Russian President Vladimir Putin’s decision to limit the spending of his country’s US$190 billion sovereign wealth fund, the National Wealth Fund (NWF), could help resolve some uncertainty over its mandate and direction – although already announced big NWF-financed projects ahead of the 2024 presidential election are likely to go ahead.
Most of the NWF’s portfolio is comprised of liquid assets generated by oil and gas revenue, which is now climbing as energy prices recover sharply as the global economy eases its way out of the pandemic. Under current law, the Russian government is allowed to spend money from the fund when its liquid assets exceed 7% of GDP; at present, they are estimated at around 7.3%. Putin is instructing the government to amend legislation to raise the minimum to 10% of GDP, which would significantly restrict spending, especially as the country experiences an energy-led recovery.
The Ministry of Finance has already warned that energy revenues will diminish in the long-term as the world undergoes a transition to lower carbon economy, so Putin is keen to preserve the fund and prevent the NWF from following the Reserve Fund into extinction.
Additionally, concerns are mounting over the inflationary effect of pumping billions into an economy that is anyway rapidly coming to life with price inflation already well above the central bank’s target of 4%, despite hikes in the policy rate. Tensions appear to exist between the central bank’s concern over the NWF’s spending exacerbating inflationary pressures and the political impetus to invest to impress the electorate.
Putin’s decision to limit NWF’s spending also touches on more fundamental issues about its mandate, which has evolved into a hybrid of stabilization and savings. The future purpose of the fund has been vague and there is an ongoing debate on the purpose of the fund that could lead to a diversification of the portfolio.
At present, the NWF’s non-liquid holdings are almost entirely domestic and comprised of infrastructure assets and stakes in banks and industrial companies, but there have been growing demands for the fund to be used to stimulate the flagging economy, potentially to support the National Projects package and National Recovery Plan, which are lagging behind targets.
The rise in the minimum threshold for spending from the fund would limit the ability to use the NWF as a strategic investor with cash to splash on state-backed projects and affirms its long-term savings commitment.
Nevertheless, up until last week there were plans for huge NWF spending plans in the run-up to the 2024 presidential elections and it seems unlikely these will be significantly curtailed. Last month, the government announced it would spend RUB2.5 trillion (US$34 billion) from the NWF’s coffers over the next three years to revive economic growth. The amount was a hike from a previously agreed RUB1.6 trillion with the additional sum spent on the Ust-Luga chemical complex.
The decision flies in the face of the central bank’s warning that the NWF’s investments over the next three years should not exceed RUB1 trillion to avoid inflation. Putin’s directive therefore appears to be a tightrope walk act, remaining cautious of inflationary effects of pumping more billions into the Russian economy while seeking to stimulate economic diversification and address the nation’s deteriorating infrastructure.
The NWF is also restructuring its currency exposures to buffer it from the effects of the growing rift between Moscow and Washington. Under the weight of sanctions, Russia announced in June that it would remove the US dollar from the NWF’s holdings – representing 35% of the portfolio – and replace it with euro (40% of AUM), Chinese yuan (30%) and gold (20%).
The move affects the liquid part of the NWF, which currently stands at around US$120 billion, and US dollars are transferred internally to another account run by the Central Bank.
Global SWF believes the move could expose the portfolio to higher levels of risk. Stabilization funds tend to have a high level of hard currency allocation with a conservative risk-averse portfolio, while savings funds are highly oriented towards foreign currency and a heavier weight than other funds in EUR, JPY and GBP. As such, NWF would be heavily weighted in CNY for a fund of its type and exposes it to geopolitical factors and the constant threat of competitive devaluation.