Russia's emergency fund dwindling rapidly: economic crisis imminent with oil price decline?

Russia's so-called National Welfare Fund (NWF - Russian National Wealth Fund) is rapidly depleting. As per the Russian Ministry of Finance, by the end of 2023, only 5 billion rubles remain out of the original 9 billion rubles (over $114.74 million). The two-year war with Ukraine saw Russia spending 4 billion rubles from the fund to aid sectors of its economy weakened by sanctions.

The National Welfare Fund was intended to cushion the impact of the Russian economy's dependency on variable revenues from hydrocarbons. The surplus from the sale of oil and gas is meant to go to a special fund, as explained by Kamil Lipiński of the Polish Economic Institute in an interview with money.pl.

The challenge lies in the expenditure being high and the declining prices of oil and gas, making it difficult to replenish the fund. As estimated by the independent Russian news portal Meduza, if the price of Urals crude oil hits $50 per barrel, the money in the fund will hold out for another two years only. In case of a serious crisis, there might soon be a scarcity of emergency funds.

Covering two years of spending from the fund is becoming increasingly challenging. The mechanism created by former Finance Minister Alexei Kudrin worked such that the government would purchase foreign currency - dollars, euros, yuan, and gold for saving when oil prices were high. If the oil prices were to fall, the accumulated currency could be used for interventions.

Each year, the Russian government set a border price for Ural type oil as part of the budget rule. Above this price, surplus revenue was transferred to the fund. However, after Russia's invasion of Ukraine and the subsequent sanctions on Russia, the prices of oil became unpredictable, and the ruble exchange rate unstable, causing the mechanism to be revamped.

As per the new regulations authorized at the end of the year by the president of the Russian Federation, the fund is topped up depending on certain oil and gas revenue levels. As a result, reserves can be topped up if the state treasury gets eight trillion rubles annually from the sale of these raw materials, as reminded by the Meduza portal.

The fund is replenished when Russian contract oil prices exceed $63 per barrel, whereas currently, Urals is priced at $62/b. As for gas, the budget grows when prices are greater than €24.2/MWh (current European cost is €27/MWh), as highlighted by Kamil Lipiński.

Market analyst Dr. Jakub Bogucki of e-Petrol emphasizes that it will become more difficult for Russia to sustain high revenues from the sale of hydrocarbons. This is due to the weakening demand from the two main consumers, China and India. On top of this, there are impending sanctions on gas and oil from the Western nations' coalition, he explains.

Even during the favorable economic trends last summer, when the ruble weakened and oil prices increased, the National Welfare Fund experienced no growth, but rather, the Kremlin dug deeper into its pockets, as pointed out by the Meduza portal.

Russia has switched its economy to war mode, boosting related expenditures by 60% compared to 2021. Budget expenditures reached 32 trillion rubles, surpassing the legal standard by three trillion rubles, posing an issue with the budget deficit.

The government chose to dip into the fund's so-called liquid assets, namely currency and gold. Meduza indicates that half a billion euros, 115 billion yuan, and 232 tons of gold were sold at that time, resulting in 2.9 trillion rubles which were used to address the deficit.

The past two years of war saw the fund being significantly depleted. The grounded aviation industry, for instance, necessitated expenses from the fund. According to Meduza's calculations, 300 billion rubles were spent on purchasing leased Boeing and Airbus aircraft, new Russian MS-21 aircraft, manufacturing Tu-214, and even upgrading airport infrastructure, all at the expense of the National Welfare Fund.

Funds were also directed towards the sanctioned Aeroflot and Russian Railways. A total of $870 million was used for modernizing the St. Petersburg metro fleet, and another 50 billion bonds of Russian Highways for financing road construction.

"The difficult situation in Russia has forced the Kremlin to plug more holes with whatever resources are available. The Russian fund was supposed to serve a similar purpose as the Norwegian Oljefondet - the oil fund. While the Norwegians invest oil profits for future generations, Russians use it to douse fires," Dr. Bogucki points out.

Money from the NWF was also used to save Otkritie Bank from VTB, which was bought out. Funds were also invested in companies listed on the Moscow Stock Exchange, shares of Sberbank, or the purchase of a controlling stake in the Central Bank (in 2020 - as indicated by the Meduza portal). Further to these expenditures, the Ministry of Finance plans to tap into the fund this year for an additional 1.3 billion rubles to cover the country's deficit.

Bloomberg reported in mid-January that the war in Ukraine has cost nearly half of Russia's liquid assets, and the dwindling of assets accumulated over years leaves the Russian nation vulnerable to shocks.

Meduza portal highlights that at the current rate of spending, the fund will maintain stability if a barrel of Russian oil keeps at a level of $73. However, the price of Russian benchmarks traded in Primorsk, including Urals oil, sits around $60-62 per barrel. This means the "oil and gas fund," meant to safeguard Russia's future, is under significant pressure, and any blow to Russian raw materials will hasten Russia's "dark hour."