National Welfare Fund: What It Is and When It Ends

16 Mar


In recent years, many economists have predicted the complete exhaustion of Russian reserves. Readers will surely remember reports that the Reserve Fund of Russia has ceased to exist. Foreign and domestic investors reacted differently to this news background. In the review we will examine in detail:

  • what the National Wealth Fund is and how it affects the investment climate;
  • what happened to the Reserve Fund of Russia;
  • What is the safety factor of the National Welfare Fund and what to expect from it in the future?


What is the National Welfare Fund?

What is the National Welfare Fund?


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The National Welfare Fund (NWF) is a financial reserve of the Government and the Central Bank , a kind of “egg pot ” on a “black” day. It consists of investment assets that can be urgently sold in order to fulfill the social obligations of the state in the event of a sharp drop in oil and gas revenues.

The data on the NWF are open and monthly updated on the website of the Ministry of Finance .


The fund is formed from two main sources:

  • Additional revenues from the sale of hydrocarbons in excess of the budgeted price;
  • Revenues from the fund’s investment management.

In the short term, the law allows a negative financial result from management. NWF funds are spent in three areas:

  • Financing of the Pension Fund of the Russian Federation, which allows it to be balanced in conditions of negative demographic dynamics;
  • Cover the budget deficit;
  • Infrastructure projects financed through VEB.

The composition of the assets of the National Welfare Fund is determined and controlled by the Central Bank. The basis of the portfolio is foreign currency and securities of states with a high credit rating.

What affects the availability and condition of state reserves, why should it be interesting for a private investor?

  1. Investment climate, attractiveness of the market for non-residents. Investment funds take into account in their models the presence and size of foreign debt and financial reserves of the country. The inflow or outflow of foreign investments, which now account for about 35% of all liquidity , significantly affects the value of Russian assets.
  2. Reserves affect the exchange rate of the ruble against major currencies. For example, they enable the Central Bank, if necessary, to support the ruble by currency intervention.
  3. The viability of the current government, its ability to maintain social stability. This directly affects the dynamics of stock assets, because the Russian economy consists of at least 70% of the public sector. The private sector, in turn, is also dependent on state policy. When investing in Russian assets, the investor must take into account political risks.

Thus, financial reserves are important not only as a source of public sector wages and pensions. The condition of the fund affects how foreign and domestic investors assess market prospects and default risks.

Reserve funds of future generations are often created by the states, which are characterized by the following features:

  1. The country has large reserves of hydrocarbons, quotations of which are subject to volatility . This means that tomorrow the price may fall by half, which is why the execution of the budget will be under threat.
  2. The state has a positive trade account balance due to an export-oriented economy. Examples are China, Japan, South Korea, Taiwan.
  3. The country has a relatively low credit rating . Because of this, it does not have the ability to massively attract cheap borrowing from other countries. For example, the United States, which has the highest bond rating, may borrow almost unlimitedly and not worry about reserves.

The world’s largest sovereign fund is Norway’s state reserve fund of over a trillion dollars. He receives income from the sale of oil and gas. Only in 2017, he earned income of sv. $ 130 billion, or 13.7% per annum. Norwegians are not afraid to invest a significant part of their savings in risky assets – shares of the largest global companies. The fund allows you to provide pensions of $ 1,745 per month and the average salary in the country is about $ 5,500. For each of the 5 million citizens accounted for $ 208 thousand reserves.

Why the Reserve Fund of Russia was liquidated

Why the Reserve Fund of Russia was liquidated

The Foundation of Future Generations that exists today appeared in Russia in 2004. Then he was called “Stabilization Fund.” Since 2008, it has been divided into two parts:

  • Reserve Fund, initially received more than 3 trillion rubles;
  • National Welfare Fund size of 782.8 billion rubles.

In recent years, the Russian budget has been in short supply. It reached its highest value in 2016 – 3.5%. The budget deficit in 2017 was 1.6% of GDP or 1.5 trillion rubles. In January 2018, there were reports in the media about the exhaustion of the Reserve Fund (which was more than three trillion rubles 10 years ago). The news was accompanied by frightening comments like: “The government has spent all the reserves.” February 1, the remnants of the Reserve Fund poured into the National Wealth Fund.

What money is spent on:

  • Megastroyki, including the Olympics in Sochi;
  • Sanation of Discovery, Binbank, Promsvyazbank, etc.
  • Coverage of losses VEB;
  • Payment of current pensions and stabilization of the FIU;
  • Covering the state budget deficit.

