Russia's Reserves - What Scope for a Further Buildup?

Russia hefty reserves have served the country well as a bulwark against macroeconomic turbulence, whether due to sharp swings in commodity prices, sanctions or global turmoil. The question of how best to manage these reserves and what portion of them should be deployed in the service of boosting economic growth has occupied Russia's leaders in recent years. There are guidelines in place, most notably the 7% of GDP threshold for the liquid part of the National Wealth Fund and guidance from the central bank regarding its desired reserve level. But as commodity prices rise, the prospects are strong for further reserve growth. We put together a tally of just how large Russia's reserves are, how much can be invested and then took a look at whether Norway's approach to managing its sovereign wealth fund could be an appropriate model for Russia.> Total reserves exceeded $800 bln as of May 2021, more than enough to ensure macroeconomic stability. This figure, which includes federal government, the CBR and regional governments, represents almost half of annual GDP. This is among the highest levels in the world and easily passes the IMF's reserves adequacy guidance. For the NWF, there is the 7% of GDP threshold set for the liquid part of the fund beyond which the fiscal reserves can be used to finance projects in Russia; with respect to CBR reserves, Governor Elvira Nabiullina stated several years ago that $500 bln is a sufficient level for gross international reserves. To put this in context, meanwhile, the IMF estimates an adequate level of gross international reserves to be around $250 bln.> R4 trln or more can be used to finance spending already this year; $27 bln can be invested from the NWF in infrastructure projects next year. The government will start financing expenditures from ruble-denominated accounts already in 2021, as it has lowered its borrowing plan for the year by R0.9 trln. Still, more than R3 trln should be left over for future years. Meanwhile, sizable infrastructural investments from the NWF may start in 2022. > Norwegian sovereign fund approach not fully applicable for Russia. The Norwegian model is a popular reference case for Russia but is only partially applicable here. The budget intake of Russia's general government (including regional governments and off-budgetary funds) is much lower than Norway's and the non-oil and gas revenues of Russia's government are also much lower. Adopting an approach similar to Norway's would result in an excessively tight fiscal policy. However, where Norway's approach bears emulation is in its focus on the "green agenda." This is an area that Russia's NWF could become more focused on in the coming years.