Business as Usual: Russia Exhausts Its Reserve Fund

Publication: Eurasia Daily Monitor Volume: 15 Issue: 8


The Russian Ministry of Finance released an official statement, on January 10, 2018, confirming that all the money previously channeled into the Reserve Fund, as well as the interest it produced during the last 12 months, had been credited to the federal budget. So the Fund will be formally dissolved and closed on February 1, 2018 (, January 10, 2018). This announcement was nothing new, since it was long ago predicted that all the assets from the Reserve Fund would be sold in 2017 to cover the state’s budget shortages. Moreover, Finance Minister Anton Siluanov told journalists last December that the government used 660 billion rubles ($11.7 billion) from the National Welfare Fund because the 1.5 trillion rubles ($30 billion) that remained in the Reserve Fund was insufficient to balance the books (TASS, December 26, 2017). Many experts pointed to this as a milestone in the Russian economy’s downward spiral (, accessed January 16, 2018). But as other observers have noted, the Russian authorities still possess enough financial reserves to balance the country’s finances this year (Echo Moskvy, January 2, 2018).

Russia’s reserve funds were established back in 2004 as a single Stabilization Fund, which was split into the Reserve Fund and the National Welfare Fund (used to cover Russia’s pension system) in early 2008. As of January 1, 2008, the overall assets stood at 3.85 trillion rubles ($156.8 billion at the then-existing exchange rate). The Reserve Fund as a separate entity started with around 3 trillion rubles in assets and grew rapidly for most of 2008; but as the financial crisis hit Russia, the money was intensively used to cover the state’s rising budget spending. Indeed, most of the reserve money collected under Putin as president, was spent under Putin as prime minister—i.e., in 2009–2011. The Fund dropped to $25.2 billion by January 1, 2012. But even at that time, the situation was not as dramatic as it might be seen since, by the end of 2008, around $60 billion poured into the National Welfa­re Fund (valued at $86.8 billion as of the beginning of 2012). So the overall drop in reserves through the 2008–2009 crisis did not exceed 28.5 percent (, Reserve Fund, National Wealth Fund, accessed January 16, 2018).

The current situation is different, but not necessarily worse. The rebound in oil prices in 2012 and 2013 contributed to the growth of the Reserve Fund to $87.4 billion in early 2014—and their collapse in 2014 caused the drama­tic devaluation of the ruble, therefore increasing the Fund’s amount in Russi­an national currency. Thus, the Fund reached its highest ruble value—5.86 trillion—not in 2008, but in the middle of Russia’s economic downturn, on February 1, 2015. Therefore the government once again was well secured in the wake of the financial crisis and Western sanctions. It took four years to exhaust the Reserve Fund. Meanwhile, the National Welfare Fund currently has more than 3.75 trillion rubles ($66 billion)—more than both funds had combined at the start of 2012. Giving that inflation reached a record low of 2.5 percent at the end of 2017, this money is well secured and will be used with all necessary assiduity (, Reserve Fund, National Wealth Fund, accessed January 16, 2018).

At the same time, one should not underestimate the improving economic conditions in Russia. Since 2012, the federal budget was in the red, with a deficit that grew from 40 billion rubles in 2012 to a staggering 2.944 trillion in 2016. But last year it was much lower: only 1.5 trillion ($30 billion) (RBC, January 15, 2018), beating the forecast of 3.2 percent of Russia’s GDP (2.7 trillion rubles, or $50 billion) made by finance ministry officials back in July 2016 (RIA Novosti, July 7, 2016). Moreover, the deficit for 2017 ended up being 45 percent lower than had been estimated by that year’s budget law (Rossiyskaya Gazeta, December 22, 2016). Now, top finance officials are talking about an expected surplus in 2018 (Vedomosti, January 15, 2018). The finance ministry recently announced plans to purchase up to $4.5 billion worth of foreign currencies, between January 15 and February 6 (Interfax, January 11, 2018). And considering that the budget law is based on an oil price of $40 per barrel, these plans look perfectly realistic; so the depletion of the Reserve Fund may not be a problem at all.

What looks concerning, however, is the Ministry’s move to abolish the Reserve Fund as such. Until last year, the National Welfare Fund had never been used for balancing the budget before. Its value changed with fluctuations in the ruble exchange rate. And some portion of it was invested in infrastructure projects—therefore, only 62 percent of it may be immediately mobilized (Rosbalt, January 1, 2018). The only steady decrease occurred between September 2017 and January 2018 (by $10.2 billion, or 13.5 percent). But since the taboo on using the Welfare Fund has now been lifted, new claims on its funds could materialize, not only from budget lobbyists but also from state-owned corporations. In October 2014, Rosneft’s director-general, Igor Sechin, unsuccessfully petitioned the government for 2.4 trillion from the Fund (RBC, October 28, 2014).

Going forward (2018–2020), the perspective for Russia’s reserve fund will likely resemble 2012–2014. Global oil prices seem to have largely stabilized, which is a comfortable situation for Russian leaders. From 2018, oil exports could add up to $20 billion per year to Russia’s reserves, while entirely eliminating the budget deficit. That said, a new international financial meltdown or another foreign policy “adventure” could easily lead Russia into a new crisis, with reserves once again being depleted.

Russia’s problem lies not in any difficulty with amassing reserves; the problem is with managing them. Russian authorities are able to exchange the reserves into dollars, euros or pounds, and to secure them by buying either US or European government bonds. What they lack is a mechanism similar to the one used by Norway’s Government Pension Fund Global—in this case, the majority of the fund is invested in shares rather than bonds (65.9 versus 31.6 percent), while the holdings are highly diversified (around 9,000 companies in 77 countries) and secured (with up to 18,000 futures and credit default swap deals). For Norway, this produced an average return of 9.2 percent per annum for 2013–2017, on a fund that amounts to $1 trillion (, accessed January 16, 2018). Yet, there are no similar policies on the horizon for Russia’s reserve fund.