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Norway Says $890 Billion Fund Likely to Follow EU Sanctions

Norway’s government, which sets the strategy for the world’s biggest sovereign wealth fund, signaled it will probably abide by sanctions against Russia agreed by the European Union and the U.S.

“In such a situation we have to react,” Foreign Minister Boerge Brende said in a statement today. The government of Norway, which isn’t an EU member, will now “study the measures carefully” before arriving at a final conclusion, he said.

EU governments agreed yesterday on their most sweeping sanctions against Russia to date, barring state-owned banks from selling shares or bonds in Europe, restricting the export of equipment to modernize the oil industry and prohibiting export of equipment with military uses.

“Serious foreign policy considerations dictate that Norway join them and we will consult parliamentary bodies before a final decision is taken,” Brende said. “The new EU restrictive measures against Russia show the seriousness of the deteriorating situation in Ukraine.”

Norges Bank Investment Management, a department inside the central bank in Oslo that handles the day-to-day management of the $890 billion wealth fund, will comply with sanctions if its investments are impacted, the Finance Ministry said.

Necessary Adjustments

“When Norway makes a decision about restrictive measures towards Russia, Norges Bank will make the necessary adjustments if the oil fund’s investments become affected,” it said in an e-mailed reply to questions.

The fund won’t speculate on the potential consequences of sanctions against Russia, NBIM spokesman Thomas Sevang said today by phone.

“We are observing the situation,” he said, declining to comment on what the fund has done with its Russian portfolio during recent months.

The wealth fund held about $3.6 billion in stocks and $4 billion in corporate and government bonds in Russia at the end of 2013, its annual report shows. Chief Executive Officer Yngve Slyngstad in April described the stake as “significant” and said Russian markets had acquired a “different risk profile” as a result of the conflict in Ukraine.

While it’s a member of the EU-affiliated European Economic Area, Norway isn’t obliged to comply with EU sanctions, according to the government in Oslo.

No Exit?

With 45 percent of its investments located in Europe, the fund will probably comply with the new EU sanctions whatever Norway’s government decides, said Swedbank First Securities Chief Economist Harald Magnus Andreassen. While that means the fund won’t be able to buy new equity or bonds from Russian state-backed banks, it can hold onto existing investments to capture a potential rebound in Russian securities, he said.

“I don’t think the oil fund is aggressively looking to exit Russia, unless that becomes an EU policy,” Andreassen said in a phone interview. “There could be downside risk on the short term in Russia, for the next months or quarters. But many will say that it can’t get worse than now, politically speaking.”

The EU’s sanctions yesterday were followed hours later by U.S. penalties against three Russian banks and a state-owned shipbuilder, adding to measures announced two weeks ago.

The wealth fund has 65 investments in Russia. Its largest holding is a 4.6 percent stake in VTB Bank worth $888 million, according to its 2013 annual report. The fund also owns 0.5 percent of OAO Gazprom.

Russian Losses

VTB became the latest target of U.S. sanctions, along with Bank of Moscow and the Russian Agricultural Bank. The penalties prohibit U.S. persons from transacting with, providing financing for or otherwise dealing in new debt of longer than 90 days maturity or new equity with the three banks, the U.S. Treasury Department said.

The wealth fund, Europe’s biggest equity investor into which Norway channels its oil and gas wealth, already saw first quarter results suffer as the escalating conflict between Russia and Ukraine eroded returns.

The fund lost 9.7 percent on its investments in Russian government bonds in the first three months. Its total return for the quarter was 1.7 percent, or 78 billion kroner ($13 billion), it said in April. The wealth fund is due to report second-quarter results on Aug. 20.

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