Russia » Economics
Author`s name Timothy Bancroft-Hinchey

US to take over Russian Stabilization Fund

Russia continues investing all its profits in the US economy
Russian government has always been proud of its innovation – Stabilization Fund, but lately this fund started causing problems. Indeed, there is no reason to convert extra revenues of national economy into US dollars and accumulate them in the special fund provided that the US dollar is steadily depreciating.

The amount of money in the Stabilization Fund exceeded the most optimistic prognoses of the government analysts. On February 1, 2003 the fund had 106.3 billion roubles (about $3.5 billion). The Fund will pile up money even faster than today if oil price do not decrease (and the decrease is unlikely to take place in the 6 months to come). 

However, independent experts are do not share the joy of the government financiers. Russian government does not seem to believe in the perspectives for Euro and strengthening Russian rouble, therefore the government continues converting the Stabilization Fund assets into the US dollars. However, the dollar is decreasing. The last meeting of the G7 countries demonstrated that the world economic leaders are not going to undertake any measures to stop depreciating US dollar. For Russian Stabilization Fund this means no profit at best and losses at worst case scenario. This does not look like the government’s achievement.

The first month of 2004 surprised Russian government. The Taxation Ministry and State Customs Committee were able not only to  accomplish the plan for revenues for January, but also to exceed it. Due to the huge efforts of these Institutions the revenues of the State Budget in January are estimated as 217 billion roubles (exceeding the plan by 6.4 percent). The first month budget had 55.46 billion roubles surplus of budget revenues over expenses. Considering that the year plan for this surplus is 83.4 billion roubles, the government financiers were able to execute in one month the plan for six month period.

Russian Central Bank has similar success. Recently Central Bank Chairman Sergey Ignatiev with pride reported President Putin of the record growth of the gold and exchange currency reserves – they became equivalent to the sum of 84.1 billion dollars. Neither czarist Russia, nor USSR had such reserves. For one month the Central Bank was able to accumulate 7 billion dollars. This Bank has no other options except for breaking its own records in the months to come. The US dollar exchange rate continues falling, and the Central Bank is required to purchase more and more dollars to stop this fall.

Russian government says the Stabilization Fund is designated for next generations. All additional state budget revenues are supposed to be accumulated in the fund if the oil price is higher than 20 dollars per barrel. Today oil price is much higher – one barrel of Russian Urals oil is sold at the price about $30. Naturally, the government has no problem with filling this “next generation fund”. However, there is another problem.

Experts in finance are deeply concerned about the government policy regarding to the Stabilization Fund. The concerns increased after the government decided to make public using the Stabilization Fund money. “We are preparing the document on managing the Fund money”, said Deputy Minister of Finance Tatiana Nesterenko in a RIA-Novosti interview.
According to Nesterenko, this paper will grant the authority of managing the Fund money to the Central Bank. “The Central Bank will act as an agent executing orders of the government on investing the money”, said the Deputy Minister.

According to her, all operations will be conducted in accordance with the law. Russian legislation allows to invest the Stabilization Fund money only in the most valuable stock. What kind of stock? The ones Russian government has always invested all its finance in – US state treasure borrowings in dollars. Most Russian gold and exchange currency reserves have already been invested in them. This means that Russian main financial assets – its gold and exchange currency reserves - are working for the US economy, and these reserves are depreciating along with the US dollar. The government is going to place its stabilization fund resources in this very “hole”.

High-ranking Russian government officials seem to be losing their mind from time to time. The President could hardly mean investing in the US treasure borrowings when he told the Prime Minister and the Minister of Finance to establish the Stabilization Fund. Were there any secret reasons for Russia, who like a whore is giving all its revenues to the American master?

Despite the decrease of the value of the deals with US treasure borrowings, Russian government continues setting hopes upon the US dollar. On the one hand, the government calls Russian citizens “to believe in rouble”, but on the other hand, it continues to believe in US dollar. Meanwhile, even the most serious currency market players became disappointed with US dollar.
According to Russian State Statistical Committee, in December 2003 banks sold 1.72 billion less dollars than purchased. In December the demand for the US currency fell three times less than it was in November. The causes are obvious: currently the US dollar exchange rate is the lowest for the last three years. Not only banks and individuals, but also big industrial enterprises, service sector, investment and real estate companies are refusing for using the US dollar. For example, after February 1 the Department of Investment Programs of Moscow Government started operating in roubles. The biggest Russian Airflot air-company is about to stop using dollars as well. Quitting dollar is on a large scale in Russia. Why do Russian authorities continue hoping for dollar?

Experts are right by saying that the Stabilization Fund money may be invested in the most valuable foreign stock, but the law does not state that they must be invested there. Russian experts many times offered the Finance Ministry more reasonable options of using the Stabilization Fund resources. For example, the additional budget revenues can be a replacement of the previously planned foreign and domestic loans, and also directed to paying the country debts ahead of time. Russian President Advisor on Economics Andrey Illarionov said about this many times. However, the Minister of Finance Andrey Kudrin sees different application for this money. While the state budget is receiving extra profits, the country in going to borrow money abroad again (although Russia has not completely recovered from the “Loan Madness” of Yeltsyn period”. Indeed, in God wants to punish a person, this person is deprived of the ability to think.