EM: Why did the government need to change the structure of the Stabilization Fund? How did its underlying principles change after its division into a Reserve Fund and National Wealth Fund?
PK: One of the goals of the reform was to disclose the proportion of budget revenues consisting of oil and gas remittances and show how these revenues are used. These revenues fluctuate, depending on the economic situation – here today and possibly gone tomorrow. Now the government can use these revenues to increase allocations to social programmes and important national projects. Imagine a situation where the money dries up. In this case it would prove extremely painful and virtually impossible to close down these projects. If this were to happen, the government would have to find additional revenue sources to continue financing these programmes. This could lead to an increase in the tax burden.
The main idea of the new budget concept is to identify which amount of revenue from oil and gas is needed to meet budget obligations and provide budget expenditures, without producing any negative effects on the economy as a whole.
EM: How will the oil revenues be allocated in future? Am I right in thinking that the principles governing the cut-off price will no longer be used or will be restructured?
PK: The cut-off price will be replaced by an oil and gas transfer mechanism. This transfer is fixed as a percentage of GDP. Previously the Stabilization Fund received only a part of oil export revenues exceeding the cut-off price ($27 per barrel). Now all the revenues from exports of oil, gas and oil products will be accumulated on a single account. The transfer will be channelled from this account to finance the oil and gas budget deficit. The government’s oil and gas revenues, which are not included in the oil and gas transfer, will be accumulated in the Reserve Fund and the National Wealth Fund. Furthermore, both new funds consisting of federal budget oil and gas revenues will be supplemented by investment income on these funds.
The tax base for revenues will not change: these will consist of export duties and mineral extraction tax. The sources for the tax will change, however: they will include not only oil, but also gas and oil products.
EM: How big should the Reserve Fund and National Wealth Fund be?
PK:The Reserve Fund should not amount to more than 10% of GDP. There is no ceiling for the National Wealth Fund. On the date of the transformation of the Stabilization Fund (January 30, 2008), the Reserve Fund amounted to R3,069 billion and the National Wealth Fund to R782.8 billion.
Federal budget oil and gas revenues will be remitted monthly to a single account and then withdrawn monthly from this account as a transfer to the budget. The transfer has been fixed at 6.1% of GDP for 2008 and should decrease on a sliding scale to 3.7% by 2011. These figures have already been fixed in absolute terms in the law on the budget. As soon as the transfer from oil and gas revenues has been performed, the money will start to be remitted to the Reserve Fund until it reaches 10% of GDP, meaning here the projected GDP for 2008. Once the Reserve Fund accounts for 10% of GDP, we will be able to remit the oil and gas revenues to the National Wealth Fund.
EM: Can you tell us the latest information about plans to use money from the sovereign wealth funds to support the pension system?
PK: Recently [former President] Putin signed a federal law on cofinancing voluntary pension savings of Russian citizens from the National Wealth Fund. From this year – starting on October 1, for five years – Russians may enter this programme. If one person invests between 2,000 and 12,000 rubles annually for future pensions via the state Pension Fund, the state will add the same amount to this investment.
In cases where a Russian citizen already has a right to a pension, but decides to withdraw from the scheme, the state will add to his [private] pension account an amount four times greater than his transfers to the Pension Fund. This programme will last 10 years for each citizen, starting from the date of his first transfer to the Pension Fund. The first amount of cash to finance this programme will be withdrawn from the National Wealth Fund in 2009. Specific amounts should be defined by the ministry of trade and economic development and approved by the federal law on federal budget for this year.
EM: Is the government considering the possibility of investing the fund’s revenues in the shares of Russian corporations?
PK: The Budget Code does not prohibit investments in Russian stock, corporate bonds and deposits of Russian banks. However, we have no right to treat the Russian market simply as a promising and interesting target for investments. We should consider the macroeconomic implications from such investments. These funds have been created to minimize risks related to dependence of the budget revenues on the current commodity market environment. With this in mind, it would hardly be reasonable to invest in the very assets whose returns are closely correlated with the risks mentioned.
The consequences are obvious. Just imagine that we invest in certain Russian blue chip companies or corporate bonds. Then, should we have to finance certain expenditures at some point in the future, we would have to withdraw these resources – and the withdrawal of a substantial amount of cash would have an adverse impact on the companies in which we had invested. The outcome would be even more disastrous at a low point in the market.
We could discuss the possibility of investing 5–10% of the National Wealth Fund money on the Russian financial market – but only if the market’s correlation with oil prices decreases, it becomes less speculative and its volume increases.
EM: In other words, these funds will not be invested in the Russian economy?
PK: They could be invested. However, you have to be very cautious with investments on the domestic market. In my opinion, this issue will only be raised in the future. You know how much state corporations – such as the development bank, Russian corporation of nanotechnologies and fund for housing restructuring – have received. Some of these resources, up to 484 billion rubles, are already invested on the Russian market. Nobody would permit these resources to lie there unused; they will be invested until being spent on important projects. I am convinced that the investment of these resources is subject to close monitoring by the government.
EM: Surely there is a risk that investments by the funds could have an adverse impact on inflation.
PK: In any case the Reserve Fund will, as in the past, play a key sterilizing function. It will withdraw from the economy money which was not backed by goods and services produced or provided in the country, but brought from outside.
People continue to lambast the ministry of finance and the government, arguing that the Russian economy is not benefiting, that the oil and gas revenues have been squirreled away, only to be invested in western assets. Now our citizens can be convinced that this is not the case: the resources are already used.
I fully understand analysts’ concerns that some of these resources – which are, it is true, windfall revenues – have been invested in the capitalization of development institutions and other programmes.
Unfortunately, these concerns are justified: above mentioned investments already caused definite inflationary impact. Growing inflation will worsen living standards of Russians and harm the business environment. From my point of view, the Russian economy is now already oversupplied with money. That’s why we should avoid investments of the National Wealth Fund inside Russia in the nearest future and keep government spending under strict control.
EM: Is the two-fund system sufficient to sterilize raw material revenues? Are there any other forms of non-inflationary use of these revenues?
PK: We hope that this system will be effective. Thanks to this system, it will be clear to everyone how much the government receives in oil and gas revenues and how much it spends. Our minister [finance minister Aleksei Kudrin] has stated on many occasions with respect to the Stabilization Fund that when the cut-off price was officially $27 per barrel dollar, the actual cut-off price was higher, approximately $33–35 per barrel. This happened because the budget was revised during the year, owing to the appearance of additional grants. Now the mechanism is becoming more transparent and understandable. We hope that we will manage to avoid any revisions in costs and that the budget will clearly outline the volume of transfers and funds, etc. I think that the reform of the Stabilization Fund and budget planning will have a sobering effect on all those who approve the state expenditures.
Interview by Simon Pirani