Russia’s Fund for Future Generations will be used to bolster the country’s pension system and its development institutions, Russian deputy finance minister Sergei Storchak has told Emerging Markets.
The country’s Stabilization Fund of sterilized oil revenues is due to be split next year into a Revenue Fund, which will remain offshore. Anything over and above 10% of GDP (about $125 billion) will go into the Fund for Future Generations – which, Storchak said in an interview, will be named the National Wealth Fund.
While the Reserve Fund will be managed according to a “conservative investment strategy”, broadly corresponding to that applied to the Stabilization Fund, there will be a longer list of types of financial assets in which it may be invested.
“As well as the debt instruments of foreign nations, the Reserve Fund may be placed in debt instruments of foreign state agencies and debt instruments of international financial institutions registered as securities, and deposited in foreign banks and credit organizations.”
Storchak says that details of how the Fund for Future Generations will be used are still under discussion. But its new name – the National Wealth Fund – has been agreed, and the principles for investment set out in President Putin’s State of the Union address: the fund “must go to improving people’s quality of life, improving the prosperity of both future and current generations”.
Two basic uses have been decided upon: “support for Russia’s pension system, and capitalization of [Russian] development institutions”. The size of the National Wealth Fund needs to be raised to the level at which these needs can be met from “revenues arising from effective management of the resources [invested in the fund]”, Storchak says.
Across the asset classes
The Fund for Future Generations will be managed with a view to “maximal diversification” between asset classes, Storchak adds. It will be invested only in foreign financial assets, with the same priority given to safety as applies now to the Stabilization Fund. This will simultaneously serve two purposes: “It will preserve the real value of revenues from non-renewable resources [i.e. oil and gas revenues] for use by future generations, and allow the use of a part of the revenues from investment to provide for current budget requirements.”
The Fund for Future Generations will be invested offshore not only in “highly liquid state securities, but also in other less liquid, but higher-yielding and riskier, financial instruments, including shares and corporate bonds”. The fund might also be invested in property. Storchak effectively ruled out investment of the fund in Russian stocks, arguing that this would run counter to the risk diversification principles on which it is based.
It is “not excluded” that external fund managers will be appointed for the Fund for Future Generations, in which case the finance ministry would arrange a tender, Storchak says. But the Reserve Fund, like the Stabilization Fund, will be managed by the Russian central bank.
The Reserve Fund, like the Stabilization Fund, will be invested 45% in dollar-denominated securities, 45% in euro-denominated and 10% in sterling-denominated. But Storchak hints that the proportions could change. The finance ministry is “analyzing whether it is expedient to widen the list of currencies in which the securities may be denominated, in order to heighten the effectiveness of the investment ... This could lead to the proportions being altered.”
Storchak is bullish on the Russian economy, suggesting that by 2009 Russia will probably overtake France as the world’s sixth-largest economy. “We don’t see any substantial obstacles to achieving that aim,” he says. In 2006, Russia’s GDP at purchasing power parity was $1.7 trillion, compared to France’s $1.9 trillion.
Storchak believes that the studies made of the lessons of the sub-prime crisis have “so far been meagre”. All that is clear up to now, he argues, is that many financial and administrative mistakes were made “not only by householders and their lenders, but also by market regulators, and many other organizations and associations”.
For this reason, “I agree with those who see in the sub-prime crisis, above all, the threat of a slowing down of world economic growth” – although this will “not be substantial”.
Russia’s economy has “sufficient durability” to meet challenges arising from the crisis. “We do not see fundamental, direct risks or new challenges for the Russian financial system.”
For more analysis of Russia's regional wealth divides, please see "Future uncertain for Russia"