Russian stabilization fund to be invested abroad


MOSCOW. (Kirill Gusev for RIA Novosti.) -

In early April, Russian Finance Minister Alexei Kudrin announced how his
ministry intends to invest the country's stabilization fund. This was an
important landmark in the months-long debates on how to use the money, which
by April 1, 2006, amounted to 1,677.44 billion rubles (about $60 billion).

The bulk of the money will be invested in foreign government bonds, and the
rest in large foreign companies, Kudrin said. Compared to relatively stable
and non-risky government bonds, shares can yield more profit, but are more
risky assets. Apparently, they will be the leader in ensuring the
profitability of the investment portfolio. The ministry assesses its
projected basic level at 4-5% annually. Its officials say they are ready to
start work on amendments to the Russian Budget Code that will allow
investing the stabilization fund in foreign stocks.

Russian experts are not surprised with the monetary authorities' decision to
invest the stabilization fund, which has growth quite large and can yield
significant profits. Debates centered rather around the sphere of placement
and around the ministry's intention to hire a private foreign management
company to manage the investment.

On the one hand, Russia is under a strong influence of the stereotype that
the state is a less efficient manager than private companies, while Russian
management business is still emerging. On the other hand, many consider it
logical that as the money will be invested in foreign stocks, it should be
managed by a foreign company that knows the market well. Yet some believe
that the Russian Central Bank can well cope with the task. After all, the
rules for where and in what amounts to invest the money will be set by law.

As the investment will be huge, the foreign manager will charge quite a
handsome fee. So the debates on the issue are likely to go on. The same is
true about the procedure of choosing a specific company, as many will
compete for the tidbit. The procedure has to be transparent, as it deals
with national property. After all, the stabilization fund accumulates mainly
windfalls from Russian energy exports.

Apparently, the decision to invest the money in foreign stocks indicates the
Finance Ministry's conviction that the Russian economy is not yet ready to
use it efficiently. Its influx in the economy in the form of government
spending on industry restructuring and infrastructure modernization will
aggravate the situation by spurring inflation, instead of helping the
country. Spending of the sum accumulated in the fund in 2005 alone would
push the inflation rate to 18-20%, Kudrin said. Spending on the social
sphere would have similar consequences.

At the same time, many developed economies have no problems absorbing any
additional amounts of financing and even welcome it. The United States, for
example, has been able for many years to remain the world's largest debtor
by attracting foreign state and private investment.

In this connection, the developments around the stabilization fund are a
little paradoxical. On the one hand, the Russian government is taking great
efforts to attract capital and technology from abroad. On the other hand, it
is in no hurry to make its own investment, e.g. in infrastructure
development, necessary to facilitate this. Yet all potential foreign
investors stress the importance of developing infrastructure.

Today, Russia's financial policy is based on tough management of money
supply, which seems more suitable for countries with developed economies and
fully convertible currencies. For them, the problem of regulating the amount
of money in the economy and fight with monetary factors causing inflation
are most topical. In less developed nations, inflation is often the
inevitable companion of economic growth and too much focus on fighting it
can hurt more important goals, such as building a viable modern economy and
ensuring its high growth rates.

In fact, investment of the stabilization fund in Western companies' means
that Russia will finance their business with 4-5% annually. But having
attracted additional resources, these companies will be able to investment
in Russia, purchasing local assets and getting higher profits. In other
words, the money will serve the same goal as the Central Bank's $200 billion
of gold and currency reserves, which de facto support the world's leading
currency issuers.

The Finance Ministry compares the stabilization fund with future generation
funds of some developed countries. In Russia, with its investment deficit,
the comparison does not seem too relevant. It seems that the prosperity of
future generations could be ensured without making a large deposit in a
Western savings bank with a low interest rate (that can be quickly spent in
case of an economic crisis or other troubles). It could be achieved by
developing Russian sectors and industries that are now in decay, but that
are absolutely necessary for a full economic recovery.

Additional ruble investment in the economy seeking to create new jobs in
priority (and export-oriented) industries may increase inflation pressure in
the beginning. But new jobs will create new goods and services. It is
important that they should be in demand and competitive, including on the
global market. Why not invest the stabilization fund in geological
exploration and facility construction for new fields? Lack of capital in the
sphere has been felt for quite a while, and now Russia is actively engaging
foreign assistance, although it has its own funds that can bring additional
export revenues.