Wednesday, 13 June 2007

Russian oil wealth raises hopes of equity revival

Financial News

Jason Corcoran in Moscow

11 Jun 2007

Welfare fund will mostly invest overseas

Russia is planning to spin off an investment fund from its $114bn (€84.3bn) official oil reserves to invest in foreign stocks.

The National Welfare Fund could be seeded with about $25bn from next February. Russian Finance Minister Alexei Kudrin said the investment structure would be similar to Norway’s state pension fund, 60% of which is invested in stocks and 40% in bonds.

Peter Westin, chief economist at Moscow’s MDM Bank, said: “Modelling the management of the Russian fund on Norway’s would indicate a focus on investing the fund in foreign securities, and thus would shield the fund from Russian-specific risk, which we believe would be a healthy approach.”

The Norwegian fund’s assets are invested abroad to prevent its economy from overheating but Russian President Vladimir Putin recently raised the prospect of the fund investing in domestic stocks.

Putin suggested part of the windfall could be used to support blue-chip companies, such as state-controlled energy group Gazprom, whose share price value has fallen almost 20% this year.
Julia Tsepliaeva, chief Commonwealth of Independent States economist at ING, described Putin’s view as potentially dangerous.

She said: “If Putin’s idea of government intervention on the equity market materialises, the country may not only face higher inflation, but the stock market could also destabilise and overheat. Foreign investors may not like the idea either, as, in this case, Government intervention is unlikely to be of help.”

In a rare public spat, Putin’s comments clashed with Kudrin’s, who said an infusion of government cash into the equity market to support stocks would be ill-fated.

Chris Weafer, chief strategist at Alfa Bank, said there was little consensus in the cabinet on how best to invest the funds.

He said: “Economy Minister German Gref and his colleague Kudrin are both opposed to the state champion model. Gref recently suggested Russia walk from its controlling equity stakes, apart from Gazprom, while Putin’s camp blames the 1998 crash on a lack of state intervention.”

If a decision is taken to invest in Russian assets, Westin said it should be restricted to mainly bonds and only involve a fraction of the fund. He said: “The Government should limit exposure to Russian risk. ”

The Stabilisation Fund, set up in 2004 to accumulate oil reserves, will cease to exist from next year when it reaches the equivalent of 10% of GDP, or about $125bn.

The accumulated fund will be renamed the Reserve Fund and will continue to be invested in the same way – in AAA-rated foreign government debt. Any additional funds above 10% of GDP will be allocated to a second scheme, the National Welfare Fund.

The central bank will continue to manage the Reserve Fund while the remaining investments are up for grabs.

Arkady Dvorkovich, head of the Kremlin’s economic research department and a Putin aide, has called for international fund managers, not the Government, to be involved. Kudrin said a special agency or a private asset management company might manage the fund’s assets, but the model has not yet been finalised.

The Russian Ministry of Finance is predicting the Reserve Fund will reach $142bn and the welfare one $25bn when the split takes place in February; both could continue to rise in value if oil and gas prices remain high. Roland Nash, head of research at Renaissance Capital, an investment bank, said the fund should reach 10% of GDP about six months before the presidential elections, “creating a political imperative for the money to be invested domestically”.

The Moscow equity market has taken a buffeting in recent months. The Micex index has risen by 0.2% this year, compared with 81% last year, while the Russia US dollar-denominated RTS Index is up 0.7%. Eric Kraus, managing director of hedge fund Nikitsky Russia, blames a combination of initial public offering overload and poor investor sentiment.

He said: “We are bewildered by the recent underperformance of the Russian equity market. Given the superb macroeconomic fundamentals, as well as the strong performance of Russian debt, real estate, foreign direct investment and private equity markets, we are not overly worried.

“Having been oversold, the pendulum appears to be swinging back and we find the market presents a compelling buying opportunity.”

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