War in Ukraine Drains Nearly Half of Russia’s Liquid Assets
(Bloomberg) -- Russia’s government has tapped almost half of the national wealth fund’s available reserves to shield the economy against the fallout from its almost two-year war in Ukraine, leaving it vulnerable to future shocks.
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The National Wellbeing Fund’s holdings of cash and investments that can be easily liquidated slumped to 5 trillion rubles ($56.5 billion) at the end of last year from 8.9 trillion rubles before the war, while total holdings fell almost 12% to 12 trillion rubles, Finance Ministry data showed. The value of the fund’s stakes in Russian companies and in bonds that were issued to finance infrastructure projects has surged by more than 2 trillion rubles, according to Bloomberg calculations.
“The total size of the NWF seems quite irrelevant now that a big chunk of it has been invested in Russian shares and infrastructure – essentially illiquid investments,” said Tatiana Orlova, economist at Oxford Economics. “Only liquid investments can be considered as rainy day reserves, the rest is gone.”
The wealth fund, which has taken years to build up its assets, is set to come under further pressure as Russia’s economy continues to be buffeted by sanctions that were imposed by Western nations in response to President Vladimir Putin’s February 2022 invasion of Ukraine. The Finance Ministry tapped around 3 trillion rubles from the fund to cover the budget deficit last year as it ramped up spending on the military and measures to cushion the economy. It plans to take another 1.3 trillion rubles this year.
In addition, budget rules provide for NWF funds to be paid over to the Finance Ministry to compensate it for a loss of export revenue should its earnings from oil sales undershoot the budget estimate of $60 a barrel.
What Bloomberg Economics Says:
“If oil prices continue to ignore the risks of supply disruption from the Israel-Hamas war, the remaining stock of the NWF’s liquid assets will continue to dwindle, making Russia increasingly vulnerable to shocks. It will last only another one to two years if Russia’s oil export price declines below $50.”
— Alex Isakov, Russia economist
“If the situation regarding energy prices is completely negative, we will use the National Wellbeing Fund,” Finance Minister Anton Siluanov told reporters last month. “But if we see that it decreases, then we will take other budget balancing measures. It’s clear that we are not interested in nullifying the National Wellbeing Fund and sitting without a penny in reserve.”
Read More: Russia Plans Huge Defense Spending Hike in 2024 as War Drags
Such measures could include the partial privatization of state companies or increasing local borrowing.
The average price of Urals, Russia’s main crude-export blend, dropped more than 17% last year to $62.99 a barrel, according to the Finance Ministry. Bloomberg Economics projects that NWF will continue to be depleted this year unless the price exceeds about $73.
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