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. Last Updated: 07/27/2016

Ministers Back Changes to Oil Fund

Finance Minister Alexei Kudrin has won key backing for his plan for Russia's windfall oil gains by offering some money for ministers to spend, while defending his main goal of using surplus revenue to cut debt.

Top government and Central Bank officials have agreed that surpluses gathered in a state stabilization fund should be used exclusively to pay down foreign debt from 2006, Kudrin said.

But the oil price at which cash starts flowing into the fund would rise by $1 to $21 per barrel, also in 2006, freeing up 60 billion rubles ($2 billion) a year to invest in Russia's rickety infrastructure.

"We have submitted our report to the government. It is the joint position of several ministers," Kudrin said, adding he had won the support of Economic Development and Trade Minister German Gref, Deputy Prime Minister Alexander Zhukov and Central Bank head Sergei Ignatyev.

In winning the backing of key economy officials, Kudrin has boosted his position against spending ministers, whose plans he says risk stoking inflation. But Prime Minister Mikhail Fradkov has yet to come on board.

Record oil prices mean the fund, set up this year, is growing faster than expected and will soon reach a ceiling of 500 billion rubles ($17.4 billion) that can only be drawn down to cover any budget deficits.

Kudrin advocates using the fund surplus to pay down Russia's $40 billion-plus debt to the Paris Club of sovereign lenders inherited from the Soviet Union.

Russia is in talks with the Paris Club on swapping its debt into eurobonds or making early cash repayments. Germany, Russia's largest creditor, said Wednesday that the outcome of the debt talks was still open.

Kudrin responded to German concerns that any deal should be based on the Paris Club's inclusive principles, and not on a bilateral basis. "It should be a general agreement based on general principles," he said. And in his strongest comments to date, Kudrin named $10 billion as one possible debt buyback number.

"This is extremely positive for the markets," said Christopher Granville, economist at United Financial Group. "Now there's a realistic prospect of a reduction of Russia's debt stock, and that should be good for both yield spreads and Russia's debt ratings."

Russia won investment-grade status from Moody's last year, but both Standard & Poor's and Fitch have held off, citing concerns over corruption and Russia's weak banking system.

The fund surplus will be drawn on to the tune of 75 billion rubles ($2.6 billion) next year to cover a shortfall in the State Pension Fund resulting from a cut in payroll taxes that takes effect Jan. 1.

But Kudrin is keen for the pensions bailout to be seen as a one-off, and he was firm that the extra budget funds made available via the $1 hike in the fund's base oil price be spent only on infrastructure investment.

"We firmly agreed that the 60 billion rubles be used exclusively for investment. Financing the pension fund deficit should come out of general budget spending," he told reporters.