National Funds of Russia Gain Momentum in 2013

Russia National Funds
Russia National Funds
Russia Data Talk: By creating the Stabilization Fund in January 2004 to make better use of excess oil revenues, the Russian government made a significant step toward balancing the federal budget. Unpredictable oil and gas price fluctuations might either boost federal revenues during a boom or bring the economy to a halt in case of adverse economic conditions. Since the Russian budget is largely dependent on oil and gas revenues, these fluctuations can cause sudden negative impact on the economy, as evidenced by the recent financial crisis. The Stabilization Fund was meant to compensate for lower-than-forecasted oil and gas prices to keep the economy running, to fulfill budget obligations, and to counterbalance a budget deficit during harsh economic downturns. The Stabilization Fund grew swiftly from USD 3.73 billion in January 2004 to USD 157.38 billion in January 2008, due to the upbeat economic conditions and rising oil and gas prices. In the beginning of 2008, however, the Russian government decided to split the Stabilization Fund into the Reserve Fund, and the National Wealth Fund. The Reserve Fund assumed the Stabilization Fund’s function of balancing the government budget to a larger degree; it was also used to finance national debt, while the National Wealth Fund’s aim was to provide a cushion for the pension fund of the Russian Federation. Both funds were supported by the federal oil and gas revenues and the National Wealth Fund was about a quarter of the size of the Reserve Fund. However, during the recession, which occurred right after the split in January 2008, the changes in of the two funds differs significantly. As oil prices fell, the Reserve Fund diminished by 82%, from USD 142.6 billion in August 2008 to the trough of USD 25.44 billion in December 2010, an amount that had to cover both the budget deficit and expenditures. Yet, the National Wealth Fund remained relatively unchanged during the recession and its aftermath. When oil and gas prices subsequently started to rise again boosting Russia’s oil and gas revenues, the Reserve Fund started to recover its losses, gradually reaching USD 84.68 billion by February 2013. At the same time, the National Wealth Fund had accumulated USD 87.61 billion, making both funds almost equal in size. Russia National Funds There are different arguments in support of various ways of utilizing national funds in Russia. Some politicians are in favour of spending the funds to boost the economy, while others propose investing them with higher rates of return, which poses the question of the trade-off between risk and return. It is a proven fact that the creation of the national funds to balance the budget was a timely decision implemented by the Russian government, which assisted in financing the budget deficit during the recession period. In spite of a significant drop in oil prices in 2008-2009, the Reserve Fund and the National Wealth Fund still managed to maintain a positive total balance above USD 100 billion. Because of its counter-cyclical function linking it closely with oil and gas price fluctuations, the Reserve Fund was hit harder and took up only 22% of the total USD 119.25 billion Stabilization Fund in July 2011. Yet, the recent accumulation of resources in both funds, especially since the beginning of 2013, signifies the recovering trend and increased confidence that the Russian budget will be less susceptible to any economic emergency down the road. Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog
22nd March 2013 National Funds of Russia Gain Momentum in 2013

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