No backup plan: The liquidity of Russia’s National Wealth Fund could dry up in months if oil prices crash

RU

Russia’s vanishing “safety cushion”

The concept of isolating Russia’s oil windfall revenues into a separate fund was first introduced by Vladimir Putin in his second year as president, during an address to the Federal Assembly concerning the 2002 budget. The idea was attributed to economist Andrey Illarionov, who at the time was working as a presidential advisor. Initially, Putin suggested not a standalone fund but rather two budgets: a basic budget calculated on a low oil price and an additional budget that would be feasible to implement if prices were higher. However, the Ministry of Finance never created two separate budgets. Instead, in 2004, the concept evolved into the Stabilization Fund — a financial reserve where all excess revenues, i.e., income earned when the Urals oil price exceeded $20 per barrel, would be accumulated.

The driving force behind this financial safety cushion, then-Finance Minister Alexei Kudrin, often turned to biblical analogies to elucidate the concept. “Joseph served the ruler of Egypt, who sought an explanation for his dreams. Joseph interpreted the famous vision of seven lean cows and seven fat cows grazing in a field, a vision no one else could explain. He foresaw seven plentiful years and seven years of famine, advising to collect taxes and create a grain reserve fund to help in lean years,” Kudrin explained in 2008. In essence, he elaborated, “this is a parable about the Stabilization Fund, but also about the cyclical nature of the global economy.”

The practice of saving windfall revenues instead of spending them led to criticism against the Ministry of Finance, with Kudrin’s team facing particular scrutiny for holding Stabilization Fund assets in foreign securities, primarily U.S. bonds. “You practically robbed the country — trillions of rubles were wasted, don’t try to fool us, you had no right to send that money abroad,” said LDPR leader Vladimir Zhirinovsky to Kudrin during a Duma session in 2008. “Why not invest these funds in human capital, by purchasing advanced foreign equipment for our healthcare, education, and science sectors?” echoed MP Nikolai Bezborodov.

Though the Stabilization Fund was often blamed for allegedly draining money from the Russian economy to invest abroad, between 2004 and 2008, the economy grew faster than at any later time. The ruble also appreciated against the dollar. During the Fund’s four-year existence, Russia’s dollar-denominated GDP tripled. Over this period, the government accumulated nearly four trillion rubles in the Stabilization Fund, amounting to a substantial 8.5% of GDP. Fund allocations were directed toward external debt payments and pension transfers, with the remainder being invested. The fund’s management rules were simple yet strict: investments were restricted to currency accounts (45% in dollars, 45% in euros, and 10% in British pounds) and top-tier government bonds from select developed countries. Naturally, the notion of any part of this portfolio being illiquid or risky was out of the question.

The second chapter in the history of Russian sovereign funds began on February 1, 2008, and lasted almost a decade. At this time, Russia operated both a Reserve Fund and a National Wealth Fund, created from the division of the Stabilization Fund into two unequal parts. The Reserve Fund received 80% of the assets (3 trillion rubles), while the NWF received the remaining 20%. The official rationale for the split was to address new objectives. After six years of accumulation, the funds were now available for more active use: the Reserve Fund served as the government’s immediate reserve, while the NWF — initially intended to be called the “Fund for Future Generations” — was the long-term reserve. The plan was for the Reserve Fund to supplement the budget in deficit years, while the NWF would co-finance voluntary pension savings and cover deficits in the pension fund budget.

The funding structure prioritized the Reserve Fund. Excess revenues were channeled there first, and only after it accumulated more than 10% of GDP (later reduced to 7%) would funds be directed to the NWF, which could be invested in riskier or even potentially unprofitable ventures.

Reserve Fund investments were expected to follow, with minor relaxations, the same strict rules that governed the Stabilization Fund. However, the Budget Code allowed the NWF more flexibility from the start, permitting investments in “debt obligations and shares of legal entities” as well as “investment fund shares (equity interests).” In 2010, experts from the Gaidar Institute noted that, “The National Wealth Fund’s role in addressing social issues is currently minimal,” adding that, “the NWF clearly fails to fulfill its designated but institutionally and legislatively unsupported role as an instrument for addressing long-term pension system challenges in Russia.” In 2013, Putin approved the use of part of the NWF for infrastructure projects (40% of the fund, capped at 1.7 trillion rubles, with an additional 10% each allocated for projects of the Russian Direct Investment Fund and Rosatom).

But soon enough, the system broke down completely. The financial crisis and low oil prices brought a halt to inflows, and the year 2014 proved especially damaging, as Western sanctions imposed over the annexation of Crimea hit at the same time the price of oil fell by half. The resulting budget deficit forced the government to tap into reserves aggressively, and in 2015, the Ministry of Finance permitted direct budget financing from the funds. Within a few years, the Reserve Fund was nearly depleted, and in 2018, its remaining assets were merged into the NWF, marking the end of the two-fund era.

