Putin's Stash of Oil Money Is Shrinking

Photographer: Andrey Rudakov/Bloomberg

While oil prices were soaring, Russia amassed a pile of hard currency that most countries could only dream of. Just a year ago, foreign reserves held by its central bank stood at more than $515 billion, including tens of billions in energy export revenue pumped into two big sovereign wealth funds that invested the money in foreign government bonds and other overseas assets.

Now the hoard is starting to dwindle. Over the past year, total foreign reserves have fallen almost 20 percent, to less than $419 billion. The Bank of Russia has spent billions in an effort to prop up the ruble, while the Kremlin has begun raiding the sovereign wealth funds to aid banks and companies hit by Western sanctions.

The finance ministry says it will probably take $10 billion out of one of the funds to plug a hole in the government’s 2015 budget. And in his annual address to lawmakers on Dec. 4, President Vladimir Putin said that the other fund, which is intended to support Russia’s pension system, should be tapped for an unspecified amount “to implement a program for recapitalization of leading domestic banks,” which in turn would be expected to invest in infrastructure projects.

True, the remaining $419 billion is still a heckuva lot of money. Only four countries—China, Japan, Saudi Arabia, and Switzerland—have bigger hard-currency reserves.

But the demands on Moscow’s cash pile keep growing, and with oil prices at a five-year low and the economy sinking into recession, the money can’t easily be replenished. Russia Inc., barred by sanctions from tapping Western capital markets, is scrounging to pay maturing foreign debt. State oil giant Rosneft, for example, has asked for $44 billion, equaling more than half the remaining balance in the so-called Wellbeing Fund that’s earmarked to support the pension system. The government also plans to raid the funds, because its planned 2015 budget was based on $100-a-barrel oil, while the current price is less than $70.

Former Finance Minister Alexei Kudrin, who set up the two wealth funds, has expressed alarm over the situation. Tapping the Wellbeing Fund to aid an oil company such as Rosneft defeats the fund’s purpose, which is to ensure that oil price shocks don’t endanger the pension system, he told Bloomberg News last month. “At the moment when it’s necessary to use it, the value of the Wellbeing Fund will fall, together with oil and Russian capital markets, and will be of no help,” he said.

Financial institutions including VTB Bank and Gazprombank have already gotten more than $7 billion from the Wellbeing Fund and are asking for billions more. The fund essentially buys their shares in exchange for a capital injection. The central bank could step in with additional aid, says Timothy Ash, an economist at Standard Bank in London. One reason the bank has reduced the frequency of its currency interventions recently is that it is “conserving funds to use, to support corporations and banks in this way,” he says.

The flight of private capital from Russia only adds to the pressure. Net capital outflows this year are set to reach $125 billion, the highest since the 2008 financial crisis. Putin on Dec. 4 offered full amnesty to Russians who repatriate their foreign capital. The offer “smells of desperation,” Lars Christensen, chief emerging-markets economist at Danske Bank in Copenhagen, tells Bloomberg News. It’s “completely unlikely to have any impact,” he adds.

Separately, the Kremlin is asking state-controlled exporters such as Rosneft to convert more of their foreign revenue into rubles. Putin has said he has no plans to impose controls to prevent capital from leaving the country—a move widely seen as a last resort that would scare off any future foreign investment. But when the government makes such a request of “companies whose business depends on or is controlled by the state,” that is tantamount to “an introduction of capital controls, although in a different sense than the one we’re used to,” says Alexander Losev, chief executive of Moscow-based Sputnik Asset Management.