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Russia Wants to Spend Billions Saved Up in Its Wealth Fund

Russia Wants to Spend Billions Saved Up in Its Wealth Fund

(Bloomberg) -- Russia’s plan to spend tens of billions of dollars from its rainy-day fund to revive stagnant economic growth threatens to undermine the tight-budget policies that have made it a favorite among bond buyers.

“This is another blow to confidence,” said Natalia Orlova, an analyst at Alfa-Bank in Moscow. “There had been hope that the budget rule was working pretty well and that it would continue,” she added, referring to the money-saving mechanism that’s allowed Russia to build up its reserves.

The fund was set up to help tide the government over if oil prices plunge again or Russia is hit with crippling economic sanctions. But with growth and consumer incomes stalled and President Vladimir Putin’s popularity sagging, the Kremlin is eager for ways to boost living standards. Sanctions and economic instability have torpedoed hopes investment would come from the private sector or overseas.

Spending the money -- which some estimates say could amount to as much as $55 billion next year -- would subvert the fiscal rule that’s helped Russia protect its economy from the ups and downs of oil prices. Under the rule, first imposed in early 2017, the government saves all oil revenue from prices above $40 a barrel in foreign-exchange reserves to prevent it from fueling inflation.

Russia Wants to Spend Billions Saved Up in Its Wealth Fund

“The current fiscal framework requires the government to save windfall oil revenues and invest them abroad,” said Karen Vartapetov, an analyst at S&P Global Ratings in London. “This was one of the factors which in the last two years prevented Russia from getting Dutch disease.”

The Kremlin’s tight budget policies, even amid sanctions and economic stagnation, have made it a stand-out among emerging markets, helping the ruble outperform all major currencies this year. Analysts at the International Monetary Fund advised Russia against using the funds for “quasi-sovereign activities” in a recent report, saying it should safeguard resources for future generations.

The new plan has fueled controversy, causing an unusual public split between the Finance Ministry, which suggested the spending, and the central bank, which has warned it would be inflationary and counterproductive.

What Our Economists Say:

“Dipping into the wealth fund would support growth, but probably only in the short term. It’s not worth weakening the fiscal rule. There are other ways to boost spending without undermining Russia’s stability and development.”

--Scott Johnson, economist, Bloomberg Economics

Current law allows the government to consider investing the wealth fund in domestic projects when its liquid portion exceeds 7% of GDP, about $105 billion. The government expects to break that level early next year, given current oil prices.

While the fund now is only $59 billion, well below the 7% threshold, it is expected to reach $125 billion after a chunk of money saved under the budget rule is transferred in as soon as this month. That could rise to as much as $200 billion by late-2020, according to Dmitry Dolgin, an economist at ING Groep NV in Moscow. As much as 3.5 trillion rubles ($55.4 billion) could become available for spending in 2020, he forecasts.

Russia Wants to Spend Billions Saved Up in Its Wealth Fund

First Deputy Prime Minister Anton Siluanov earlier this month proposed using the surplus for domestic projects, reversing his earlier position that spending should be done outside Russia to limit spillover effects on the domestic economy. Days later, central bank Governor Elvira Nabiullina fired back with a call for raising the 7% threshold.

“I can’t agree to that idea,” Siluanov said last week. “It doesn’t mean we will spend everything above 7%; we’ll take targeted decisions and the fund will continue to grow.”

Analysts argue though that it’s not the amount of spending that’s important, but the principle of breaking a rule that’s been a foundation of Russia’s economic credibility

“These changes always create the possibility of more changes ahead,” said Erich Arispe, director of sovereigns at Fitch Ratings Ltd in London. “What happens in one or two years, if growth doesn’t pick up, what is the policy response there? Will they try to invest more?”

To contact the reporter on this story: Anna Andrianova in Moscow at aandrianova@bloomberg.net

To contact the editors responsible for this story: Gregory L. White at gwhite64@bloomberg.net, Natasha Doff

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