Russia Eyes a $90 Billion Sovereign Wealth Fund

Boats travel along the Moscow River as the Kremlin sits in the background in Moscow, Russia.

Photographer: Alexander Zemlianichenko Jr/Bloomberg

Russia is considering a consolidation of its two sovereign wealth funds to create a single treasure chest of $90.7 billion that it can tap as the country digs in for a sustained period of low oil prices.

After running down the Reserve Fund -- used to patch up shortfalls in the budget -- to near the lowest since it was created in 2008, the authorities may discuss merging it with another pool of savings accumulated during the oil boom years, according to Finance Minister Anton Siluanov. 

Anton Siluanov

Photographer: Simon Dawson/Bloomberg

“The situation has certainly changed” since Russia began to apply the principles of running separate rainy-day funds, Siluanov said on Monday in comments reported by state-run RIA Novosti and confirmed by the Finance Ministry’s press service. “Oil prices have declined, and we aren’t replenishing the funds now.”

The world’s largest energy exporter has amassed its reserves by funneling windfall revenue from oil and gas sales -- beginning in 2004 -- into what was then known as the Stabilization Fund. Four years later, the holdings were split into the Reserve Fund and the National Wellbeing Fund. Russia is now hunkering down for years of depressed crude prices, with forecasts by the government and the central bank seeing oil close to $40 a barrel in the medium term.

Siluanov said the government would still complete all the investments in infrastructure made from the $74.2 billion National Wellbeing Fund -- almost two-thirds of which are held in assets denominated in dollars, pounds and euros. The Finance Ministry plans to outline its proposals to the government, he said.

After leading the push more than a decade ago to divert energy income into rainy-day funds by first helping to create the Stabilization Fund and then dividing it in two, former Finance Minister Alexey Kudrin is now a proponent of concentrating the savings in one entity. Kudrin, who advises President Vladimir Putin after being finance minister in 2000-2011, proposed consolidating the funds more than a year ago. 

“The split in the current situation is artificial and doesn’t make sense,” he said by phone.

Raiding Funds

While the National Wellbeing Fund was designed to cover long-term outlays for social spending such as supporting the pension system, it was unsealed to finance infrastructure projects and support banks during a crisis. In 2013, it was used to buy a $3 billion Eurobond from Ukraine before the government there was toppled by protests.

The Wellbeing Fund’s “remaining part is the same source for financing federal budget spending -- just as money from the Reserve Fund,” Siluanov said. “I don’t rule out that we may discuss the question of consolidating these reserve funds to create a single volume of resources for financing the budget deficit.”

The funds are managed by the central bank under guidelines set down by the Finance Ministry. Last week, the government approved budget amendments that include the removal of the Reserve Fund’s upper limit, above which money is channeled into the second sovereign fund. The Reserve Fund is down to $16.5 billion from almost $92 billion in 2014.

Hands Tied?

“The merger could strengthen budget guarantees, because the Reserve Fund will grow,” said Vladimir Tikhomirov, chief economist at BCS Financial Group, a Moscow brokerage. But “it will also tie the government’s hands. Now it won’t have a war chest that can be used to finance some emergency projects not connected to the budget.”

As oil prices stabilized, strains on the economy are easing. The Finance Ministry still wants to reduce the budget shortfall by one percentage point each year to balance the books by 2020. This year’s deficit may be about 2 percent of gross domestic output, compared with an initial plan for 3.2 percent, Siluanov has said. The shortfall was at 1.7 percent of GDP in the first five months.

“Moving money from one pocket to another doesn’t change the essence,” said Dmitry Shagardin, chief economist at Bank Saint-Petersburg PJSC. It’s still “the Finance Ministry’s money.”

— With assistance by Evgenia Pismennaya

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