A severe blow to the capitalization of the Reserve Fund was dealt by the currency crisis of the end of 2014 – beginning of 2015. Then the rate of national currency fell twice. The central bank conducted large-scale foreign exchange interventions to support the ruble, which at that time was not yet released into the “free floating”.

Financial indicators of the National Welfare Fund

Financial indicators of the National Welfare Fund

Reserves are formed at the expense of super-profits of the oil and gas sector, if the cost of oil and gas exceeds the value established by a separate law. According to the budget rule, in different years, deductions ranged from 1.9 to 7.7% of the country’s GDP . First, they transferred to the reserves all revenues received from the sale of oil more than $ 20 per barrel, then $ 27. A conservative oil price forecast of $ 40 per barrel has been included in the budget for 2018. For comparison, at the time of writing, Brent crude oil costs about $ 78, the first time since 2014.

There are two large segments in the NWF:

  • The liquid part (money in accounts, foreign currency, bonds, gold);
  • Illiquid part (investment in long-term projects).


The list of assets in which the NWF can invest is determined by a separate law 262-ФЗ:

  • Debt securities of foreign countries (USA, Germany, France);
  • Bonds and shares of Russian companies implementing infrastructure projects;
  • Funds on VEB, VTB, Gazprombank accounts;
  • Ruble deposits in the Central Bank;
  • Units of investment funds (RDIF, Russian Direct Investment Fund);
  • Foreign currency – dollar 45%, euro 45%, British pound 10% on 01/01/18.


At the same time, according to the law, only two types of assets can have a maximum share of 100% – debt obligations of foreign countries and deposits with the Central Bank. In other words, if we assume that the American treasuries recognize the only reliable tool, the NWF will consist exclusively of them. Or, on the contrary, the Central Bank will transfer everything to rubles. Both are unlikely.

What are the prospects for the National Welfare Fund in Russia

What are the prospects for the National Welfare Fund in Russia


The volume of the National Welfare Fund as of May 1, 2018 is 3,962 trillion rubles ($ 64 billion). The target level of the size of the liquid part of the fund to GDP is 7% (now less than 4%). Until this value is reached, the funds of the National Wealth Fund will continue to be directed primarily towards accumulation, and not towards solving socio-economic and budgetary problems. According to the accepted rules, 96.5% of the additional income from the sale of risen hydrocarbons will go towards accumulation. Considering the set of investment instruments that the Ministry of Finance and the Central Bank have the right to operate on, these will mainly be US government debt bonds, foreign currency, and gold . Therefore, the most likely solution for the government in the near future will not be printing a “jug”, but increasing taxes. In 2018, the authorities promise to completely withdraw from financing the budget deficit from the funds of the National Wealth Fund and direct reserves exclusively to the pensions of future generations. However, these promises are made with high oil prices. How they will be executed at lower prices is unknown.

Obviously, the rate of spending of the National Welfare Fund in 2018 will not be as high as in 2015 and 2016, when the budget was under pressure from low oil prices and sanctions. During 2018, with oil prices above $ 60, the National Welfare Fund will quickly replenish. Central Bank systematically increases the purchase of foreign currency for the Ministry of Finance. At the moment, about 350 billion rubles are spent on these goals monthly. In 2018, it is planned to buy at least $ 46 billion. By the way, this will not allow the ruble to strengthen strongly, even with expensive oil.


The share of gold is increasing – 18% of all gold reserves (gold reserves) of Russia. The gold reserves of the Central Bank are $ 80.4 billion (more than China’s and the fifth largest in the world). At the same time, the share of securities denominated in foreign currency decreases. Already announced plans to phase out purchases of US securities (22% or $ 96 billion). This is due to geopolitical reasons and does not mean a review of the reliability of public debt of developed countries.

The question of the advisability of investing in foreign assets remains ambiguous. In the first quarter of 2018, the placement of funds of the National Welfare Fund in currency instruments turned out to be unprofitable (minus 0.1% or 3.5 billion rubles). Including due to speculative currency transactions, which turned out to be extremely unsuccessful. For example, the dollar was bought at the highs, paired with the euro, and was sold after its decline. The second reason for the loss was the temporary effect of the growth of the ruble. However, on a longer horizon, investments in the same US national debt more than paid off against the background of a two-fold drop in the Russian currency in 2014–2015.

The general conclusion is as follows. Despite sanctions, weak economic growth and low efficiency of the public sector, nothing threatens the Russian financial system in the near future. Stability is ensured by a low level of public debt and constant replenishment of reserves in the form of a National Wealth Fund.

I invite you to comment in the comments: how do you represent the future of the fund, what do you think is right or wrong in the state policy regarding reserves. For example, is it worth it to spend on investing in the domestic economy or to save to cover future risks.