2024-03-02 02:43:23
The great Russian resistance to the high costs of war and Western sanctions has been due to numerous factors.
A great demand for oil, unexpected income… but one of the country’s greatest shields, which have served to save its budgets and its currency, has gone under the radar: the Russian National Wealth Fund (NWF). This vehicle is an emergency fund originally created to ‘level out’ the volatility of the oil market in Russian accounts and generate capital gains along the way, however since 2014 it has had a very different purpose: to act as a financial cushion, continuing to fuel spending Russian and shore up its currency.
Now experts have focused on this ‘secret engine’ of Russia that has seen how its liquid reserves have already plummeted by 50% since the invasion of Ukraine, just at the time when the Eurasian country needs greater spending to face a new year of operations in Ukraine, in addition to other challenges. In fact, Russia itself has changed its legislation this month to accelerate the outflow of liquidity from this fund to Russian accounts.
The NWF was created in 2008 when the Russian Stabilization Fund was split into two vehicles. On the one hand, the Reserve Fund, which was dedicated to investing in low-yield assets abroad and, on the other, this company, which was dedicated to receiving part of the oil capital gains and investing in higher risk assets. Finally Russia dissolved the first and turned the NWF into its great ‘investor’ pillar, especially since 2014, when it invaded Crimea and the first sanctions began and began to reduce its international exposure.
Until that moment, the idea was to use the fund to prevent an oil surplus or a deficit from causing shocks in its budget management, providing stability through a vehicle that would operate on the margins and that would offer returns every year with those ‘remnants’ of gold. black. Currently, in addition to carry out numerous ruble buying and selling operations with the Central Bank of Russia, this fund is one of the large owners of all Russian companies such as Sberbank (it owns 50%). It is also the largest investor in numerous projects such as the manufacturing of commercial aircraft or a multitude of energy plants such as the LNG plant in Yamal.
The last decade Russia uses this fund as a key player in its national defense. To begin with, accumulating massively liquid assets so that, in the event of sanctions or geopolitical problems, we can use these reserves as gasoline. On the other hand, use part of them to invest in strategic companies for Russia and develop its industrial fabric in the face of the threat of an investor flight.
According to the latest records from the Ministry of Finance, the public fund has seen its liquid assets collapse by almost 50% to $57 billion (2.7% of GDP). compared to the 112,700 dollars they had amassed Before the war. Although it has illiquid assets, the reality is that many of these are due to investments that the fund has made to keep its economy running and, in the current situation, it does not seem that it can have access to them. The total volume of its assets has fallen ‘only’ 12.2%, however, Oxford Economics explains in its latest report that “the total size of the NWF is irrelevant because all of these investments are mostly totally illiquid, with shares in its portfolio and infrastructure projects, only ‘cash’ can be considered a reserve for difficult times, the rest does not exist.”
In that sense, Russia faces an era of record spending. To begin with, the budget approved for 2024 contemplates a 30% increase in military spending for take it to 376.7 billion euros. This has been mixed with a deficit that came from 2023, which affected a negative 2% of GDP. In that sense, with Western financial markets closed, the country has consistently sought to avoid going into debt and, to do so, actively resorts to this ‘fund’. The deficit, in any case, seems like it is not going to go anywhere and in January a negative result of 3.3 billion dollars was recorded. According to their estimates for 2024, they expect a deficit of 1.6 trillion rubles or 9.5 billion dollars.
Economic problems
From the government itself and the International Monetary Fund there is talk of “difficult times” for the Eurasian economy. Although the international organization raised its growth forecasts to 2.6% They defend that it is an artificial growth derived from public spending due to the war, but that, under these figures, Russia’s real economy is in low hours. “This is a war economy in which a State with a considerable cushion, built over a decade, is buying to finance the conflict” Kristalina Giorgieva, president of the IMF.
