26 January 2018

Russia's Fraying Financial Safety Net Hangs by a Thread


The Kremlin has drained the Reserve Fund, which was used to help address budget deficits, and now is left to rely on its National Wealth Fund, which is intended to provide for Russia's future and guarantee its pension system. Russia, facing increased U.S. sanction pressure and on the brink of a recession, must address the financial crises in its banking and defense sectors and among its regional governments. The recent rise in oil prices relieves some of the pressure on the government, and increased borrowing on the international market and sizable foreign exchange currency reserves will help Russia stave off destabilization as pivotal elections approach. 

Russia's sovereign wealth reserves, once bloated by years of abundant petroleum revenue, are today just shadows of their former selves. And on Feb. 1, the country's Reserve Fund, designed to help the government balance its budget, will officially disappear as it is legally recombined with the National Wealth Fund, a separate pot of money that backs up Russia's pensions. But the merger is a move in name only. It will come after the country's Finance Ministry appears already to have drained the Reserve Fund's remaining $17 billion in cash to plug a looming budget hole. With Russia's financial security blanket wearing thin, the question as national elections approach will become whether its people will continue to trust the current administration to manage the country's increasingly shaky finances.

In 2008, Russia split its sovereign wealth Stabilization Fund into two separate pools of money — the Reserve Fund and the National Wealth Fund — giving each its own focus. The two funds were to collect the financial windfall from Russia's large oil and gas revenues. The Reserve Fund would act as a kind of rainy day reserve to help the federal government pay for budget deficits. And the National Wealth Fund was set up to provide a safety net for government-funded pensions and to make investments in development projects guaranteeing Russia's long-term economic future. Pensioners represent a key demographic for President Vladimir Putin's administration. They currently constitute about 40 percent of the electorate, and importantly, they are much more likely to vote in elections. Reassuring them that the country would not follow the path it did in the 1990s, when financial destabilization led to the pension funds drying up, has been one key to Putin's longevity in office.

No comments: