This Post considers the three Russian SWFs--the National Welfare Fund, the Reserve Fund, and the Russian Direct Investment Fund.
Russian investing has already encountered criticism in European Union countries. The state-owned natural gas monopoly Gazprom is buying gas pipelines and storage facilities in Europe; officials there have suggested that the company was operating from foreign policy motives rather than economic ones when it shut off gas to Ukraine in 2006 after the election of a pro-Western government. Gazprom said it was a purely commercial matter. Andrew E. Kramer, Russia Creates a $32 Billion Sovereign Wealth Fund, The New York Times, Feb. 1, 2008).
When it comes to global benchmarks for the country's investment and business climate, Russia's ratings have improved—but they're still closer to the bottom than to the top. Transparency International ranks Russia 133 out of 176 in its corruption index (see graphic below). The Heritage Foundation lists it 144 out of 184 in its ranking of economic freedom. The World Bank says Russia is 92 out of 189 in ease of doing business. Watchdog organization Freedom House describes Russia's status as "Not Free." (Michelle Caruso-Cabrera, The $10 billion man out to change Russia's image, CNBC Dec. 11, 2013).
One of the new funds, now called the Reserve Fund, will retain the initial purpose of insuring the Russian budget against a steep fall in oil prices. It will hold $125 billion and be maintained at a size roughly 10 percent of Russia’s gross domestic product, as it is now.
The other, the Fund for National Well-Being, with $32 billion, is intended to buoy the pension system as the Russian population ages and the share of those working shrinks. Under a law passed last spring, the new fund can be invested in foreign stocks and bonds. Andrew E. Kramer, Russia Creates a $32 Billion Sovereign Wealth Fund, The New York Times, Feb. 1, 2008).
Kirill Dmitriev is on a one-man mission to change Russia's image in the eyes of world investors. The 38-year-old graduate of Harvard and Stanford runs Russia's newest sovereign wealth fund—the $10 billion Russian Direct Investment Fund.
Unlike most sovereign wealth funds, which invest outside their country of origin (including two other Russian wealth funds that control more than $80 billion in assets) the fund that Dmitriev manages directs money back into Russia—co-investing in the country with the sovereign wealth funds of China, Abu Dhabi, Korea, Italy, France and Japan. (Michelle Caruso-Cabrera, The $10 billion man out to change Russia's image, CNBC Dec. 11, 2013).
The Russian government will invest up to 450 billion rubles ($13.7 billion) in infrastructure projects from its sovereign wealth fund together with private capital, President Vladimir Putin said on Friday, in a move that could give a significant kickstart to the faltering Russian economy. Up to half the money to be invested in the projects will come from the National Welfare Fund, Russia’s $87 billion sovereign wealth fund made up of windfall oil export revenues, he said. (Putin Pledges $14 Bln From Wealth Fund for Infrastructure, RIA Novosti, June 21, 2013).
Putin's comments come amid disagreements within Russia's government over how to manage the country's oil revenues. Energy levies account for half of federal revenues, making the budget highly sensitive to the oil price.
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While only the Reserve Fund is officially designated to protect the budget against lower oil prices, the fund was heavily depleted, having fallen to 3 percent of gross domestic product from 10 percent in 2008, when global markets crashed.
The National Welfare Fund is officially designated to secure Russia's pension system, and plug a growing deficit in Russia's state pension fund. It is mostly invested abroad in low-risk government securities.
Those disagreemnst tend to pit long term future fund interests against more short term macro economic stability and development objectives.
The government has discussed the possibility of dipping into the National Welfare Fund before, a prospect that has met a mixed response from investors, according to Vladimir Savov, an analyst at Otkritie Bank in Moscow.
“On the one hand, investors like that there is this money sitting there [in the reserve fund] that will be a cushion against global turbulence and external shocks. On the other hand if there are these pressing needs to stimulate growth not by printing money or dipping into the budget maybe it’s not a bad idea,” he said. (Courtney Weaver, Russia to Dip Into Reserve Fund, Financial Times, April 22, 2013)