In that sense, “if you look closely, production is increasing for military purposes but the level of consumption is decreasing, just as happened in the USSR, a high level of manufacturing but a low level of consumption.” The Russian Ministry of Economy showed in its latest presentation that in 2024 they expect Defense spending accounts for 40% of the entire budget. The Official Monetary Policy and Financial Institutions Forum (OMFIF) agreed and highlighted how high inflation and high interest rates are wreaking havoc on its economy.
“Although it is clear that Russia could withstand this situation for a few more years due to its powerful buffers, it is generating a significant blow to the economy in the medium term”
“If you look at the data superficially, you can talk about an economy that is ‘resistant’ to the costs of the invasion,” explained Mark Sobel, president of OMFIF, but “This is a short-term vision.” “which does not speak to the reality of clear economic degradation.” From the forum they explain “although it is clear that Russia could withstand this situation for a few more years due to its powerful shock absorbers”, it is generating “a blow to the economy in the medium term” that already seems inevitable.
This has caused Russia to resort massively to its emergency fund this year. In order to do so at an accelerated pace, it has resorted to a legal change that, specifically, allows Russia to withdraw more assets. This same month of January, the Duma confirmed the new Kremlin regulations, through which the NWF will not receive the 11.5 billion rubles They expect their budget from oil revenues, but practically all of it will go to their budget.
Until now this had not been a problem, as Russia had withdrawn liquidity from the oil surplus. In fact, in 2022, about $16.2 billion that would have gone to the NWF due to high barrel prices was withdrawn directly to cover military spending. In 2023 there was a special law to the withdrawal of 38.1 billion dollars, while 32 billion ‘extra’ liquid assets were sold during the course of that year to cover said deficit.
These massive withdrawals caused, among other things, that they were left without any liquidity in euros on their balance sheets. On the other hand, the Minister of Finance himself, Anton Siluanov, explained that “Given the situation of energy prices we have decided to use the National Fund, But if we see that your assets continue to decrease, we will take other measures because we are not interested in leaving you penniless.”
Oil will be the key
According to Bloomberg Economics analyst Alex Isakov, if we continue using this ‘tool’ “we would be approaching the end of these Reserves by the end of 2024, so Russia is no longer having ‘insurance’ against low prices. of the oil”. For his part, the expert concludes that “when this stock of assets liquidity “Russia will become much more vulnerable to crises,” although it all depends on the export price of Ural oil.
It all depends on whether the ‘return’ limit is met, which makes the difference between the fund providing the expected income or whether it will be a blow to Russian ambitions. This is 60 dollars a barrel (according to the price of the Urals). If this figure is not achieved, Renaissance experts anticipate a reduction of at least 1 trillion rubles. For their part, CentroCreditBank experts assume that a barrel of Urals, on average, will be priced at around $50 per barrel.
“Discounts in Russian oil prices increased and reference oil prices decreased”
Currently, this reference price has been quoted in a very safe area for Russian interests, currently standing at $74.6 per barrel. However, for much of 2023 it has been below and there are serious doubts that this balance can be maintained this year. Particularly now that he is having trouble moving oil with his ‘ghost fleet’. However, the Russian energy minister, Alexander Novak, stated in his last press conference which is expected to exceed 70 dollars. However, the strong divergences on crude oil demand maintained by OPEC and the International Energy Agency could mark everything.
At the moment, the latest data on the part of Russia go against the interests of the National Fund. According to the IEA, oil export revenues are already at their lowest level in six months, at generate 14.4 billion dollars in December. “Discounts in Russian oil prices increased and reference oil prices decreased,” the agency explained in a statement.
“Everything depends on energy prices,” explained Sulianov. “If there are not enough we will probably use the fund.” However, their scenarios are optimistic and they are betting on record oil revenues that not only allow them to finance themselves. However, in any case they hope that the reduction remains at 11.1 trillion rubles (112 billion dollars) by 2025 and up to 13 trillion by 2026. This in the scenario of oil above 60 dollars.
Source: El Economista Magazine