Sanctions over Ukraine may threaten Russia’s investments in assets denominated in euros and U.S. dollars, Economy Minister Alexei Ulyukayev said, urging the use of the nation’s wealth funds for domestic projects.
“We should now very attentively study the risks of investing into dollar and euro securities, given the geopolitical situation we have right now,” Ulyukayev told lawmakers in Moscow today when questioned on whether returns on foreign securities are too low.
U.S. and European sanctions triggered by President Vladimir Putin’s annexation of Crimea from Ukraine last month stoked capital outflows and raised the specter of a recession as economic growth stumbled to a four-year low. With tensions escalating in the worst standoff since the Cold War, the U.S. and its European allies are threatening a new round of penalties against Russian interests if the crisis continues.
Russia’s two sovereign wealth funds, which held the equivalent of $175 billion as of March 31, are allowed to invest in securities denominated in dollars, euros and British pounds, according to the Finance Ministry. In 2013, the Reserve Fund’s investments returned 0.08 percent when measured in terms of a basket of approved currencies. In ruble terms, the Reserve Fund earned 9.9 percent last year as the Russian currency declined 9.4 percent against the central bank’s basket of dollars and euros, according to data on the ministry’s website.
The government should consider investing in “other instruments,” including infrastructure projects, Ulyukayev said. Russia will dip into its wealth funds next year to finance development of Crimea, according to four people with knowledge of discussions.
Russia is facing the weakest economic growth since 2009, with expansion slowing to 0.8 percent in the first quarter as fixed-capital investment shrank 4.8 percent, Ulyukayev said.
Under the current rules, the budget’s extra oil and gas revenue is channeled to the Reserve Fund, until it reaches 7 percent of gross domestic product.
The Russian funds, which also include the National Wellbeing Fund, are managed by the central bank under guidelines set down by the Finance Ministry. They can also invest in state debt of Austria, Belgium, Britain, Germany, Canada, Denmark, Luxembourg, Netherlands, U.S., Finland, France and Sweden, according to the ministry. The Reserve Fund also counts Spain on its list of approved investments.
Russia’s holdings of U.S. government securities fell to the lowest level since 2011 in February, declining for a fourth straight month, to $126.2 billion, from $131.8 billion in January, Treasury Department data showed yesterday.
Supporters of spending “everything possible” inside Russia are using the threat of assets being frozen abroad to make their case, Dmitry Polevoy, chief economist for Russia and Commonwealth of Independent States at ING Groep NV in Moscow, said in e-mailed comments.
“However the initial logic of creating these funds was to save, not to earn maximum return,” Polevoy said. “And in current circumstances it may be better to get at least something, than getting nothing at all for a long time, while this money is invested into infrastructure with unclear return profile. Or not getting anything at all.”