Russia’s National Wealth Fund (NWF) has so far defied expectations that it faces a slump in portfolio value amid increasing sanctions and domestic economic recession, but the situation could still change as Western governments tighten their measures in response to intervention in Ukraine.
In US dollar terms, the NWF’s AUM has held up due to the strong value of the rouble. The rouble broadly stabilised in April 2022, returning to pre-war levels in the early part of the month before falling back slightly. However, the remaining capital controls imposed by the CBR in the wake of Western sanctions have rendered the currency largely untradeable, which meaning that the RUB/USD exchange rate will trade sideways. Much will depend on the success of the country’s attempts to shore up the rouble with its insistence that “unfriendly states” pay for energy exports in roubles.
At the turn of May, the NWF’s assets under management totalled RUB11 trillion (US$155 billion), which represented only a marginal drop in US dollar terms but due to appreciation of the rouble implied a local currency value loss of 14.9%. However, the fund’s liquid assets overall shrank to US$110.89 billion in April from US$115.3 billion as the government tapped the fund for pensions payouts.
NWF’s stake in Sberbank has plummeted, as has the value of its Aeroflot stake. Additionally, the fund is under pressure to invest RUB1 trillion in Russian stocks to prop up the Moscow stock exchange.
Last month, Russian news agency Interfax stated that Russia is considering spending around RUB107 billion (US$1.34 billion) from NWF to recapitalize flagship airline Aeroflot in response to sanctions. The plan is to buy into a new share issue by Aeroflot via an open subscription and spend a further RUB57 billion roubles on equity stakes in other Russian airlines to help them pay debts, reported Reuters. The move comes on top of a RUB80 billion bailout in 2020 at the height of the global lockdown during the pandemic.
Faced with difficulties in accessing global financial markets and the junk status of Russia’s sovereign debt, the NWF’s large pool of financial resources is tempting for any government to draw upon. While the decline in AUM was relatively small in April, NWF’s liquid assets plummeted. This could make it harder to finance a fiscal deficit. Presently, this is not an issue. According to the Ministry of Finance, in the first four months of 2022 the federal budget had a RUB1.04 trillion surplus. Yet, the authorities have indicated they will use funds to cushion a forecast budget deficit.
Last June, the NWF decided to ditch its US dollar holdings, which totalled US$41 billion and represented 35% of its foreign currency and gold holdings, and increase investments in euro to 40%, Chinese yuan to 30% and gold to 20% with the remainder comprised equally of yen and pound sterling. By March, the fund had approximately 37% allocated in euro, 31% in renminbi, 22% in gold, 5% in sterling and 5% in yen, indicating it was close to its targets, albeit tilted more towards the Chinese currency and gold.
NWF’s asset base will continue to suffer rapid attrition caused by global isolation and likely economic recession. Nevertheless, The NWF will be used to support the value of stocks and government bonds that have shrunk sharply since late February.