Putin puts Russian sovereign wealth fund back on agenda

Financial News

Jason Corcoran in Moscow

21 January 2008

Analysts hope the vision of a Norwegian-style investment strategy will prevail
Plans are back on track to spin off a sovereign wealth fund from Russia’s $150bn (€101bn) oil reserves to invest in foreign stocks and bonds after President Vladimir Putin’s decision to nominate a successor, according to Moscow analysts.

The aim of Finance Minister Alexei Kudrin to set up a Norwegian-style future generations fund next month looked uncertain when Sergei Storchak, the minister responsible at the Stabilisation Fund, was arrested on charges of embezzlement, which he denies.

Concerns emerged after an Israeli fund manger said Kremlin officials had given him the go-ahead to conduct a “velvet reprivatisation” in strategic industries and suggestions the fund should pay off oil group Rosneft’s debt.

But Kudrin was bolstered last month when Putin nominated Dmitry Medvedev, a liberal reformer close to Kudrin, as his favoured presidential successor.

Yaroslav Lissovolik, chief economist of Deutsche Bank in Russia, said: “The Stabilisation Fund is the anchor of Russian macroeconomic policy. There has been some disagreement about its future but the changes in the top echelons of government have given me added conviction the Minister of Finance’s vision will prevail.”

The Stabilisation Fund will be divided into the Reserve and National Prosperity funds from February 1. The Reserve Fund, expected to total 10% of Russia’s GDP, will perform a similar role to the Stabilisation Fund, cushioning the federal budget in the event of an oil price plunge.

Oil and gas revenues above this limit will supplement budget spending and will go to the National Prosperity Fund, which could be seeded with between $25bn and $30bn.

This month the Finance Ministry said the Reserve Fund would follow the same investment rules as the Stabilisation Fund – with at least half going into developed countries’ sovereign bonds – but it is devising the Prosperity Fund’s investment strategy with other ministries and the central bank. While a detailed investment model has yet to be seen, finance ministry officials have indicated the fund will initially adopt a cautious approach.

A spokeswoman for the ministry said the fund would not immediately invest in foreign equity. She said: “The rules are not ready yet, due to a delay, but we will go ahead when they are.” She said the state prosecutors had extended the detention of Storchak until April 9.

Kudrin wants the investment structure of the Prosperity Fund to resemble Norway’s state pension fund, 60% of which is invested in stocks and 40% in bonds. He has suggested a special agency or a private asset management company might manage the fund’s assets.

The overhaul of the Stabilisation Fund has been a point of political contention and disagreement continues about how it should be used. Pressure has been increasing on Kudrin to loosen the purse strings ahead of the presidential elections but he has consistently voiced fears about irrational domestic spending, which could overheat the economy and further fuel inflation.

The Government wants to revitalise the country’s industrial base and diversify the economy from energy exports towards investing in high-technology projects. It has drawn $12.3bn from the Stabilisation Fund to seed investment in infrastructure projects and nanotechnology.

Funds from oil revenues have found their way into the Russian Venture Company, a state fund created in August to support start-ups. US venture capitalist group Draper Fisher Jurvetson, Russia’s VTB Asset Management and Israeli financial services group Tamir Fishman have entered into deals with the RVC. Under these arrangements, the firms will create a fund with their money and state money. By the end of next year, the RVC hopes to have alliances with between seven and nine more funds.

The RVC initiative suffered a setback when Tamir Fishman pulled out of the deal, following comments made by its Russian minority partner Oleg Shvartsman of fund manager Finans-Group. In an interview with Kommersant newspaper, Shvartsman said the Government had authorised him to acquire the assets of some firms and then give them to an asset management group on what he called “a voluntary-coercive basis”, which he described as “velvet reprivatisation”.

The Russians could learn from Azerbaijan how best to spend their oil riches. The former Soviet state set up the State Oil Fund of the Republic of Azerbaijan in 1999 to transfer the benefits of energy exports to future generations.

The fund’s assets are used to finance capital budget expenditure – particularly related to infrastructure – and projects aimed at stimulating small to medium enterprises, reducing poverty and addressing other social problems.

Its main source of revenue is income from oil contracts, including proceeds from the sale of profit oil, which account for about 75% of its annual revenues.

Katya Malofeeva, chief economist for Russia at Renaissance Capital, said: “So far, the inflow of oil revenues has been only a fraction of the expected total inflow as commercial oil only started flowing last year. The country expects to receive $150bn to $200bn in the next 20 years through existing projects.”

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