Norway Oil Fund Reassessing Risk on Significant Russian Holdings

Norway’s $850 billion sovereign wealth fund, the world’s biggest, is reviewing risk in Russia, where it has “significant” holdings, Chief Executive Officer Yngve Slyngstad said.

“We observe that there’s a different risk profile,” Slyngstad told reporters in Oslo yesterday, after testifying to lawmakers on the fund’s investment strategy. “We are at any given time also considering conditions that have dimensions of geopolitics and geopolitical risk.”

Russia unexpectedly raised interest rates yesterday as policy makers in Moscow struggle to stop capital flowing out of the country amid western condemnation of a standoff with Ukraine. The rate rise followed a downgrade by Standard & Poor’s, which cut Russia’s credit rating one step to BBB-, one level above junk. S&P cited the tense situation between Russia and Ukraine, which it said could spur significant outflows and “undermine already weakening growth prospects.”

The benchmark Russian Micex index has slid 15 percent this year, while the Ruble is the worst performing currency among developing nations this year after the Argentinian peso.

Norway’s wealth fund held 22 billion kroner ($3.7 billion) in Russian stocks at the end of last year and 25 billion kroner in the country’s corporate and government bonds, according to its annual report.

Significant Investments

“We have significant investments in Russia,” Slyngstad said.

Norway’s biggest bank, DNB ASA, said yesterday it’s selling its Russian operations after its business there failed to live up to its predictions. JSC Commercial Bank DNB Bank will be sold to Asokerco Trading Limited LLC, owned by the majority shareholder in B&N Bank JSC, Mikail Shishkhanov, DNB said.

The wealth fund, which reports first-quarter results on April 30, returned 15.9 percent in 2013, after rising 13.4 percent the year before, it said Feb. 28. Its stock holdings returned 26.3 percent, while bond investments climbed 0.1 percent. Real estate investments gained 11.8 percent.

The fund has sought to shift its holdings to capture more global growth, and has steered investments away from Europe as emerging markets in Asia and South America increase their share of the world economy.

‘Challenging Situation’

“What’s happened over the last two years is that there’s been a dawning crisis, at least a challenging situation, in emerging markets,” Slyngstad said. “The question that’s been in the market for a long time is whether several possible countries, China for example, have challenges. What we’ve said is that we still look positively on the situation in general, but that we have to be prepared for a market correction when we’ve had such a significant rise in stock markets over several years.”

The fund has failed to meet a 4 percent real return target, on average, since the late 1990s. Over the past five years it has returned an annual 9.74 percent, on average.

Parliament is questioning the fund’s highest-ranking officials after local media reports questioned whether the state-run investor followed its mandate when it bought into Formula One ahead of a planned initial public offering. The fund can only buy private equity if a company is planning to sell shares to the public. The IPO was subsequently canceled and its chief executive is now mired in a corruption probe.

The decision to buy a stake in Formula One before a planned listing was based on an assessment that an investor can get a “considerably better” price at that point rather than waiting until “afterwards once everyone has been there,” Slyngstad said. “We have had full openness on this investment all along.”

Norway, western Europe’s biggest oil and gas producer, channels its fossil-fuel income into the wealth fund to shield the $500 billion economy from overheating. The investor got its first capital in 1996, added stocks in 1998, emerging markets in 2000 and real estate in 2011. The government is allowed use the targeted 4 percent return to plug budget deficits.

Before it's here, it's on the Bloomberg Terminal.