SWF Radar RussianStabilizationFund

Thomson Reuters reports that, “Russia does not yet have a sovereign wealth fund (SWF) but is working to create one, Prime Minister Vladimir Putin told U.S. Treasury Secretary Henry Paulson on Monday.”

The article quotes Putin as telling Paulson that, “Since we do not have a sovereign wealth fund yet, you are confusing us with someone else. But we are ready to [create a SWF], especially if you want us to.”

Russia’s National Wealth Fund (also known as the National Welfare Fund or National Prosperity Fund), which was formed by splitting the Stabilization Fund in two (with the greater part of the assets being assigned to the Reserve Fund, the other fund formed in the split), is generally considered to be Russia’s SWF.

Taking the second part of the Putin quote at face value, it could make sense for the United States to ask that state foreign investments be channeled through SWFs that identify themselves as such. This would make such investments easier to track and regulate and would certainly facilitate and add significance to the work of the IMF’s International Working Group.

But the US Treasury’s recent agreement with its Chinese counterpart to clear the way for indirect foreign investment by China’s SWFs via the country’s state-owned enterprises disconfirms that such transparent channeling is being explicitly sought.

The Moscow Times reports that, “A Moscow court denied bail Wednesday to Sergei Storchak, the deputy finance minister who has been held in pretrial detention on corruption charges since November. … Storchak himself appeared by video link from a holding cell in Lefortovo Prison. The judge ordered Storchak to remain in detention until July 9, upholding a decision in April to extend his pretrial detention while the preliminary investigation is completed. Prosecutors hope to compile their evidence by July.”

The article gives the background information that, “Storchak, who was Russia’s foreign debt negotiator and overseer of the $160 billion oil stabilization fund before his arrest, has been accused of attempting to embezzle $43 million from state budget funds. His arrest has been widely interpreted by analysts as an effort by sparring Kremlin cliques to put pressure on liberal Finance Minister and Deputy Prime Minister Alexei Kudrin.”

Rachel Ziemba writes at the RGE Analysts’ EconoMonitor blog that, “Where Russia is concerned, its worth noting that investment by Russian companies (both private and state owned) far outpaces that of government investment funds. Russia's reserves (now over $500 billion) are managed in conservative assets. So does the new reserve fund and (for now) the national wealth fund. Extrapolating from the track record of the Stabilization fund, the wealth fund could be transparent and a relatively passive actor, especially since a lot of actors want it to invest at home rather than abroad. Thus, Russia's corporations may continue to be the face of Russia abroad.”

In the post she also highlights some of the challenges of looking at sovereign wealth funds in a vacuum.

Reuters reports that, “A Russian court on Tuesday extended to July 9 the pre-trial detention period for Deputy Finance Minister Sergei Storchak, who is accused of embezzling $43 million, his lawyer said. Police detained Storchak in November. He was Russia’s chief foreign debt negotiator and oversaw the country’s $144 billion stabilisation fund, a cash pot accumulated from oil and gas revenues.”

FT Lex writes that, “The National Wealth Fund is estimated to be in the top ten largest sovereign wealth funds and is projected to reach $80bn in 2011. Strategic overseas investments cannot be ruled out. But it is important not to overstate Russia's potential impact. The National Wealth Fund's strategy is bogged down in political infighting and there are calls for using some money to tackle Russia's state pension deficit and infrastructure backlog. Though the thought of Moscow investing directly in the US agitates some American politicians, the truth is the fund is tiny compared with the $800bn that private equity has on hand.”

The Moscow Times reports that, “A Moscow court said Thursday that Sergei Storchak, the deputy finance minister charged with embezzlement, would remain in custody until Apr. 8 to allow investigators more time to gather material on the case. … Storchak, who led Russia’s foreign debt negotiations and oversaw the $160 billion stabilization fund, was detained in November on suspicion of attempting to embezzle $43 million in state funds.”

Reuters writes that, “The investigator leading the case against Russia’s deputy finance minister [Sergei Storchak], who was arrested on attempted embezzlement charges in November, is himself facing a probe, Russian media reported on Saturday.”

Storchak was arrested in connection with his supervision of Russia’s Stabilization Fund.

Storchak’s arrest has been interpreted by analysts as an attack by on the liberal wing of the Kremlin. Storchak’s boss, finance minister Alexei Kudrin, is a leading member of this wing.

The Stabilization Fund was recently split into a Reserve Fund and National Welfare Fund.

The Moscow Times reports that:

On January 30 the Russian Stabilization Fund split into a National Wealth Fund and Reserve Fund. The new Reserve Fund comprises an initial $125.4 billion, which will be maintained at roughly 10 percent of GDP and may be used to cover budget deficits, as originally intended at the inception of the stabilization fund. The National Welfare Fund, on the other hand, amounting currently to $32 billion, will play the role of a SWF and will be used to pay pensions and for infrastructure projects.

Although plans to diversify Russia’s SWF investment portfolio have long been underway, the recent drop in the dollar provided an additional incentive to change the current composure of the funds beyond dollars and Euros to include the Japanese yen and other possible currencies to the mix. New rules for the funds allow the government to invest in AA-rated financial products rather than continuing their previous limitation of using only those with a AAA rank.

From the use of both names in the first paragraph, it seems that the question of what Russia’s new SWF is actually called in English is still far from resolved: “National Wealth Fund” or “National Welfare Fund”?

The Financial Times reports that, “[Russian] plans to invest the $32bn National Wealth Fund in global equities and corporate bonds have been put on the backburner amid fears over the global market downturn and infighting about how best to invest the fund. Sergei Storchak, the deputy finance minister in charge of overseeing the fund, is in jail charged with an attempt to steal public funds. His arrest has been seen as part of a Kremlin struggle over control of the funds.”

The National Welfare Fund is Russia’s new SWF-type investment fund, formed after the Stabilization Fund’s split this week into a Reserve Fund and National Welfare Fund.

Interfax reports that, “Russia’s Stabilization Fund of 3.85 trillion rubles ($157.38 billion) as of January 30, 2008, ceased to exist after it was divided into two parts on Wednesday, January 30.”

The reports states that the new Reserve Fund holds an initial 3.069 trillion rubles ($125.4 billion) and the new National Welfare Fund an initial 783 billion rubles ($32 billion).

The National Welfare Fund will play the role of a sovereign wealth fund.