Ministry Seeks Lock On Fund Spending

The government needs to lock up to $50 billion in its sovereign wealth fund for five to seven years to make portfolio investment in foreign shares feasible, said Deputy Finance Minister Dmitry Pankin, who supervises the fund.

The government has set aside $162 billion in energy revenues split between two funds -- the Reserve Fund, which serves as a safety cushion for the budget, and the $33 billion National Welfare Fund, earmarked for riskier investments.

Both funds are currently invested in top-rated bonds as part of the country's $500 billion gold and foreign exchange reserves. Officials have until Oct. 1 to draw up an investment strategy for the welfare fund, which is set to become the country's first sovereign wealth fund.

Fund managers from the Finance Ministry and the Central Bank want a clear investment horizon and a timetable for withdrawals amid calls from industry lobbies for the money to be used to buy domestic stocks or support the banking system.

"Ideally, we need an investment horizon of at least five to seven years for a fixed amount of $30 billion to $50 billion, which we can set aside without touching it," Pankin said in comments cleared for publication Wednesday.

"Such a horizon gives us a possibility to invest in shares," he added.

Pankin's boss, budget hawk Finance Minister Alexei Kudrin, who is one of the architects of the oil windfall funds, was reappointed this week to the government headed by Prime Minister Vladimir Putin, suggesting a defeat for the industry lobbyists.

The windfall investment debate in Russia is politically charged as various Kremlin groups vie for influence. The arrest of Pankin's predecessor, Sergei Storchak, last year was seen as an attempt to weaken Kudrin.

"If the situation changes, the price of oil falls and we do not have such inflows any longer, we cannot rule out that some money could be placed on the domestic market," Pankin said.

"But in the current situation we should not do that. Moreover, to regard this money as long-term liabilities of the banking sector is a mistake," he said, adding that after its investment the money may be put back into the budget.

"We are not talking about keeping this money forever; after five to seven years we may use it to finance the pension system," Pankin said. The welfare fund's strategy will most likely be coordinated with pension reform.

Pankin said he was not impressed so far by other sovereign wealth funds' performance in direct investments. "At the moment, sovereign wealth funds are on the losing side with their attempts with direct investment." He also said it was not clear what would constitute a politically motivated decision by such a fund. He said Russia did not entirely rule out private equity investment, as opposed to portfolio investment in stocks, but the proposed investment horizon of five to seven years was too short for such attempts.