Tuesday, April 24, 2007

Russia To Start Investing its Fund in Higher-Yield Investments

After a long waiting period and continuous urging of key Russian and Western economists, Russia has finally taken a step toward an active management of its stabilization fund, which has amassed over $100 billion in windfall oil revenues since its inception three years ago. The Financial Times reports:

A reserve fund will be kept at 10 per cent of gross domestic product – enough to support budget spending for three years even if oil prices were to halve. Any surplus after using a set portion of energy revenues for budget spending will go into a “future generations” fund for longer-term projects.

The reserve fund is projected to hold about $142bn and the future fund $24bn when the divide occurs next February, and both could continue to grow rapidly if energy prices remain high.

Mr Kudrin told the Financial Times the reserve fund would be invested in a conservative portfolio of government bonds – as the stabilisation fund is now. But the other fund could invest in higher risk assets, aimed at maximising returns.

“There we will have corporate shares from various sectors, including oil and gas, so we will have a bigger income,” Mr Kudrin said, adding that the money could eventually buy assets such as real estate.

He suggested Russian or western fund managers could be appointed to manage the fund – a contract likely to attract vigorous competition.

The plan demonstrates the turnround in Russian public finances, fuelled by record energy prices, since its 1998 crisis. Russia has built gold and foreign exchange reserves of $356bn – the world’s third biggest – in addition to its petrodollars fund.

Russia has been often criticized for sitting on a big chunk of money, while the growth in its economy was slowing down. Some economists still argue that the amassed capital in the fund should be invested into domestic projects, at a much higher rate than the current investment pace of the "National Project" program. Russia's still underdeveloped infrastructure, and most importantly underdeveloped community areas would potentially profit from such investments. Yet Russia has understandably avoided such an approach. The "vertical of power" that Putin has been constructing still fails to ensure a fast and accurate implementation of government initiatives. Middle-level corruption takes an even bigger toll. The government is afraid that the amassed investments will dwindle rapidly if such capital expenditures are undertaken.

At least the investment of the fund into higher-yielding securities will generate some additional revenue for to ensure a future balance in the budget, but the problem of capital underinvestment in the economy still remains

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