National Welfare Goes to the Market
// Dmitry Medvedev allowed investing the money of the Stabilization fund in Russian securities
Yesterday Dmitry Medvedev ordered that by October 1 the government prepare documents providing for investing the money of the National Welfare Fund (NWF) in Russian as well as foreign securities. With that, the President virtually finished the discussion about the expediency of using the money of the Stabilization fund in the home market. So far Russian Finance Minister Alexey Kudrin has argued that it would be dangerous for the macroeconomic stability. The volume of the NWF is likely to amount to 3 trillion roubles by the end of 2008.
Yesterday Dmitry Medvedev convened a meeting on economic matters, where Prime Minister Vladimir Putin acted as a formal subordinate of the head of state for the first time. The President said that the government will have to prepare the drafts of all statutory acts concerning investing the money of the NWF by October 1, 2008. The meeting behind closed doors lasted for 40 minutes, but Dmitry Medvedev made its outcome the point during his opening address already, “It’s necessary to consider the issue of expanding the opportunities of investing the money of the NWF in a number of instruments, including shares and bonds, that is corporate securities of a range of issuers. Here both Russian and foreign issuers are meant.”
As it was set up in 2004, the key end of the Stabilization fund was the sterilization of the budget’s oil revenues in ultra-conservative instruments outside Russia – just like the Central Bank did with its gold and exchange currency reserves. By 2006 the discussion, whether it was necessary to make the money of the Stabilization fund work for the benefit of Russia’s economy, became especially heated. In May, 2007 Finance Minister Alexey Kudrin consented to splitting the Fund into two parts – the Reserve fund and the Fund for Future Generations – starting from February 1, 2008. However he insisted on keeping on with an utterly conservative strategy of allocating the money of the former Stabilization fund: in foreign deposits, currencies and government notes. In the autumn of 2007 the second Fund was renamed becoming the National Welfare Fund, and Mr Kudrin had to agree to even a more risky scheme of investing the money of the NWF. Though June 9, 2007 he still insisted on a purely external allocation of the NWF’s money. Late 2007 amendments to the Budget Code stipulated that the major objective of the NWF is financing the needs of the pension system.
Yesterday Dmitry Medvedev specified the goals as well as the probable technology of the NWF investing, “For the financing to be implemented properly, an ad hoc finance body will be set up.” The Finance Ministry is to prepare proposals on the make-up of the future organization. In May, 2007 Alexey Kudrin stated that the NWF money could be given to private management companies after tenders. However, an official with the presidential Administration is pretty sure that Vnesheconombank will de-facto be in charge of the money, “Everything has been determined already. Do you believe it is by pure chance that the Head of VEB Vladimir Dmitriev attended yesterday’s meeting?”
Now VEB is in charge of 350 bln roubles – the money of those who haven’t decided on private pension funds for investing the money of the accumulative parts of their pensions there. The resources of the NWF proper far exceed this number – the volume of the pension money in charge of VEB may reach 1.5 trillion roubles in 2009, which would equal 5% of Russia’s GDP of 2007.
The accurate numbers at stake are unknown yet: Early 2008 the Reserve fund was estimated at 3.07 trillion roubles, and the NWF – at 774 bln roubles. According to the Budget Code, Russia’s oil revenues go to the federal budget in the form of a so-called oil and gas transfer. After the transfer (3% of the GDP) is accomplished, the process of filling the reserve fund is launched (to 10% of the GDP). When the Reserve fund hits the target, which can happen in November 2008, the NWF will be filled. Taking account of the volume of Russia’s GDP in 2007 – 30.7 trillion roubles – approximately 1 trillion will go to the Reserve fund. Yaroslav Lissovik of Deutsche Bank assumes that by late 2008 the volume of the NWF may amount to 2.7 trillion roubles, and by late 2009 – 5.2 trillion (with average annual oil prices being $96 per barrel in 2008, and $102,5 in 2009, whereas now the price is $135).
Taking account of the capital outflows of $2.6 bln (the figure is relevant for May, 2008), this money can substitute the investments of foreigners in Russian assets and foster a market grow in 2009.
It need be said that in May, 2007 President Vladimir Putin asked Alexey Kudrin about a possibility of investing budget funds in the stock market. At that time the Finance Minister explained that the bubble, which will inevitably appear in the stock market, will jeopardize the macroeconomic stability, and investing this money in Russia will disperse the inflation. President Dmitry Medvedev prefers to stay away from that sort of discussions.
Dmitry Butrin, Maxim Shishkin, Yelena Kiseleva, Suzanna Farizova
All the Article in Russian as of June 18, 2008
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