Stabilization Fund of the Russian Federation

The Stabilization fund of the Russian Federation (Russian: Стабилизационный фонд Российской Федерации) was established based on a resolution of the Government of Russia on 1 January 2004, as a part of the federal budget to balance the federal budget at the time of when oil price falls below a cut-off price, currently set at US$27 per barrel. In February 2008 the Stabilization Fund[1] was split into a Reserve Fund, which is invested abroad in low-yield securities and used when oil and gas incomes fall, and the National Welfare Fund,which invests in riskier, higher return vehicles, as well as federal budget expenditures. The Reserve Fund was given $125 billion and the National Welfare Fund was given $32 billion.

Furthermore, the Fund is to serve as an important tool for absorbing excessive liquidity, reducing inflationary pressure and insulating the economy of Russia from volatility of raw material export earnings, which was among the reasons of the 1998 Russian financial crisis. To prevent high inflation rates the fund is invested into abroad only.

Aggregate amount of the Stabilization fund of the Russian Federation

Datein Billion US dollarsin Billion rubles
01.30.20081573,852
01.01.2008156.813,849.11
01.12.2007144.433,517.05
01.11.2007147.603,649.25
01.10.2007141.053,519.09
01.09.2007132.913,409.07
01.08.2007127.483,263.56
01.07.2007121.683,141.35
01.06.2007116.853,026.68
01.05.2007113.702,920.50
01.04.2007108.112,812.21
01.03.2007103.552,708.85
01.02.200799.772,647.21
01.01.200789.132,346.92
01.12.200683.212,189.52
01.11.200676.622,049.30
01.10.200670.731,894.09
01.09.200664.731,730.64
01.08.200682.142,207.33

Recent developments

According to amendments to Russia’s budget code inspired by President Vladimir Putin’s budget address of March 2007 and passed in April 2007, in February 2008 the Stabilization Fund was supposed to be split into a Reserve Fund, to be invested abroad in low-yield securities and used when oil and gas incomes fall, and a Future Generations’ Fund (later renamed the National Welfare Fund), which will invest in riskier, higher return vehicles, as well as federal budget expenditures. Unlike the Stabilization Fund, the new funds will also accumulate revenues from oil products and natural gas.[2][3][4]

On 21 May 2007, President Vladimir Putin urged the government to pump surplus oil revenue into domestic stocks by buying Russian blue chips such as Gazprom and Rosneft, which had fallen since the beginning of the year, instead of foreign securities, which previously had been explicitly forbidden due to fear of inflation.[5]

Accumulation and expenditure

The Fund accumulates revenues from the export duty for oil and the tax on oil mining operations when the price for Urals oil exceeds the set cut-off price.

The capital of the Fund may be used to cover the federal budget deficit and for other purposes, if its balance exceeds 500 billion rubles, spending amounts are subject to the federal budget law for the corresponding fiscal year.

As the capital of the Fund had exceeded the level of 500 billion rubles in 2005, part of its surplus was used for early foreign debt repayments as well as to cover Russian Pension Fund's deficit.[6] The details of these transactions in 2005 are as follows:

Transactions in 2005billion USD
Early debt repayment to the International Monetary Fund 3.33
First debt repayment installment to the countries-members of the Paris Club 15
Paid to Vneshekonombank (VEB) for loans provided to the Ministry of Finance in 1998-1999 for servicing the state foreign debt of Russian Federation 4.3
Transferred to the Russian Pension Fund. 1.04

Investment Policy

Governance Structure

The Fund is managed by the Russian Ministry of Finance, in accordance with the procedure defined by the Government of the Russian Federation. Some functions of asset management may be delegated to the Central Bank of the Russian Federation ("the Bank of Russia"), based on its agreement with the Government.

Concerning the Fund's objectives, its capital is to be invested in foreign sovereign debt securities. Securities' eligibility criteria are subject to the Government's approval.

The Ministry of Finance is empowered by the Government to establish the Fund's currency composition and its strategic asset allocation in line with the investment policy for the Fund's management.

The Ministry of Finance may use one or both of the following schemes defined by the Government to invest the Fund's capital.

Schemes defined by the Government to invest the Fund's capital
Investment in eligible foreign fixed income securities directly
Allocation to the Federal Treasury's accounts with the Bank of Russia in foreign currency, with the total return of these accounts based on indices composed of eligible foreign debt securities and defined by the Ministry of

Finance.

The Fund assets are currently invested solely under second scheme (allocation to the Federal Treasury's accounts with the Bank of Russia).

Investment Guidelines

The Government determined that eligible debt securities for the Fund investment are to correspond to the following requirements.

Fixed income securities of Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, the United Kingdom, and the United States, denominated in US dollars, euro, GB pounds (sovereign debt securities)
Issuer shall have a long-term credit rating at AAA/Aaa level (highest investment grade) from at least two of the following three rating agencies: Moody's Investors Service, Standard and Poor's, Fitch Ratings
Minimum amount outstanding of a candidate security: 1 billion US dollars, 1 billion euro, 500 million GB pound respectively
Securities shall be bullet
Securities shall have no call or put options
Fixed coupon type if a coupon bond
Not for private placement

Debt secuirities on the date of purchase will have a minimum remaining maturity of 0,25 years and are not to exceed three years.

The Fund assets are currently invested in the following currency composition:

US dollars45%
Euro45%
GB pounds10%

Currency composition and the maturity restrictions are applicable to all Fund's assets and are subject to revisions by the Ministry of Finance.

Reporting

The Ministry of Finance publishes a monthly report in mass media on the Fund's accumulation, spending and balance and reports quartelry and annually to the Government on accumulation, investment and spending of the Fund's capital. The Government will report quarterly and annually on the Fund's accumulation, spending and investment of capital to both chambers of the Russian Parliament (State Duma and Council of Federation).

See also

References

  1. ↑ Russia's Stabilization Fund, Globalization 101, a project of SUNY LEVIN Institute, retrieved on 6 August 2012.
  2. ↑ RIA Novosti - Business - Russia's Duma approves Stabilization Fund transformation
  3. ↑ RIA Novosti - Opinion & analysis - Putin's address leaves philosophy aside
  4. ↑ International Spotlight: Russia
  5. ↑ Putin wants oil revenue to go into Russian stock market - International Herald Tribune
  6. ↑ Statistics on the National Debt in Russia in relation to GDP from 2002 to 2012, World Economic Outlook Database, April 2012.
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