Pankin Says Turmoil Won't Change Fund

The government does not plan to change the draft investment strategy for its $49 billion National Welfare Fund because of market turbulence, Deputy Finance Minister Dmitry Pankin said Friday.

But a government source said the pension reforms announced Wednesday could potentially alter the fund's asset allocation, which the Finance Ministry had previously said was based on specific assumptions about the investments' time horizon.

According to the draft strategy, the government could invest up to half of the welfare fund in shares plus a further 30 percent in corporate bonds. The investment universe will include emerging markets and a yet unknown percentage in Russian assets.

"We are not changing our strategy. Everything will work in the current macroeconomic environment," Pankin said, adding that the ministry had asked for another month to work on the plans.

"The draft strategy makes it possible to use the fund in domestic financial markets in case of a changing macroeconomic situation," Pankin said.

The domestic use of the welfare fund is set to become a bone of contention among government agencies.

The government source said the Finance Ministry is working on two separate documents -- a government decree that will set out the framework for asset allocation, and a law on a new state corporation, the Russian Financial Agency.

The agency will receive a mandate to invest the welfare fund and will hire private asset managers from both Russia and abroad. The source said the decree would give the Finance Ministry sweeping powers over geographic and asset class allocation, but a snap government decision to back a new pension reform proposal this week has brought new uncertainty for the fund.

The government will effectively increase social security charges by swapping the current tax for three separate levies worth 34 percent of all salaries, Prime Minister Vladimir Putin said Wednesday, in a move aimed at boosting pensions.

The proposal, put forward by Health and Social Development Minister Tatyana Golikova, is out of tune with the proposed long-term fiscal strategy envisioning a yearly contribution from the welfare fund to the pension fund amounting to 0.6 percent of the country's gross domestic product.

Putin's decision to hike social security tax as well as his comments about using the welfare fund to lighten the tax burden on enterprises with no further clarification took officials and the business community by surprise.

Standard and Poor's harshly criticized the government when Finance Minister Alexei Kudrin suggested last month that the welfare fund may be used to support financial markets.

"The Finance Ministry may temporarily have to scale back or even abandon its plans to invest oil and gas revenues outside the country," said Anna Zadornova, an analyst at Goldman Sachs.

Officials had earlier said the welfare fund was expected to reach $100 billion by the end of 2008, but Pankin said the figure may be slightly lower because of falling oil prices.