Accumulating currencies for long periods today is economically reckless
After February 24, 2022, the operations of the National Welfare Fund (NWF) were terminated. This was the official statement of the authorities.
Let me remind you that the FNB was created in 2008 on the basis of the Stabilization Fund that existed earlier. Initially, the NWF was conceived as a reserve fund to strengthen the provision of pensions in the country for the long term. In 2018, there was some reorganization of the FNB. The remnants of the Reserve Fund that had been operating until that time were attached to the NWF, and the Reserve Fund itself was liquidated. From now on, the NWF was entrusted with the task of not only maintaining and strengthening the budget of the Pension Fund, but also ensuring a balance (covering the deficit) of the federal budget. Additional oil and gas revenues (taxes and duties) are defined as the source of the formation of the National Welfare Fund. those that exceed the basic oil and gas revenues that form the federal budget. The division of oil and gas revenues into basic and additional was determined using the so-called budget rule. Specifically, since 2017, those calculated on the basis of the price per barrel of Urals oil in the amount of $40 in 2017 began to be attributed to basic income. This is the base price subject to an annual indexation of 2 percent from 2018. Last year, for example, the basic oil and gas revenues received by the federal budget exceeded 3 trillion rubles. The FNB grew by leaps and bounds. If in 2008 its volume was 1 trillion rubles, then by the end of last year it had grown to 13.6 trillion rubles.
An important feature of the NWF is that it is formed mainly at the expense of foreign currencies (there is a ruble component, but it is very insignificant). The FNB is administered by the Ministry of Finance of the Russian Federation. Therefore, the NWF is often called the “currency wallet” or “currency piggy bank” of the financial department. And since the Ministry of Finance itself does not enter the foreign exchange market, the operations for buying and selling the currency of the National Welfare Fund and the current management of the foreign exchange part of the fund are carried out by the Central Bank of Russia.
With the beginning of the NWO, the functioning of the NWF and the operation of the budget rule were suspended. All oil and gas revenues began to go to the federal budget of the Russian Federation, which until recently allowed the Ministry of Finance to maintain it in a deficit-free state. For ten months, according to the Ministry of Finance, oil and gas revenues received by the budget reached 4.8 trillion rubles.
The most serious event in the life of the NWF this year was also the fact that part of its assets was frozen at the end of February. The freezing of 300 billion dollars of assets of the Bank of Russia (also at the end of February) was discussed and continues to be discussed. But I would like to remind you that in the mentioned 300 billion, part of the currency belongs to the Ministry of Finance, this is the currency of the National Welfare Fund. The work was organized as follows: the Ministry of Finance opens foreign currency accounts with the Central Bank, and the latter places the funds of the Ministry of Finance in different currencies and in various financial instruments (mainly bank deposits and treasury securities of other states).
As of February 1, 2022, the volume of the NWF amounted to 13,610,271.7 million rubles, or 10.2% of GDP projected for 2022. Part of the funds of the National Welfare Fund (approximately 35%) at that time was placed in shares and bonds of Russian issuers (the so-called investment part of the Fund). The remaining funds are the so-called “liquid part”, consisting mainly of foreign currency. Plus, some of the liquid funds – gold and a small amount of rubles. 38.6 billion euros, 4.2 billion pounds sterling, 600.3 billion Japanese yen, 226.8 billion Chinese yuan, 405.7 tons of gold in impersonal form, 266.1 million rubles. As of February 1, the volume of the liquid part of the National Welfare Fund amounted to 6.6% of GDP, or 8.8 trillion rubles ($112.7 billion). So, the freezing of foreign exchange assets of the Bank of Russia meant that there was also a freezing of foreign exchange funds of the NWF (with the exception of the Chinese yuan).
If converted into US dollars, then on February 1, the stock of the euro in the National Welfare Fund at the then exchange rate was equivalent to $44.8 billion, the stock of pounds – $5.6 billion, the stock of the yen – $5.2 billion. ” as part of the NWF amounted to 55.6 billion dollars. Overnight, exactly half of the liquid part of the NWF evaporated!
