As Russia Eats Through its Reserve Funds, Some Thoughts About Why They Matter

Slon.ru cites Mr. Nikolai Kasheev, Research and Analysis Director with Promsvyazbank, who talks about the relative weakness of Russian reserve funds. Similar funds exist in 44 countries including China, which operates four national funds with a total value of close to USD 1.5 trillion. Next in terms of value are the seven United Arab Emirates’ funds with USD 1.3 trillion in assets, Norway with USD 850 billion in its state pension fund and Saudi Arabia with reserves of USD 760 billion.

With assets of USD 150 billion, Russian reserve funds are only the 10th in terms of value. In per capita terms, Norway is the absolute leader with USD 160,000 in reserve funds per each inhabitant. With USD 1,000 in reserve funds per capita, Russia is way down the list together with China. For example, neighboring Kazakhstan has USD 9,000 per capita in reserve funds. According to Mr. Kasheev, Russia managed the funds too conservatively and passed up on the opportunity of bigger returns by investing almost exclusively in government debt securities – a dubious practice given their long-term investment horizon.

According to the IMF, pension outlays in Russia are projected to increase from 8-9% of BDP to 14% of BDP by 2030. The Russian pension fund is already USD 50 billion short every year, but instead of using the reserve funds to compensate for this shortfall, the Russian Government is using them to patch up the central budget.

Spending all the reserve funds’ money, which is projected to happen by the end of next year, will significantly impact the macroeconomic conditions in the country. It could lead to increasing debt and budget cuts with uncertain effects on the exchange rate and overall liquidity. However, it is not the presence of the reserve funds that impresses the business and makes it willing to invest and operate in Russia. Rather, it is the necessary structural changes that will lead to a more diversified economy.

 

Russian Ministry of Finance to Reduce Subsidies to Regional Budgets by 15.5%

Russian business daily Vedomosti reports that the Russian Ministry of Finance plans to reduce subsidies to regional authorities by 15.5% in 2017.  One of the items that will be cut is that aimed at fulfilling President Putin’s executive order from May 2015 to increase the salaries in the public sector.
Other subsidies will be cut as well, such as those related to road construction and maintenance. This might seriously impact the regional authorities, as their sources of revenue are either stagnating or decreasing. In January 2016, only nine regional budgets recorded a surplus, while 79 regions ran a deficit.  In April 2016, consolidated regional and municipal debt in Russia amounted to 2.65 trillion rubles (USD 40.5 billion).
Russian Government decided to freeze the budgetary expenditures at 15.78 trillion rubles (USD 241.3 billion) in 2017. During the last two years, it transferred as much as 1.6 trillion rubles (USD 24.5 billion) to various levels of local government.

Putin’s Assistant Complains About the Strengthening Ruble

Russian state news agency Interfax reported that President Putin’s adviser Andrey Belousov complained about the strengthening ruble.  Stronger ruble means lower income for the Russian central budget and damages the competitiveness of the Russian industry and agriculture, Belousov said.
Lower demand for the local currency and a sharp decline in capital outflow in the second quarter of 2016 strengthened the ruble, increasing its value to the dollar by 17% since the beginning of the year.  The Russian Government decided to make the best of the ruble’s decline after the Crimean crisis and the introduction of mutual trade sanctions between Russia and the West.  At the beginning of 2014, the ruble traded at just above 33 to a dollar, then rose to over 78 in February 2016.  On July 20, the USD/RUR trade closed at 63.82.

German and Chinese Consortia Bid for the Moscow-Kazan Railway Line

Russian daily Kommersant outlines the details of a German proposal to construct the Moscow-Kazan high-speed railway line. The consortium of German companies that includes Siemens promised to invest in the concessionaire’s equity and provide more than EUR 2 billion in export credit financing. Total investment required to complete the second leg of the Nizhniy Novgorod-Kazan railway is estimated at 501.4 billion rubles (USD 7.8 billion), of which 75 billion rubles (USD 1.17 billion) should be invested in the form of equity.
The German consortium competes with a Chinese bid.

Higher Taxes for the Russian Gas Sector Remain in Force

According to the Russian edition of Forbes, the Russian Ministry of Finance decided to prolong the increased tax rate for gas companies for another year.  The oil sector is also expected to be taxed more heavily.  Although the information hasn’t been officially confirmed, it is reasonable to expect that the Russian government will do everything possible to reduce the budget deficit, and the Ministry of Finance confirmed that a certain increase in taxes in the sector is inevitable. 

The tax increase enacted in 2015 came as a surprise, but was considered to be an one-off event.  President Putin promised to leave the taxes unchanged until 2018, but the Government made an exception for “excess income caused by devaluation” and collected additional 200 billion rubles (USD 3.1 billion) from the oil companies and another 100 billion rubles (USD 1.55 billion) from Gazprom alone.

Russians Renounce Responsibility for the Country

Citing the Levada Center research institute, Kommersant reports that only a third of Russian citizens feel responsible for the developments in their country. However, a full 22% consider their responsibility to be insignificant. As many as 64% of the surveyed stated that they feel no responsibility for the fate of their land whatsoever.
Only 22% of the surveyed Russians believe that it is possible for them to influence the society they live in, while a full 73% feel that such a possibility doesn’t exist at all. Sense of control grows as the focus narrows: 42% of the surveyed feel they’re able to control the situation in their city or region.  The same percentage of Russians believe they have the situation at work under control.
In a separate survey, Russian Public Opinion Research Center VTsIOM found that only 26% of Russians believe that their country belongs to the group of major powers. A majority of the surveyed consider the welfare of citizens as the main characteristic of a major power. At the same time, a non-profit organization “Public Opinion” found that 48% of the surveyed citizens are interested in politics, a record-high figure since 2001. As many as 60% of Russians believe that their government is running a successful foreign policy.