Russian Wealth Fund Falls Most Since 2010 as Deficit Widens

Russia’s Reserve Fund dropped the most in more than four years last month as the government unsealed one of the country’s two sovereign wealth funds to cover a widening budget deficit.

The holdings shrank $8 billion to $77.1 billion, the lowest since December 2012, as the Finance Ministry used its maximum yearly allowance of 500 billion rubles ($8 billion) for budget financing, according to a Tuesday statement by the ministry in Moscow. The fund disposed of securities equal to $3.6 billion, 3.1 billion euros ($3.5 billion) and 510 million pounds ($769 million).

The world’s biggest energy exporter, entering its first recession in six years, is using the fund to cover the fiscal shortfall after the price of oil, which together with natural gas accounts for about half of state revenue, fell to the lowest since 2009. The Finance Ministry last week said it wants to dip deeper into the fund to cover a deficit that may reach 3.8 percent of gross domestic product this year.

“The reserves provide not only budget stability, but also financial certainty,” Finance Minister Anton Siluanov said Monday. “If we eat through our reserves, we’ll lose that stability and won’t have the resources to finance the budget deficit.”

Russian Sanctions

Russia, facing higher borrowing costs in global markets amid U.S. and European Union penalties after President Vladimir Putin’s incursion into Crimea a year ago, doesn’t expect to borrow abroad in 2016 after already ruling out issuing foreign bonds in 2015, according to Siluanov.

The Finance Ministry has proposed cutting this year’s net domestic bond issuance to 180 billion rubles from an earlier planned 280 billion rubles, according to draft budget amendments published on the government website.

The Reserve Fund may shrink to 519 billion rubles by the end of 2016, as the Finance Ministry wants to use 3.67 trillion rubles this year and 1.16 trillion rubles in 2016, the ministry said. It estimates the fund will increase to 630 billion rubles in 2017.

The reserves will allow the government to decide on gradual cuts in budget spending as state revenue will contract, according to Siluanov.

“During the three years, it’s necessary to take structural measures to cut our spending liabilities, which we can’t cope with in these conditions,” he said.

The ministry, which will submit budget amendments to the government on Wednesday, estimates that federal budget revenue will be at 12.5 trillion rubles in 2015, 17 percent less than earlier planned. Budget income is projected to fall short of 2016 and 2017 plans by 11 percent and 7.7 percent, respectively. The changes will need lawmaker approval.

While the Finance Ministry is proposing cuts in outlays on defense, law enforcement, health care and education, it may increase social spending by 204 billion rubles to 4.2 trillion rubles.

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