Russia to dip into its sovereign funds

At the end of January, Russia’s sovereign funds amounted to $160 billion. Tax revenues from oil and gas have been accumulated to the funds since 2003. While the government largely stayed out of its funds last year, this year it is planning to draw on them more actively to support the economy.

Prime minister Medvedev last week signed a decree permitting the use of up to 500 billion rubles from the Reserve Fund to cover this year’s budget deficit. The Reserve Fund was established indeed to cover budget deficits during economic downturns. As of end-January, the Reserve Fund stood at 5.9 trillion rubles ($85 billion). The money is invested in liquid foreign-currency-denominated assets, and is included in Russia’s foreign currency reserves.

The government’s support program approved earlier this year should get funding up to 550 billion rubles this year out of Russia’s second major sovereign savings fund, the National Welfare Fund. The money will be used to capitalise banks, which will then redirect the money to finance large infrastructure projects and provide credit to firms. The National Welfare Fund was initially established to meet future pension obligations. The Fund was, however, used to support the economy already in the 2009 financial crisis.

The National Welfare Fund held assets worth 5.1 trillion rubles ($74 billion) at the end of January. Most of the Fund is kept by the CBR and is also counted as part of Russia’s foreign currency reserves. About a quarter of the Fund’s assets have been allocated in various forms to domestic banks for lending forward to companies. There has been huge demand for this money in recent months, as banks and firms actively pursue government grants and support.

Although the assets of the two funds are mainly in the form of foreign currency held by the central bank, the foreign currency reserve does not automatically shrink if the finance ministry withdraws money. The finance ministry uses the foreign currency for buying rubles from the CBR, and thus the value of the CBR’s foreign currency reserve remains unchanged.§

Allocation of National Welfare Fund assets, 31 Jan. 2015

Source: Russian finance ministry