Russia’s fiscal stabilization fund is increasingly being used to support the government’s “war economy” as sanctions bite.
The NWF’s mission as a “rainy day” fund for fiscal stabilization is being chipped away by the needs of Russia’s economic defense. The fund fell 8.5% m-o-m to RUB10.8 trillion (US$178.4 billion) by October, and down 6.6% y-o-y in rubles and 22.3% y-o-y in US dollars, as it was hit by the turmoil in the wake of President Vladimir Putin's war against Ukraine
In mid-2022, Putin ordered his government to draw up new rules for how the NWF can be spent, using it to advance funds to maintain economic activity and support emergency investment. Earlier in the year, the government planned to allocate U$46.8 billion in 2023 and US$20.9 billion in 2024 from the NWF to support spending, according to the TASS news agency. However, the mission of the fund is expanding to support the country’s infrastructure, signalling the fund’s politicized mission creep as Russia becomes increasingly isolated due to the invasion of Ukraine.
The aviation industry is the main target of support. The national airline Aeroflot is in trouble. It carried 2.2 million passengers in March 2022, including on its low-cost airline, Pobeda - less than half the 4.6 million carried in March 2019.
The Russian government announced this week that it is planning to use RUB1.4 trillion (US$22.7 billion) from the NWF to replace foreign aircraft with domestic equivalents as sanctions impede the supply of parts and components. The funds will be channelled to aircraft leasing companies to replace Boeing and Airbus airliners with new Russian-built planes, including Sukhoi's Superjet 100 and Irkut's MS-21. Around 1,000 planes will need to be replaced by 2030 to end the reliance on Western suppliers.
The move comes after Russian state flagship airline Aeroflot announced in June that it planned to raise up to RUB185 billion (US$3 billion), supported by the NWF, in an emergency share issue to order 300 aircraft from United Aircraft Corporation – despite passenger numbers being down by around a third compared to pre-pandemic levels. Airbus and Boeing accounted for all but 10 of Aeroflot's 187-strong fleet at the start of 2022. During the pandemic, Moscow stepped in to buy RUB80 billion (US$1.3 billion) of Aeroflot shares using the NWF, indicating that the fund is increasingly used to prop up the troubled flag carrier.
Last month, Russia announced plans to spend RUB400 billion (US$6.8 billion) of NWF funds on investment projects, on top of the RUB535 billion it had already spent on maintaining financial stability. Russia plans to spend up to RUB4 trillion from the NWF separately this year to finance a budget deficit.
This week, the finance ministry announced it plans to allocate a portion of the NWF to finance budgetary expenditures. Finance Minister Anton Siluanov told the State Duma, “We have not yet used resources of the National Wealth Fund to finance budgetary expenditures. We are only planning to do so now because the year is coming to an end soon; the bulk of expenses are incurred at year’s-end. We have the right to do so this year - to use NWF resources for spending. We plan to exercise this right.”
