CRITICS TARGET DECISION TO LET STABILIZATION FUND INVEST IN RUSSIAN SECURITIES

Last week President Dmitry Medvedev gave Russia’s Finance Ministry and Central Bank until October 1 to draft proposals on the investment strategy of the country’s Stabilization Fund. In February of this year, the fund, which was created in 2004 as a reserve to ensure that the federal budget could be balanced if the price of oil fell below a cut-off price (currently $27 per barrel), was split into a $129 billion Reserve Fund, which is invested abroad in low-yield securities and retains the Stabilization Fund’s original mandate, and a $33 billion National Welfare Fund (NWF), which invests in riskier, higher return vehicles, as well as federal budget expenditures. Amendments to the Budget Code introduced at the end of 2007 stipulated that the main objective of the National Welfare Fund was financing the needs of the pension system.

Still, at least as of June 2007, Finance Minister Aleksey Kudrin was still insisting that NWF money be invested exclusively abroad (Kommersant, June 18). That has now changed. Medvedev told the Finance Ministry and Central Bank that it was necessary “to think about expanding the list of instruments for [the National Welfare Fund’s] investment to include securities of both Russian and foreign issuers.”

When Prime Minister Vladimir Putin reappointed Kudrin as finance minister last month, and Medvedev approved the nomination, many observers saw it as a reassuring signal to both Western investors and Russian free-market advocates that the new Kremlin administration and cabinet would pursue a liberal economic policy. That optimism was buoyed by the apparent demotion of figures like Igor Sechin, the reputed leader of the “siloviki” hardliners, who was moved from the post of deputy Kremlin chief of staff to the ostensibly less influential post of deputy prime minister. Some observers, however, see Medvedev’s call for expanding the National Welfare Fund’s investments to include securities “of both Russian and foreign issuers” as a sign that Kudrin has been defeated by, or capitulated to, the hardliners in the area of macroeconomic policy, and that Medvedev is perhaps not the reformer they had hoped him to be.

The man who first proposed that Russia set up a stabilization fund was Andrei Illarionov, who was Putin’s economic adviser in the Kremlin before quitting in protest over Putin’s policies in December 2005 and is now a senior fellow at the Cato Institute, the Washington-based libertarian think-tank. Illarionov has said that a stabilization fund “by definition cannot be used and cannot be spent inside the country.” After Illarionov’s departure, Kudrin was the only government official left to keep to his line, at least partially, and he came under strong pressure to abandon that position. In May 2007 Putin suggested that surplus oil revenue be used to support domestic stocks like those of the state-controlled energy giants Gazprom and Rosneft. In September 2007 Sergei Chemezov, head of the new state corporation Russian Technologies, proposed loaning money from the Stabilization Fund to domestic companies (Moscow Times, December 19, 2007).

On November 15, 2007, a Federation Council Budget Committee roundtable called for money from the Stabilization Fund to be invested not only in Western stock market indices, but also in stocks and bonds of Russian state monopolies. Konstantin Sonin, a professor at the New Economic School/CEFIR in Moscow, warned that this would “encourage ineffective and uncontrolled investment by state corporations and provoke them into default.” Andrei Illarionov denounced the roundtable’s suggestion as “thievery” (Kommersant, November 16, 2007).

The day after the roundtable was held, November 15, 2007, Deputy Finance Minister Sergei Storchak, who oversaw the Stabilization Fund, was arrested. He was subsequently charged with attempted embezzlement of more than $43 million from the federal budget. Storchak remains incarcerated.

Andrei Ryabov of the Carnegie Moscow Center said that President Medvedev’s order to the Finance Ministry and Central Bank to “think about” expanding the NWF’s investments to include both foreign and Russian securities suggests that the Russian government was moving toward an “inflationary policy.”

Signs of this trend are the “large social expenditures that … no one wants to restrain. On the contrary, we constantly see, every week, the parliament adopting amendments that add something, increase something to someone and so on,” Ryabov said. “Plus, [there is] the unceasing pressure of various lobbyists, who are likewise demanding all kinds of projects.” By way of example, Ryabov cited the program for developing Russia’s railroad system by 2030 that was recently signed by Prime Minister Putin and will cost a whopping 14 trillion rubles or around $588 billion (RosBusinessConsulting, June 17). According to Ryabov, this program was prepared long ago by Russian Railways, the state-owned railway monopoly. “I don’t think it will stop there. Other … powerful [and] substantial state companies will come with their demands and claims,” Ryabov added. “To all appearances, the vector of economic policy has begun to bend in this direction.”

Ryabov concluded that since there were “very few” people in the current cabinet who shared Kudrin’s stated views on macroeconomic policy–“you could count them on the fingers of one hand,” he said–a “balance of forces” was developing “in favor of supporters of an inflationary policy” (Vlast, RTVi television and Ekho Moskvy radio, June 20).