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 economy of the great state was supported by the Stabilization Fund, created in 2004. In 2008, it was completely restructured and renamed the Reserve Fund and the National Wealth Fund. He acted as a rational continuation of the program "budget development", created in 1998 to finance large-scale industrial projects, which were supposed to serve as an engine in times of crisis.
The primary idea of the Stabilization Fund
The innovative format of the Stabilization Fund was completely contrary to 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 oil prices, while sterilizing excessive dollar revenues from oil sales. Inflation was to be controlled by investing in foreign assets. In the medium term, the Stabilization Fund was to act as a reserve to eliminate the problems associated with financing the structure of state pensions. In fact, the Reserve Fund and the National Welfare Fund act as a specialized monetary fund, which is actively used today to stabilize the state budget as a result of revenue reduction. It can also be used for state needs, but in the long run.
Why does Russia need a fund?
The Russian Reserve Fund has been formed over many decades due to the fact that the state budget has a strong dependence on external factors. The well-being of nations depends on world commodity prices. Today, when severe 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 collected 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 been faced with such a phenomenon as default.
Reserves Formation Stages
The first stage of the formation of the Reserve Fund began in 2003. An account was formed, which received funds earned from the export of natural resources. We’ll clarify here that profits from oil sales were not directed to a special account, but superprofits. That is, the remainder of the money from fuel sales, which were not provided for by insufficiently optimistic forecasts. The second stage of reserve formation is 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 an “airbag” has become a prerequisite for the continued prosperity of the nation. The last stage in the formation of the stock is the Reserve Fund and the National Welfare Fund.
Fund stabilization of the economy
The state’s export capabilities are greatly affected by a strong link to oil and gas exports. The situation leaves a negative imprint on the status of the state and strikes at production facilities that are export-oriented. The source of funds of a natural format is blocked to the economy due to the export of goods and services. All incoming cash flows are blocked by petrodollars. The Russian Reserve Fund today is responsible for ensuring the balance in the federal budget, since the price of oil today is several orders of magnitude lower than what was budgeted for 2014-2017. The fund is responsible for linking excessive liquidity, reduces inflationary impacts, and eliminates the effects of price spikes in the global raw materials market on the national economy. You can summarize and highlight the main three functions of the fund:
- Overlapping the deficit of the Russian budget.
- Prevention of the development of the Dutch disease in the economy.
- Financing pension savings and covering the budget deficit of the Pension Fund.
The purpose of the welfare fund and the movement of funds
Theory is one thing, but practice and history speak of a slightly different purpose of the reserve. The funds of the Reserve Fund are used to ensure that the state fulfills expenditure-related obligations while reducing revenues from the oil and gas sector of the economy. The volume of reserves is set at 10% of the GDP expected for the coming fiscal year . Initially, cash flows are directed to treasury accounts. The missing amount of funds from the non-oil sector is blocked by redirecting money through an oil and gas transfer. The following is the filling of the Reserve Fund itself. After its volume will correspond to 10% of the funds received, cash flow will be redirected to the National Welfare Fund, which will compensate for the deficit of the pension budget. The reserve fund remains untouched until the moment when revenues from the oil and gas sector of the economy are reduced by several times. 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 due to excess profits from the sale of oil. Capital replenishment is due to:
- mineral development tax;
- export duties on crude fuel;
- duties that are levied for the export of goods made from oil.
Another source of replenishment is the profit from managing the latter. The size of the Reserve Fund is controlled by accounting for funds in separate accounts that are opened by the Treasury with the Central Bank of the Russian Federation. All income-account transactions on the account are conducted by the Ministry of Finance of the Russian Federation in accordance with the law.
Special fund management mechanisms
As mentioned above, the National Welfare Fund acts as part of the federal budget. Moreover, the management of reserve funds is carried out 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 Wealth Fund is provided immediately when a deficit occurs. Information on the receipt and expenditure of funds from the reserve is published every month in the media.
Amounts of savings of the Russian government
The Ministry of Finance of the Russian Federation informed the public that over the past two years, the National Welfare Fund has increased by about 51.3%, and the Reserve Fund has grown by 72.9%. The reserve fund grew by 2.085 trillion rubles and by January 1, 2015, despite the prevailing crisis, amounted to 4.945 billion. In dollar terms, both reserves are estimated by specialists at 165 billion dollars. The positive capital gains are overshadowed by the statement of the Accounts Chamber, which was made in October 2014. According to representatives of the agency, while maintaining the rate of decline in oil prices on the international market and with the degradation of the state’s economy, the National Welfare Fund of Russia will be completely exhausted in the next two years.
Recent data from the Ministry of Finance
As of April 1, 2015, the size of the Reserve Fund amounted to 4.425 trillion rubles, or 75.7 billion dollars. The National Wealth Fund is equivalent to 4.436 trillion rubles, or 74.35 billion dollars. During the month of March, a decrease in 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, where the conditions for spending funds from funds were agreed. According to preliminary calculations, the volume of the reserve by the end of 2015 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.