Last week, the Ministry of Finance published information on the state of the NWF at the end of October this year. The total volume of the NWF is 11.374.08 billion rubles. (equivalent to 8.5% of GDP). Surprisingly, the Finance Ministry’s reporting in no way reflects the fact that half of the NWF’s liquidity was frozen at the end of February. The Ministry of Finance, without hesitation, fixes in its reporting the volumes of individual “toxic” currencies in the NWF as of October 31: 45.73 billion euros; 4.94 billion British pounds; 602.70 billion Japanese yen. And also: Chinese yuan – 301.72 billion Chinese yuan, 0.53 billion Russian rubles and 554.91 tons of monetary gold.
There are a lot of questions here. The most important: is the liquid part of the NWF in the form of three “toxic” currencies frozen or not frozen? Judging by all the messages and signs, it is frozen. Why, then, in its reporting, the Ministry of Finance shows “the ears of a dead donkey”, without making the reservations inherent in professional financiers that the euro, pounds and yen in the Fund are frozen? After all, it would be necessary to say at least in accounting language that these are “non-performing” or “problem” assets of the Fund. Is this a display of unprofessionalism or a scam?
Yes, and in oral presentations, the Minister of Finance Anton Siluanov is silent about the fact that half of the liquid funds of the Fund is arrested, citing fictitious figures of the Fund. I guess what the minister would have said if asked about it. He would probably say: it was the Central Bank that froze the currency. And its (the Central Bank’s) obligations to the Ministry of Finance remain valid. At the right time, the Central Bank will transfer these funds to the Ministry of Finance in ruble form at the appropriate rate of the euro, pound or yen.
I will continue. The mentioned rubles will leave the printing press of the Central Bank and will not be provided with anything. In addition, inflation will be promoted. And inflation is a hidden taxation of the entire population. The Ministry of Finance’s idea of creating a “currency pocket” failed, and this fiasco, in the long run, will be paid for by millions of Russian citizens.
Let me remind you that even earlier, in the so-called prosperous years, the Fund’s assets placed in foreign banks and Western treasury securities brought very meager returns. And sometimes losses. In today’s environment, these losses are already inevitable. And the Ministry of Finance records them in its reporting on the NWF. As for the “liquid part” of the Fund, the losses amounted to (per horse of the month, billion rubles): February – 3.08; March – 4.80; April – 4.38; May – 3.36; June – 3.42; July – 1.28; August – 3.43; September – 11.51; October – 7.12. Total for nine months total losses – 42.38 billion rubles. And for the year it can be more than 50 billion rubles. Along the way, I will note that in the “investment part” of the NWF, the losses are even steeper, but this is a topic for a separate discussion.
There is another important issue regarding the Fund’s currency composition presented by the Ministry of Finance. The mentioned values of “toxic” currencies in the Fund at the end of October differ from those figures that were at the end of February. Those. at the time when it was announced that the work of the Fund was frozen until the time when new rules for such work were determined. So, at the end of February, the assets of the National Welfare Fund of the euro were 38.56 billion units, and at the end of October – 45.73 billion. For pounds sterling, the figures were equal, respectively: 4.18 billion and 4.94 billion units; for yen: 600.30 billion and 602.70 billion units; in Chinese yuan – 226.78 billion and 301.72 billion units.
It turns out that in eight months, the foreign exchange reserves of the National Welfare Fund increased by 7.17 billion euros (by 18.6%), 0.76 billion pounds (by 18.2%), 2.40 billion yen (by 0.4%) 74 .94 billion yuan (up 33.0%). So, contrary to the official statements of the monetary authorities (the Central Bank and the Ministry of Finance) that they do not work with “toxic” currencies and recommend that all Russian participants in the foreign exchange market abandon “toxic” currencies in favor of “friendly”, the Ministry of Finance is somehow increasing the reserves of “toxic” currencies. » currencies. True, judging by the latest data, the Ministry of Finance has been especially energetic in accumulating the Chinese yuan since February. But here a series of new questions arises: who carries out operations to buy foreign currencies to replenish the NWF?
