned changes would cut the share of payroll tax revenue invested for future retirees -- known as the funded part of the system -- to 2 percent from 6 percent, while increasing the share that pays current retirees to 20 percent from 16 percent.

“Foreign money will only come in if there is local money,” said Aganbegyan. “The big funds, very respectable funds worldwide, are not going to be the only ones believing in the long term. They want to see that locals believe in the long term as well.”

To contact the reporter on this story: Maria Levitov in London at mlevitov@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

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