Following the onset of the full-scale invasion of Ukraine in February 2022, the NWF saw another sharp decline: its liquid portion, available for quick use, shrank by three trillion rubles and now totals only 5.3 trillion rubles (with the NWF’s share of GDP dropping from 7.2% to 2.8%). While the projected budget deficit for 2025 is relatively modest (1.1 trillion rubles, or 0.5% of GDP), the situation could shift dramatically if the government’s fairly optimistic forecasts do not materialize. These projections hinge on an expected price of $69.7 per barrel for Russian oil and a GDP growth rate of 2.5% with inflation at 4.5%. The core issue with the NWF is that most of its assets are illiquid and would be of little use in a sudden crisis.

Useless Illiquid Assets

The NWF currently holds just under 13 trillion rubles ($133.7 billion), equivalent to 6.7% of Russia’s GDP and nearly as much as the federal budget plans to spend on the war in 2025. However, not all of the NWF can be easily accessed. The liquid portion stands at 5 trillion rubles, primarily in yuan and gold, which the Ministry of Finance sells as needed. Based on recent trends, this portion could be exhausted within two to three years. Russia's Central Bank even suggests that, in a high-risk scenario (such as a drop in commodity prices from $70 to $55 per barrel of Brent oil), this liquid portion of the NWF could even be depleted by the end of 2025.

At that point, the government would have to turn to the illiquid portion, which makes up 60% of the total fund and is invested — or, to put it bluntly, spent — on various support projects. Nearly a quarter of the fund’s total assets, 3 trillion rubles ($30.8 billion), are invested in Sberbank shares, with an additional 722 billion rubles ($7.4 billion) in preferred shares of Russian Railways, 690 billion ($7.1 billion) on deposit at VEB.RF, 492 billion ($5.1 billion) in bonds of Russian Highways, and several hundred billion rubles in shares of VTB and Gazprombank, Aeroflot, DOM.RF, Rostec bonds, GTLK bonds. Some can even be found in very private projects of varying economic efficiency, including: NLK-Finance LLC, Aviacapital-Service LLC, and the Territorial Development Fund.

Such investments would be unthinkable for a normal sovereign fund with strict rules, like Norway's, and even for the Russian Stabilization Fund during Kudrin's tenure. For instance, 300 billion rubles ($3.1 billion) from the NWF were used to purchase 160 leased aircraft that had been blocked by foreign owners at the start of the war. The money went to NLK-Finance LLC, a subsidiary of the state-owned Administration of Civil Airports (Aerodromes). The state-owned GTLK also engages in aircraft leasing, having received an additional 152 billion rubles ($1.6 billion). While aircraft are commercial assets capable of generating income and are indeed an investment subject, they are considered too risky for a state fund to manage. Furthermore, it is unlikely that the companies will ever redeem or repurchase these bonds. Therefore, when planning conservatively, it is best to assume the illiquid portion of the NWF is worth nothing.

No safety net

If political decisions had favored budget discipline, transparency, fair competition, and a peaceful policy respecting its neighbors, the accumulation of reserves could have continued, providing the budget with an additional source of revenue unrelated to taxation. Management of a portfolio of reliable foreign bonds is a simpler task than overseeing the effectiveness of investments in infrastructure and other projects.

However, this did not happen, and such handling of the NWF will have clear consequences for the budget and the Russian economy going forward.

First, the NWF cannot become the main donor for the budget — its liquid portion holds limited funds (2.8% of GDP). The government is currently managing to utilize other financing methods to cover a moderate deficit (expected to be less than 2% of GDP by the end of 2024, according to the Ministry of Finance). Primarily, this includes domestic borrowing and the withdrawal of funds from state enterprises. Nonetheless, NWF resources remain crucial for many of the less efficient enterprises and projects it invests in, as well as for numerous individuals with personal stakes behind them.

Second, the dynamics of the NWF's assets are likely to be inertial, meaning that over time, it will gradually deplete. While it is unlikely that the fund will be entirely exhausted by 2025, it could shrink by several trillion rubles and become fully depleted within 2 to 3 years.

The Ministry of Finance currently does not expect such a scenario and even aims to accumulate additional funds — targeting the accumulation of 5.5 trillion rubles ($56.6 billion) of liquid assets by the end of 2025 and 9.3 trillion rubles ($95.6 billion) by the end of 2027. However, this can only occur if conditions are favorable for Russia: oil prices must remain above $70 and subsequently not fall below $66 per barrel, military spending must stabilize (it has been rising steadily each year), among other factors that also need to align. Conversely, in a scenario marked by significant economic crises and a sharp increase in the budget deficit, the NWF will no longer be able to fulfill the role for which reserve funds were originally intended in the early 2000s.