$32Bln Fund Must Go the Extra Mile

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Most countries with sovereign wealth funds say they are only investing their windfall profits for future generations. If only it were so simple for Russia.

The Finance Ministry last week oversaw the split of the $158 billion stabilization fund into the Reserve Fund and the smaller National Welfare Fund. This is a big moment for the fund, which has been accumulating energy profits since it was set up in 2004. The Reserve Fund, which has an initial $125 billion, is to carry on the role of the old stabilization fund, collecting energy profits to serve as a cushion for the economy if energy prices fall. The National Welfare Fund is the sovereign wealth fund, with $32 billion to co-finance voluntary pension savings and to cover gaps in the pension system. For now, both funds are investing in Russian state instruments.

But that should change this fall, when the Finance Ministry draws up a strategy on how to invest the money held by the National Welfare Fund. A law is already on the books that will allow the money to be spent on foreign stocks and bonds.

This law is the reason why some Western governments are rattled. While the amount held by Russia's sovereign wealth fund is relatively small, it is growing rapidly. Finance Minister Alexei Kudrin told the recent World Economic Forum in Davos that windfall profits would surpass $200 billion this year. This is a significant amount of cash -- enough to acquire significant stakes in foreign companies or to meddle with another country's currency market.

Kudrin offered assurances at Davos that Russia's sole desire was to assist future generations. But, with an eye on Russia, the United States and several European countries are calling for international rules governing sovereign wealth funds.

Kudrin opposes this, and he has the support of Kuwait and Saudi Arabia. Bader Al Sa'ad, managing director of the Kuwait Investment Authority, insisted at Davos that his fund only cared about the bottom line, saying it had held a stake in Daimler-Benz since 1969 but had refused to take a board seat or otherwise participate in corporate decision-making. "The KIA has been operating for 55 years and has never made a political decision," he said.

Kudrin adopted the same line. "Any concern about the political underlining of these funds is exaggerated," he said.

We have heard similar claims in the past. Only two years ago, Gazprom cut gas supplies to Ukraine amid a dispute that Moscow insisted was not punishment for Kiev's Western-leaning ambitions but an attempt to get the nation to pay market prices.

The Finance Ministry should make the National Welfare Fund transparent by determining how the money can be spent and disclosing this together with detailed information about its investments.

Kuwait has a 55-year track record to back its claim of not using its fund as a political weapon, but Russia does not. Moscow should be willing to go the extra mile to reassure skeptics.