The Reserve Fund and the National Welfare Fund of Russia

Each economy simply must have a certain margin of safety. As for the history of Russian strength, the next cycle is over today. Initially, the Stabilization Fund, established in 2004, supported the economy of the great state. In 2008, it was completely restructured and renamed the Reserve Fund and the National Welfare Fund. He acted as a rational continuation of the "budget development" program, established in 1998 to finance large-scale industrial projects, which were to serve as an engine in a crisis.

The primary idea of the Stabilization Fund

The innovative format of the Stabilization Fund completely contradicted the radical 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 the cost of oil, with sterilization of excessive dollar revenues from the sale of oil. Control over inflation was to be effected by investing in foreign assets. In the medium term, the Stabilization Fund was to serve as a reserve for eliminating the problems associated with financing the structure of state pensions. In fact, the Reserve Fund and the National Welfare Fund act as a specialized money fund, which is actively used today to stabilize the state budget as a result of income reduction. It can also be used in public needs, but in the long term.

Why should Russia fund?

The reserve fund of Russia was formed over many decades due to the fact that the state budget has a strong dependence on the external factors' conjuncture. The welfare of states depends on the world prices of primary commodities. Today, when tough sanctions are imposed on the country by Europe and at a critically low cost of oil, the means from selling it were dominant in the replenishment of the budget, it is the collected reserve that helps to survive. It allows you to keep the national currency rate and becomes the basis for the state to fulfill its obligations to the public. If Russia did not have reserves, then the country would have long faced a phenomenon such as a default.

Stages of formation of reserves

The first stage of the formation of the Reserve Fund began in 2003. An account was formed for which funds earned from the export of natural resources were received. Here we will clarify that the special account was directed not profits from the sale of oil, but superprofits. That is, the balance of money from fuel sales, which were not provided for by insufficiently optimistic forecasts. The second stage of the formation of the reserve is the creation of the Stabilization Fund in 2004, which was in fact part of the federal budget. Due to the fact that the domestic economy had a strong link to the commodity market, the formation of a "safety cushion" became an indispensable condition for the further prosperity of the nation. The last stage in the formation of the reserve is the Reserve Fund and the National Welfare Fund.

Stabilization of the economy by the forces of the fund

The export opportunities of the state suffer greatly from the strong link to the export of oil and gas. The situation postpones a negative imprint on the status of the state and hits the production capacities that are export-oriented. In the economy, the source of receipt of funds of natural format is blocked due to the export of goods and services. All incoming cash flows are blocked by petrodollars. Russia's reserve fund is now responsible for ensuring the balance in the federal budget, since the price of oil today is several orders of magnitude lower than it was in the budgets for 2014-2017. The Fund is responsible for linking excessive liquidity, reducing inflationary pressures, eliminating the impact of price spikes on the world commodity market on the national economy. You can summarize and highlight the main three functions of the fund:

• Overlapping the Russian budget deficit.
• Prevention of the development of Dutch disease in the economy.
• Financing pension savings and closing the budget deficit of the Pension Fund.

The purpose of the Welfare Fund and the flow of funds

The theory is one thing, but practice and history speak of a slightly different assignment of the reserve. Funds of the Reserve Fund are used to ensure that the state fulfills its expenditure type obligations while reducing revenues from the oil and gas sector of the economy. The volume of reserves is set at 10% of the estimated GDP for the coming fiscal year . Initially, cash flows are sent to the Treasury accounts. The lack of funds from the non-oil sector is blocked by redirecting money through the oil and gas transfer. Then follows the filling of the Reserve Fund itself. Once its volume corresponds to 10% of the funds received, the cash flow is redirected to the National Welfare Fund, which will compensate for the deficit of the pension budget. The reserve fund remains untouched until the revenues from the oil and gas sector of the economy are reduced at times. Most of the savings in reserve capital 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 reserves of the country come from?

The Reserve Fund and the National Welfare Fund are formed not only due to excess profits from the sale of oil. Replenishment of capital is due to:

• Tax on the development of minerals;
• Export duties on crude fuel;
• The duties that are levied on the export of goods made from oil.

Another source of replenishment is the profit from managing the funds of the latter. The size of the Reserve Fund is controlled by the account of funds in separate accounts, which are opened by the Treasury in the Central Bank of the Russian Federation. All incoming and outgoing transactions on the account are conducted by the Ministry of Finance of the Russian Federation in accordance with the legislation.

Special mechanisms for managing the fund's resources

As mentioned above, the National Welfare Fund acts as a part of the federal budget. At the same time, the management of the reserve funds is done in a slightly different format, rather than financial assets in the federal budget. The main objectives of money management are to protect 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 of the National Welfare Fund is instant, if there is a deficit. Information on the receipt and on the use of funds from the reserve every month is published in the media.

The size of the 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 increased by about 51.3%, while the Reserve Fund increased by 72.9%. The reserve fund has increased 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 experts at $ 165 billion. The positive growth in capital is overshadowed by the statement of the Accounting Chamber, which was made in October 2014. According to the representatives of the agency, while maintaining the rate of falling oil prices in the international market and degrading the state's economy, the National Welfare Fund of Russia will be fully exhausted in the next two years.

The latest data from the Ministry of Finance

As of April 1, 2015, the size of the Reserve Fund was 4,425 trillion rubles or 75.7 billion dollars. The National Welfare Fund is equivalent to 4.436 trillion rubles or 74.35 billion dollars. During the month of March, the NWF cut was reduced by 244 billion rubles, and the Reserve Fund - by 295 billion rubles. Recall that in late March, the State Duma adopted a crisis budget, where the terms of spending of funds from the funds were stipulated. 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.