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. Last Updated: 07/27/2016

Kudrin Defends Fund as Oil Soars

As global oil prices reached the dizzy heights of $90 per barrel, Finance Minister Alexei Kudrin said Friday that Russia would not accept restrictions from some Group of Seven countries on how it invested its oil wealth abroad.

"Sovereign wealth funds should be subject to the general rules of the free movement of capital," Kudrin said at a meeting with G7 finance ministers in Washington. "We do not want there to be any such restrictions."

Concerns have been raised in Europe and the United States that sovereign wealth funds, investment vehicles used by governments to invest their windfall funds into foreign equities, have at times been driven by political, not commercial, motives. Western governments have also been suspicious of Russia's motives in investing in their countries' strategic sectors, such as energy and aerospace.

From next year, Russia plans to use around $20 billion from its $140 billion stabilization fund in the National Welfare Fund to invest in foreign stocks.

Russian officials have insisted that the welfare fund will be used to make portfolio, not strategic, investments.

In a joint statement after their talks, G7 ministers and central bankers voiced their concerns about how transparently sovereign funds are structured and managed.

But the G7 officials also stressed that sovereign wealth funds were "increasingly important participants in the international financial system and ... our economies can benefit from openness to [sovereign fund] investment flows."

While opposing any formal restrictions on sovereign funds, Kudrin told G7 ministers that Russia might be willing to make some concessions.

"Working out reasonable recommendations that are not as binding as a code of conduct is in principle possible -- but only if it suits countries like us that have funds to invest," he said.

Britain's finance minister, Chancellor of the Exchequer Alistair Darling, argued against limiting the activity of sovereign funds, saying it would "send the wrong signals across the world." He said, however, that the funds had to "operate on a commercial basis and no other basis."

"The U.S. will benefit from inward investment. We cannot get into a position where [the U.S. is] using this as an excuse for protectionism," Darling told reporters Friday.

"We welcome inward investment from sovereign wealth funds, but it has to be a two-way street," he said.

French President Nicolas Sarkozy, speaking at a European Union summit in Portugal on Friday, appeared to take a tougher line on sovereign funds. "We've decided not to let ourselves be sold down the river by speculative funds, by unscrupulous attitudes that do not meet the transparency criteria one is entitled to expect in a civilized world," Sarkozy said. "It's unacceptable and we have decided not to accept it."

Kudrin, the longest-serving finance minister in the Group of Eight, said ahead of the talks Thursday that he intended to participate in discussions on an equal footing with his G7 counterparts.

Buoyed by high oil prices that have soared on geopolitical instability and insatiable demand, particularly from China, Russia has adopted an increasingly assertive stance on the world stage.

Kudrin predicted that the latest surge in oil prices, which has been driven by worries over Turkey's threat to invade northern Iraq and a falling dollar, would be temporary.

"Oil is significantly overpriced," Kudrin told reporters Saturday in Washington. "Based on our studies, a more realistic price is closer to $50 per barrel. Taking into account inflation, oil will ... be at about $60 a barrel in 10 years."

Kudrin also predicted that the dollar would continue to fall and expressed the hope that it would happen gradually.

While soaring oil prices have acted as a boon to Russia's economy, enabling it to accumulate substantial foreign currency reserves, energy revenues have been one of the major contributors to the country's spiraling inflation.

"Inflation has accelerated to a high tempo, and it is difficult to reduce it quickly," Kudrin said.

On Thursday, Kudrin conceded that inflation would hit double digits by the end of this year, and President Vladimir Putin told callers in a phone-in show that the government would miss its 8 percent target.

The Kremlin's response to rising inflation has been to seek agreements with retailers to fix prices on basic food products, while also cutting import tariffs on dairy and milk products. But analysts have dubbed these steps as quick-fix measures that would only bring short-term relief.

Internationally, Putin is eager to show Russia as a "very strong economic force," said Stanislav Belkovsky, an analyst who tracks Kremlin politics. "Russia believes it is on an equal footing with G7 nations because of its financial might. But they do not understand the political essence of this equality."

Belkovsky said he feared that by investing windfall oil revenues abroad, Russia would be investing not so much in the stock market as in a "vision."

But Roland Nash, head of research at Renaissance Capital, said Russia and the West appeared to be engaged in a form of "parochial tit-for-tat," which could harm the interests of all parties.

"I think this mutual suspicion that exists between Russia and the West has negative consequences for both sides," Nash said. "The more investment you can have, the more it furthers the broader strategy of both sides."