14 Jun 2019 15:02

CBR mentions plans for NWF funds use among potential pro-inflationary factors

MOSCOW. June 14 (Interfax) - Monetary policy, including with respect to the National Wealth Fund, could affect inflation trends in the medium term, the Central Bank of Russia said in its press release following the key rate meeting.

"The mid-term inflation dynamics may be affected by fiscal policy parameters, including decisions on the use of the liquid part of the National Wealth Fund in excess of the threshold level set at 7% of GDP," the bank said.

This is the first time the CBR has listed this among potential pro-inflationary factors has thereby joined the debate on how to spend NWF funds.

The threshold of 7% of GDP at which the Russian Budget Code allows NWF money to be invested could be around 1.8 trillion rubles in 2020 and 4.2 trillion rubles in 2021, the Finance Ministry estimates.

First Deputy Russian Prime Minister Anton Siluanov, who is also the country's finance minister, has said the NWF would rise above the 7% threshold in 2020 thanks to windfall oil and gas revenue. Russia needs to decide this year already on where to invest money from the NWF that exceeds 7% of GDP, and to draw up the criteria according to which projects will be selected for NWF funding inside the country, Siluanov told reporters during the St. Petersburg International Economic Forum.

Amendments drafted by the MinFin provide for "putting the legal foundations in place for issuing state export credits from NWF money after the liquid portion of the fund (deposits and funds on Central Bank accounts) has reached 7% of GDP. The MinFin believes that the proposal would make it possible to maintain the NWF's "sterilizing" function and to "minimize the risks that have risen substantially of Russian assets being seized/frozen in foreign jurisdictions, above all the United States and in Western European countries, and, as a result, the total loss of Russian investments as the result of hostile actions by foreign states with respect to Russia."

Sovereign loans to carry out major projects abroad with Russian involvement - a classic example being nuclear power plant construction - are not the only option for investing NWF money above the 7% threshold, First Deputy Prime Minister Siluanov said. In general there are two positions, he said. "The first is that, if we do invest, then invest abroad, so that there is no pressure on the exchange rate and inflation, on tightening of monetary policy, because NWF spending is essentially easing of the fiscal rule. The second position is that we need new money and if this state money leads to private investors investing ten rubles of private money for every ruble [of state money], then why not. It seems to me that we could go for such types of projects that generate additional investment demand among private businesses when investing NWF funds inside Russia," Siluanov said.

The Central Bank's comments regarding other inflation risks are virtually the same as those it made after the last meeting.

"Short-term proinflationary risks have abated compared to March. The effects of the VAT hike have fully materialised. The revision of the interest rate paths by the US Fed and other central banks in advanced economies in 2019 H1 reduces the risks of persistent capital outflows from emerging markets," the document reads.

"That said, significant risks are posed by elevated and unanchored inflation expectations, as well as by several external factors. In particular, the risk of a slowdown in global economic growth still looms caused, among other things, by the further tightening of international trade restrictions. Geopolitical factors might lead to strengthened volatility in global commodity and financial markets, affecting exchange rate and inflation expectations. Supply-side factors in the oil market may amplify volatility of global oil prices," it reads.

"The Bank of Russia leaves mostly unchanged its estimates of risks associated with wage movements, prices of individual food products, and possible changes in consumer behaviour. These risks remain moderate," the CBR said.