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Awash in oil income, Russia forms wealth fund

Email|Print| Text size + By Andrew E. Kramer
New York Times News Service / February 1, 2008

MOSCOW - Russia has split its oil proceeds into two funds and cleared the way for one to invest in foreign stocks and bonds, officials said yesterday. But actual investments are not expected to begin until fall at the earliest.

The move sets up an investment pool with $32 billion, rivaling big American hedge funds and offering another sign of the dizzying wealth these days of oil-producing countries like Russia.

Russian officials are already moving to address possible concerns from US and European regulators about a government entity investing on the stock exchanges with such large resources.

A deputy finance minister, Dmitry V. Pankin, offered assurances yesterday that the new fund would serve purely economic goals. "What are they worried about, foreign investment coming to their country?" Pankin said of critics in Western countries. "They should not worry, they should hope."

Russia accumulated $157 billion in its oil proceeds fund, one of 40 or so sovereign wealth funds worldwide with a total of $2.5 trillion under management.

One of the new funds, now called the Reserve Fund, will retain the initial purpose of insuring the Russian budget against a steep fall in oil prices. It will hold $125 billion and be maintained at a size roughly 10 percent of Russia's gross domestic product, as it is now.

The other, the Fund for National Well-Being, with $32 billion, is intended to buoy the pension system as the Russian population ages and the share of people working shrinks. Under a law passed last spring, the new fund can be invested in foreign stocks and bonds.

Yet at least until September, Pankin said, the finance ministry will retain the money in a central bank account that pays interest at a rate equivalent to the returns of foreign government bonds - the same conservative investment the government chooses for the Reserve Fund.

A deputy US Treasury secretary, Robert M. Kimmitt, wrote in Foreign Affairs in January that sovereign wealth funds should be welcomed to the United States as stable long-term investors that help increase stock prices and reduce volatility. He also noted risks, including the possibility that foreign intelligence agencies would provide nonpublic information to the managers of such funds to assist their investing decisions.

Russian investing has already encountered criticism in the European Union. The state-owned natural gas monopoly Gazprom is buying pipelines and storage facilities in Europe; officials there have suggested that the company was operating from foreign policy motives rather than economic ones when it shut off gas to Ukraine in 2006 after the election of a pro-Western government. Gazprom said it was a purely commercial matter.

Pankin said the finance ministry had not yet decided whether it would hire an outside fund manager. That has not stopped banks from making proposals, he said.

A manager will be chosen only when the fund begins investing in corporate debt and securities, he said, as the ministry does not need assistance in buying government bonds.

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