As I have already said, until February 24, the Bank of Russia acted as the agent of the Ministry of Finance for foreign exchange transactions. But on February 28, he announced that he would completely stop dealing with foreign currencies. On the website of the Bank of Russia, on the page fixing the daily operations of the Central Bank with foreign currency, there are dashes for the ninth month (the absence of operations for both buying and selling foreign currency). Who is now carrying out mysterious operations in the interests of the Ministry of Finance to build up the foreign exchange reserves of the NWF? On this issue – complete silence on the part of both the Central Bank and the Ministry of Finance.
My working version is as follows: the Central Bank and the Ministry of Finance are quietly continuing foreign exchange operations related to the NWF. I would like to draw your attention to the fact that a mysterious item “Other assets” has appeared in the monthly balance sheets of the Central Bank. Rather, this line was previously in the Central Bank’s balance sheet, but it was purely “technical”, amounting to fractions of a percent in relation to the total assets. And here is the latest data at the end of October: the value of “Other assets” amounted to 8.769.0 billion rubles, or 18% of all assets of the Bank of Russia. By the way, this position was more than twice the size of the “Credits” position. And surprisingly, the Bank of Russia does not disclose the content of the “Other assets” position. A real military secret!
So, it turns out that activities related to the NWF were not suspended, as was officially announced at all levels after February 24th. This activity was also expressed in the fact that the accumulation of “toxic” currencies – the euro, the British pound sterling, the Japanese yen – continued. Which again contradicts the official calls of the authorities to get rid of the currencies of unfriendly countries as soon as possible.
Even if there were no sanctions war and the threat of frosts, the accumulation of currencies for a long time (namely, this was the main idea of the NWF) today is reckless from an economic point of view. Judge for yourself: inflation in many Western countries has stepped over the bar of 10 percent per year. If this currency has been lying in the Ministry of Finance’s “box” of the National Welfare Fund for several years, what will be left of it when the currency from the “box” is withdrawn and spent on buying something useful?
Some experts have calculated what losses we would incur with these “toxic” currencies, even if there was no threat of freezing. The calculations refer to the euro. As of January 1, 2022, 33.39% of all international reserves of the Russian Federation were denominated in euros (out of a total of $630.6 billion). That is, 210.55 billion dollars, or at that rate, approximately 185 billion euros. Since then, over the three quarters, cumulative inflation in the Eurozone has stood at 7.9%. Thus, 14.6 billion euros have already burned. By October, there was an additional approximately 1.5% inflationary depreciation. Total for ten months 17.8 billion euros. And in a year it should exceed 20 billion euros. And if you keep the euro for years, the losses increase many times over. Alas, the story is the same with the so-called “friendly” currencies. They can depreciate against the ruble and at the same time lose purchasing power as a result of inflation. Take, for example, the Chinese yuan. Inflation in China is moderate, that’s true. But the exchange rate of the yuan, as always, is declining. From the beginning of the NWO to mid-September, the yuan weakened against the ruble by 9%. And against the US dollar, the Chinese yuan has depreciated by 13% since the beginning of the year by the end of October.
There has always been criticism of the FNB. It sharply intensified after February 24. Many in Russia believed that the functioning of the NWF should not be suspended, but completely stopped. The NWF does not work for Russia, and it even works very well for its geopolitical opponents. First, the accumulation of foreign currencies means lending to those Western countries that issued these currencies. Secondly, these currencies can be frozen and then confiscated (i.e. stolen) by the same West. Let me remind you again: A week after the start of the NWF, foreign exchange was stolen from the NWF in the amount equivalent to $55.6 billion.
Alas, the Russian parliament has just passed a law providing for the preservation of the notorious budget rule for 2023-2024 (though in a noticeably relaxed form). And if the budget rule is preserved, then the NWF is also preserved. This cannot but complicate the struggle announced by the Russian authorities for economic sovereignty and economic mobilization.
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