Oil Funds Will Cover Shortfalls for 3 Years

Faced with the prospect that Russia's proverbial rainy day could run into months and years, the Finance Ministry said Tuesday that its accumulated oil wealth would be adequate to cover potential budget deficits through 2011.

The combined value of the Reserve Fund and the National Welfare Fund, still referred to collectively as the stabilization fund, reached $222 billion as of Feb. 1, Pyotr Kazakevich, deputy head of the ministry's department for international relations, state debt and financial assets, said at a news conference.

"It's obvious that we will have to use the contingency fund this year. The amount used to cover the federal budget deficit this year will not be insignificant, but we believe we'll be able to use these reserves both in 2010 and in 2011 as well," he said.

Russia is facing its first deficit in 10 years as revenue dries up and the government boosts spending to fight what will also likely be its first year of economic decline in a decade. Finance Minister Alexei Kudrin said last week that the 2009 federal budget deficit could be 4.4 trillion rubles, or 5.4 percent of gross domestic product, and that it could reach 6.1 percent of GDP if the budget is not revised to reflect a lower oil price.

The two funds were created last year from a division of the stabilization fund, which was established in 2004. The Reserve Fund is invested in low-risk securities, whereas the National Welfare Fund is allowed to seek higher-yield investments to help fund the country's pension system.

The Finance Ministry began dipping into the funds last year to support the banking sector and the crumbling equity market, with Vneshekonombank receiving 175 billion rubles from the welfare fund in November to invest in domestic stocks and bonds.

On Feb. 1, Kazakevich said, the Finance Ministry deposited another 235 billion rubles with VEB at a rate of 7 percent until 2019, which the state-controlled bank will use to give subordinated loans.

The Reserve Fund, which stood at 4.86 trillion rubles ($137.3 billion) as of Feb. 1, posted a yield of 205 billion rubles ($5.6 billion) in the period from Jan. 30, 2008, to Jan. 15, 2009. The National Welfare Fund, worth 2.99 trillion ($84.5 billion), returned 63.4 billion rubles ($1.75 billion) over the period.

In ruble terms, the yield represented a 26 percent gain, he said, although it would have been a 2.5 percent loss in dollar terms. The reserves are kept in rubles, dollars, euros and pounds, Kazakevich said

Kazakevich also said the ministry was considering appointing a foreigner to a top position in a new state corporation that will manage the National Welfare Fund and possibly the Reserve Fund, the Pension Fund and the state debt. The government will begin discussing the creation of the corporation, to be called the Russian Financial Agency, in the coming weeks, he said.

"To oversee the nuances of the financial market effectively, there must be personnel closer to the market and to market participants," he said.