The Ministry of Finance is reluctant to support raising the upper limit of withdrawals from the National Wealth Fund (NWF) from 4.2 to 6 trillion rubles, First Deputy Finance Minister Irina Okladnikova said. Invest Foresight asked Igor Nikolaev, Chief Researcher at the Institute of Economics of the Russian Academy of Sciences, for his assessment on the controversial move.
– The total National Wealth Fund holdings are valued at 10.78 trillion rubles today. Will raising the spending limit to 6 trillion indeed be critical?
– The problem is that not all of the NWF holdings are liquid assets. Let me remind you that when the total NWF assets stood at 12 trillion rubles or more, its liquid part was still about 7 trillion.
I suspect that the Ministry of Finance does not want the spending limit to extend to the entire liquid part of the fund, or be close to it.
– Why not? What could be the problem if it does?
– As professional financiers, the ministry’s senior officials want to keep some cushion ‘for a rainy day,’ as they say. By raising the limit, we will essentially give this up. So, the important part is not the total value of all NWF holdings per se, but how much of it is readily available and convertible. And the liquid part is always significantly lower than the total value, which is normal.
– The National Wealth Fund is tapped to fund major infrastructure projects. Spending less will mean fewer projects. Is this right? Or will the projects just take a little longer?
– The problem is that the Russian economy has been showing a certain growth due to a policy called the fiscal stimulus, or the injection of government money. The Finance Ministry believes it should be continued because it is perfectly aware that, if this stimulus is discontinued abruptly, the growth will most likely lose momentum as well.
Therefore, understandably, the ministry wants some money left. And, most importantly, it believes, not without reason, that, if prolonged, this stimulus will provide a good safety net for the economy. Economic uncertainty still remains high, and the sanctions pressure is only growing, as we see. That is, our financial authorities just want to have a plan B.
– So, the popular phrase ‘a good housekeeper won’t spare any snow in winter’ does describe the situation, and the Finance Ministry is doing the right thing?
– Yes, exactly.
– You said earlier that the liquid part of the National Wealth Fund will be enough for 2024. This moves the main risks to 2025-2026, doesn’t it? What are these risks?
– The risks are that the treasury may simply run out of money, or almost out.
The government has moved to increase the tax burden for companies and the wealthy, clearly expecting the measure to add extra funds to next year’s budget revenues.
In fact, the Finance Ministry is citing this as one of the reasons why it is against raising the spending limit – additional revenues will come from taxes anyway, so there is no need to do this.
Indeed, there is no doubt that Russia will have enough liquidity for 2024. So today, the ministry is taking this conservative approach to spending, to make sure they have enough for the next year as well.
– If the liquid part may not be enough for the future, does this mean they will have to cut the funding for all the projects previously funded with the NWF?
– Naturally, the officials will be mainly looking at what is happening with the extra tax revenues. But, if you are short of money and your savings are not enough, you will have to lend more.
– How risky is this in the current circumstances?
– Our debt burden is already on the rise. Last April, Anton Siluanov said that in 2024, we would spend 6.5% of the budget revenues on servicing the state debt, a share that is expected to grow to 9.7% by 2026.
Let me remind you that in 2019, the debt-related expenses were around 3.6%. Essentially, they seem to be able to triple over six years.
But most importantly, around 10% of the total revenue will be spent on servicing the state debt – and it is a fortune. It is trillions of rubles.
– And what are we supposed to do?
– What do we have? If we reduce the savings limit and lending becomes more expensive, this means extra burden on the budget. All we can do is to cut expenses, which is not a good option considering all the obligations that have been already announced.
– This must negatively impact GDP growth as well.
– Absolutely. This puts the claim or assumption that the fiscal stimulus policy may be extended, in question – when, in fact, this policy is the only reason why the Russian economy is showing any growth at all. If this extensive fiscal stimulus is wound down, the prospects of growth become completely vague.
– Does this mean the finance ministry now has to choose between two evils?
– Exactly.