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UPDATE 1-Russia oil fund to cover budget shortfalls-FinMin

Published 02/03/2009, 06:40 AM
Updated 02/03/2009, 06:48 AM

(Adds details, quotes, background)

By Toni Vorobyova

MOSCOW, Feb 3 (Reuters) - Russia's oil wealth funds should cover any budget deficits for at least the next three years, and some of the money may also be used to give more support to the financial system, a Finance Ministry official said on Tuesday.

The funds, worth $222 billion on Feb. 1, were amassed as Russia reaped the benefits of high prices for key export oil and a year ago were split into a Reserve Fund aimed at plugging any budget holes and a longer-term focused National Wealth Fund.

But while then the hot topic was which assets and countries will benefit from NWF's investments, now both funds are needed to help Russia through the hardest economic climate in a decade.

"Undoubtedly we will have to use the means of the Reserve Fund already this year... A not insignificant share may be used for covering the budget deficit," said Pyotr Kazakevich, deputy head of the Finance Ministry's state assets department.

"But we think that both 2010 and 2011 we will also be able to use this resource."

Finance Minister Alexei Kudrin said last week that Russia may run a budget deficit of 6.1 percent of gross domestic product, while the Reserve Fund is set at around 10 percent of GDP and is currently worth $137.3 billion.

The $84.5 billion NWF has already provided 175 billion roubles ($4.84 billion) for state share purchases which helped Moscow's bourses find a floor in late 2008 and 235 billion roubles for subordinated loans to commercial banks.

Moscow is expected to approve another round of capital injection for Russia's banking sector, which it has charged with financing the real economy, keeping the money market running and filling any funding holes left by the global credit crunch.

Estimates for the new package range from $27 billion to $40 billion and sources say subordinated loans could be used again, though banks say they need Tier 1 capital such as direct equity purchases by the state.

"We cannot exclude the possibility that the resources of the National Wealth Fund will be invested with the aim of extra support for financial structures," Kazakevich told a news conference without elaborating further.

Other countries with accumulated reserves are also using them to ease the impact of the financial crisis -- in Kazakhstan national welfare fund Samruk-Kazyna was used to effectively nationalise top bank BTA and provide broader support for the sector.

Russia is also working on letting investment firms manage some of its assets, and in the longer term creating a state-controlled Russian Financial Agency to take on the job.

Such measures will enable it to invest the money, where allowed by legislation, in a wider range of instruments such as shares and corporate bonds and to directly enter the market.

The state share purchases carried out late last year were done in a round-about way by transferring wealth fund money to state bank VEB which then invested in the stock market and paid 7 percent interest back into the fund.

Kazakevich said that over the past year, the funds earned 26.9 percent in roubles terms but lost 2.5 percent in dollar terms. The rouble's depreciation has helped boost the value of the cash pile in local currency by around 1 trillion roubles. (Reporting by Toni Vorobyova; Editing by Andy Bruce)

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