Oil Fund Split Into Reserve and Welfare

The government split its $157 billion stabilization fund into reserve and growth subfunds on Thursday, but officials are still at odds over how to invest the windfall, as the fund's supervisor sits in jail and legal risks remain.

The Finance Ministry said it had split the fund into a $125 billion Reserve Fund, which will cushion the budget from a fall in international oil prices, and a growth-oriented $32 billion National Welfare Fund.

"The Finance Ministry has completed the transformation" of the stabilization fund, Pyotr Kazakevich, deputy head of the ministry's debt department, who oversees day-to-day management of the fund, told a briefing.

Kazakevich's former boss Deputy Finance Minister Sergei Storchak was arrested in November and charged with an attempt to embezzle public funds. He denied the charges. The arrest is seen as a part of struggle for control over the vast cash hoard.

The split is part of the budget reform, under which all of the state's energy revenues will from now on be collected in the new Oil and Gas Fund that will then send some of the money back to cover any budget deficit.

The reform's architect, Finance Minister Alexei Kudrin, said the new mechanism would help illustrate the country's dependency on energy. The new funds will not grow until the transfer of funds back to the budget is completed.

The revenues will then flow into the Reserve Fund, which will cushion the budget from a possible fall in international prices for oil, playing the same role as the stabilization fund.

The rest of the money will flow into the growth-oriented National Welfare Fund, which may soon be invested in riskier assets such as corporate bonds and shares, becoming the country's sovereign wealth fund.

The government gave the Finance Ministry until Oct. 1 to design an infrastructure for the welfare fund's investment. Until then both funds will be invested in sovereign or government agencies' bonds rated not lower than AA-.

Until then the Central Bank will continue to manage both funds despite the legal risks posed by potential suitors like Swiss trading firm Noga, which obtained a court order to freeze Central Bank accounts in France this month.

Kudrin has fought hard in recent years to make sure the fund is strictly invested abroad, but calls are growing to use it at home for long-term corporate lending, external corporate debt buybacks or purchasing Russian stocks.

"We need to understand when and how the money may be withdrawn from the fund," Kazakevich said. By law, the welfare fund can be used to co-finance voluntary pension savings and to cover the Pension Fund's deficit.

Economists see the pension system's reforms as the key economic policy challenge, and President Vladimir Putin's chosen successor Dmitry Medvedev made it the key theme of his campaign.

The government is working on pension reform, and the first proposals may see the daylight this month. Kazakevich said he expected the voluntary pension savings legislation to be ready by mid-year.

"After that we will have more certainty and will be able to prepare our own proposals," he said.