Ways the National Welfare Fund may be spent in 2020
Russian authorities have been discussing options for spending the National Welfare Fund (NWF). The NWF had reached $124.1 billion by the beginning of August, due to government current account transfers of last year’s FX purchases ($66.6 billion). As the liquid part of the NWF (currently $98.8 billion) will reach $120 billion (7% of GDP), the Budget Law allows it to begin being spent for other purposes.
Spending options under discussion include export lending, financing of infrastructure projects and investment in foreign assets. The government advocates spending money domestically, and there’s no shortage of corporates interested in getting cheap financing from the NWF. Even Gazprom wants access to the money, to build gas chemical plants in the Baltics. The CBR would prefer to maintain the current scheme, under which NWF funds are part of FX reserves, and invested in liquid foreign assets.
We believe the most likely outcome of the autumn discussions will be a decision to use NWF funds domestically, but on a relatively limited scale. We don’t think all of the excessive part ($20-$25 billion) will be spent next year. Spending in 2020 may be closer to $5 billion -$10 billion.
The decision to spend the NWF within Russia will not lead to sharp RUB appreciation. Technically it won’t directly alter CBR FX purchases on behalf of the Minfin. It will be structured as additional RUB emissions from the CBR. The same mechanism was used when the reserve fund financed the budget deficit four years ago. So we believe that the overall impact of NWF spending on the RUB will be limited.
NWF spending will probably complicate monetary policy implementation, as the CBR will have to build additional liquidity. A boost to domestic demand will also lead to some inflationary pressures. But in the amounts expected (less than $5 billion to $10 billion), NWF spending won’t change the macroeconomic outlook.
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