Reserve Fund and National Welfare Fund of Russia

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:45

Each economy is simply obliged to have a certain margin of safety. As for the history of Russian strength, the next cycle is over today. Initially, the Stabilization Fund, established in 2004, supported the economy of the great state. In 2008, it was completely restructured and renamed the Reserve Fund and the National Welfare Fund. He acted as a rational continuation of the "budget development" program created in 1998 to finance large-scale industrial projects that were supposed to act as an engine in a crisis.

The initial idea of the Stabilization Fund

The innovative format of the Stabilization Fund completely contradicted the fundamental idea of the "development budget" project. It was based on the formation of a reserve, which was supposed to compensate, if necessary, the budget deficit due to an unexpected drop in the cost of oil, while sterilizing excessive dollar revenues from oil sales. Inflation was to be controlled byinvestment in foreign assets. In the medium term, the Stabilization Fund was supposed to act as a reserve to eliminate problems related to the financing of the state pension structure. In fact, the Reserve Fund and the National We alth Fund act as a specialized monetary fund, which is actively used today to stabilize the state budget as a result of a reduction in income. It can also be used for government needs, but in the long term.

Why does Russia need a fund?

The Russian reserve fund has been formed over many decades due to the fact that the state budget is highly dependent on the conjuncture of external factors. The well-being of states depends on world commodity prices. Today, when tough sanctions are imposed on the country by Europe and at a critically low cost of oil, the proceeds from the sale of which were dominant in replenishing the budget, it is the accumulated reserve that helps the country survive. It allows you to maintain the exchange rate of the national currency and becomes the basis for the state to fulfill its obligations to the population. If Russia did not have reserves, then the country would have long faced such a phenomenon as a default.

Stages of formation of reserves

The first stage of formation of the Reserve Fund began in 2003. An account was formed to receive funds earned from the export of natural resources. Here we clarify that the profits from the sale were not sent to the special accountoil, but superprofits. That is, the balance of money from fuel sales that was not provided for by insufficiently optimistic forecasts. The second stage of the formation of the reserve was the creation of the Stabilization Fund in 2004, which was essentially part of the federal budget. Due to the fact that the domestic economy was strongly tied to the commodity market, the formation of a "safety cushion" became a prerequisite for the further prosperity of the nation. The last stage in the formation of the reserve is the Reserve Fund and the National Welfare Fund.

Stabilization of the economy by the fund

The export capacity of the state suffers significantly from a strong link to oil and gas exports. The situation leaves a negative imprint on the status of the state and strikes at production capacities that are export-oriented. The economy has been cut off from the source of natural funds due to the export of goods and services. All incoming cash flows are blocked by petrodollars. The Reserve Fund of Russia today is responsible for ensuring a balance in the federal budget, since the price of oil today is several orders of magnitude lower than it was in the budgets for 2014-2017. The Fund is responsible for tying up excessive liquidity, reduces the impact of inflation, and eliminates the consequences of the impact of price fluctuations in the world market of raw materials on the national economy. We can summarize and highlight the main three functions of the fund:

• Covering the Russian budget deficit.
• Prevent developmentThe Dutch disease in the economy.
• Financing pension savings and covering the budget deficit of the Pension Fund.

Purpose of the Fund welfare and cash flow

Theory is one thing, but practice and history speak of a slightly different purpose of the reserve. The resources of the Reserve Fund are used to ensure that the state fulfills expenditure-type obligations while reducing revenues from the oil and gas sector of the economy. The volume of reserves is set at the level of 10% of the estimated volume of GDP for the coming financial year. Initially, cash flows are directed to the Treasury accounts. The missing amount of funds from the non-oil sector is covered by redirecting money through the oil and gas transfer. This is followed by the filling of the Reserve Fund itself. After its volume corresponds to 10% of the funds received, the cash flow is redirected to the National We alth Fund, which will compensate for the pension budget deficit. The reserve fund remains inviolable until the moment when revenues from the oil and gas sector of the economy are significantly reduced. Most of the reserve capital savings are converted into financial assets and currency. These are debt obligations of international organizations and securities, deposits in foreign financial institutions.

Where does the flow of funds to the country's reserves come from?

The Reserve Fund and the National Welfare Fund are formed not only at the expense of excess profits from the sale of oil. Replenishmentcapital comes from:

• mineral development tax;
• export duties on crude fuel;
• duties that are levied on the export of goods made from oil.

Another source of replenishment is the profit from the management of the funds of the latter. The size of the Reserve Fund is controlled by accounting for funds in separate accounts opened by the Treasury with the Central Bank of the Russian Federation. All income and expenditure operations on the account are carried out by the Ministry of Finance of the Russian Federation in accordance with the law.

Special fund management arrangements

As mentioned above, the National We alth Fund acts as part of the federal budget. At the same time, the reserve funds are managed in a slightly different format than financial assets in the federal budget. The main goals of money management are to preserve them, as well as to stabilize the level of income from their transformation into assets in the long term. All assets into which funds can be transformed are clearly defined by the Budget Code of the Russian Federation. Assistance from the National Welfare Fund is provided immediately, in the event of a shortage. Information on the receipt and expenditure of funds from the reserve is published every month in the media.

Russian government savings

The Ministry of Finance of the Russian Federation informed the public that over the past two years the National Welfare Fund has increased byabout 51.3%, and the Reserve Fund grew by 72.9%. The reserve fund increased by 2.085 trillion rubles and by January 1, 2015, despite the reigning crisis, it amounted to 4.945 billion. In dollar terms, both reserves are estimated by specialists at $165 billion. The positive capital gains are overshadowed by a statement from the Accounts Chamber in October 2014. According to representatives of the agency, while maintaining the pace of falling oil prices on the international market and with the degradation of the state economy, the National Welfare Fund of Russia will be completely exhausted in the next two years.

Most of Finance latest data

As of April 1, 2015, the size of the Reserve Fund was 4.425 trillion rubles or 75.7 billion dollars. The National We alth Fund is equal to 4.436 trillion rubles or 74.35 billion dollars. During March, the reduction of the NWF by 244 billion rubles was recorded, and the Reserve Fund - by 295 billion rubles. Recall that at the end of March the State Duma adopted a crisis budget, which stipulated the conditions for spending funds from the funds. According to preliminary calculations, by the end of 2015 the volume of the reserve will be only 4.618 trillion rubles. It is planned to spend about 864.4 billion rubles on the development of infrastructure projects for the reconstruction of the state economy.