The Ministry of Finance has decided on the new structure of the National Welfare Fund (NWF). Euro, yen and pounds sterling are excluded from the composition of the NWF currencies, a source close to the government told Vedomosti, the information was confirmed by a source familiar with the text of the department’s order. According to them, according to the new structure, up to 80% of the fund is allowed to be invested in yuan, up to 40% – in gold. That is, the shares can vary: for example, 70% will be yuan, 30% – gold.
According to the current proportions approved by the Ministry of Finance in the summer of 2021, the NWF should consist of 39.7% of the euro, 30.4% of the yuan, 5% of the pound sterling, 4.7% of the yen and 20 .2% – from gold. Previously, the fund included US dollars. Funds in euros, pounds and yen in accounts with the Central Bank are blocked due to sanctions.
As of December 1, the volume of the fund was 11.4 trillion rubles, or 8.5% of the projected GDP for 2022. As of the same date, the Ministry of Finance estimated the liquid part at 7.6 trillion, or 5.7% of GDP. 41.9 billion euros, 2.8 billion pounds sterling, 478.5 billion Japanese yen, 309.7 billion Chinese yuan, as well as 555 tons of gold in depersonalized form were placed on separate accounts for accounting for the funds of the NWF with the Central Bank. In addition, part of the funds is placed in the shares of Sberbank, securities of Russian companies, including bonds for the implementation of investment projects, as well as deposits in VEB and large banks.
According to one of the sources, the new structure does not mean that the Central Bank will immediately purchase gold on the market. The Ministry of Finance, as it always did, submits applications, and the Bank of Russia itself decides how and when to carry out the purchase – the regulator can allocate the necessary volumes of gold from existing reserves in favor of the government, redistributing them within its balance sheet.
The adaptation of the current structure of the NWF to the new one will also be carried out as part of the redistribution of reserves within the balance sheet of the Central Bank, explained another source, also close to the government. Deposits in the Central Bank pegged to the euro, pounds and yen will be re-pegged to the yuan, the source said.
The management of gold and foreign exchange reserves (GFR) of Russia is carried out by the Central Bank, the regulator acts as the government’s agent for the purchase of assets for the NWF. In addition to the funds of the fund, the Bank of Russia purchases gold reserves on its own. In total, Russia’s international reserves amounted to $581.7 billion as of December 23, according to the materials of the Central Bank. Finance Minister Anton Siluanov estimated in March that the countries that backed the sanctions had frozen about half, or $300 billion, of Russia’s reserves. At that time, the volume of gold reserves amounted to $640 billion, their amount decreased, among other things, due to exchange rate revaluation. The structure of the reserves of the Central Bank differed from the norms established for the NWF. At the beginning of 2021, assets in euros (33.9%), banking gold (21.5%), yuan (17.1%) and dollars (10.9%) occupied the largest share.
Vedomosti sent inquiries to representatives of the Ministry of Finance and the Central Bank.
Purchase mechanism
As Siluanov told reporters on December 27, purchases of foreign currency for the NWF could begin as early as January. But if earlier the budget rule that regulates market operations to replenish reserves assumed that oil and gas excess profits go to the fund (above the so-called cut-off price, which was $44.2 per barrel this year), now a different mechanism is in operation.
In particular, the Ministry of Finance determined the nominal amount of basic, i.e. unconditional, oil and gas revenues at the level of 8 trillion rubles. in year.
It is assumed that all income in excess of this amount will be directed to reserves. As Vedomosti wrote earlier, according to the approved budget parameters, the total amount of purchases under the budget rule next year could be about 900 trillion rubles.
“The issue was agreed with the Central Bank. From January next year, the rule will work. Mechanism clarified: 8 trillion [за год]. Everything above is there [в ФНБ]everything below is from there [из ФНБ]. We will make an assessment from monthly indicators and, accordingly, we will make a decision on replenishment or non-replenishment [изъятии из] National Wealth Fund,” Siluanov explained to reporters.
The monthly amount of purchases will be determined taking into account seasonality, so it may vary from month to month, a source close to the government told Vedomosti.
Siluanov also clarified that the purchases of foreign currency for the NWF would be made in yuan. There are currently no alternatives to the Chinese currency, according to the minister.
Basic oil and gas revenues are determined on the basis of a price of $62-63 per barrel of Urals with a production of 10-10.5 million barrels per day. Budget revenues were calculated at an average annual Urals price of $70.1/bbl.
The average price of Russian Urals oil, which, after the imposition of sanctions, is sold at a discount to Brent, for the period from November 15 to December 14, 2022, amounted to $57.49 per barrel, the Ministry of Finance cited an estimate. A month earlier, it was $71.1.
Siluanov, however, promised that the Ministry of Finance in 2023, with oil prices below $70 per barrel, would not replenish the NWF.
Management of reserves
The Bank of Russia will not need to conduct operations on the open market in order to adapt to the new structure, said Alexander Isakov, chief Russia economist at Bloomberg Economics. Everything can be done within the balance, he agreed. From the point of view of the Ministry of Finance, the NWF is in principle similar to a “structural ruble deposit”. That is, we can assume that it is stored in rubles, but the yield is tied according to the formula to the selected benchmarks, in this case, currency ones, he explained.
Most likely, the Ministry of Finance will set a target structure, for example, 70% – yuan and 30% – gold, and the maximum levels of 80% and 40% will be used by the Central Bank in managing the NWF, macroeconomist Viktor Tunev believes.
In his opinion, the structure of the NWF should be determined by the objectives of the ruble exchange rate and the liquidity of the relevant instruments. Gold is not the most liquid “cargo”: it is difficult to sell it quickly in large volumes, and its long-term attractiveness in terms of maintaining value is questionable. In this logic, the NWF should consist of rubles and yuan. Their structure may change depending on the deviation of the ruble from the target value for the year, Tunev said.
It is logical that the unblocked part of the Central Bank’s reserves should correspond to the structure of the liquid part of the NWF, the economist added. But then you need to sell gold for yuan, except in the Chinese market it is impossible to do this, summed up Tunev.
The structure of the NWF should be formed from two considerations: firstly, the standard rules for portfolio management, that is, profitability, liquidity and reliability, Isakov believes. Secondly, the price of the asset should go in antiphase with the price of oil, he added. That is, it is ideal to accumulate reserves when assets are cheap and oil is expensive. Gold usually goes in antiphase with oil, the yellow metal is the raw material with the highest negative correlation, Isakov explained. But gold is not suitable for active intervention in the market, he agreed. On the other hand, the correlation of the yuan with the dollar is very tight – up to 80% – due to the managed exchange rate regime. Therefore, the share of the yuan should be closer to the maximum bar of 80%, the expert concluded.