UPDATE 2-Russia may invest wealth fund in economy - Putin

Wed Apr 11, 2012 7:36am EDT

By Douglas Busvine and Jason Bush

MOSCOW, April 11 (Reuters) - Russian President-elect Vladimir Putin said on Wednesday that the government should consider investing money held in the larger of its two sovereign wealth funds in regional development and strategic projects.

Putin's comments, in an annual address to parliament, appeared to undermine efforts by Finance Minister Anton Siluanov to save Russia's windfall oil revenues as insurance against a possible oil-price collapse.

Putin said Russia "can think about" investing some of the funds in the $89.5 billion National Welfare Fund in developing Eastern Siberia and the Far East, and part in strategic projects. He called for a government decision this year.

Putin's comments come amid disagreements within Russia's government over how to manage the country's oil revenues. Energy levies account for half of federal revenues, making the budget highly sensitive to the oil price.

Russia is planning to introduce new budget rules within the next two months that will define how much of these revenues to save in the two sovereign wealth funds, the National Welfare Fund and the Reserve Fund, presently worth $62.3 billion.

While only the Reserve Fund is officially designated to protect the budget against lower oil prices, the fund was heavily depleted, having fallen to 3 percent of gross domestic product from 10 percent in 2008, when global markets crashed.

The National Welfare Fund is officially designated to secure Russia's pension system, and plug a growing deficit in Russia's state pension fund. It is mostly invested abroad in low-risk government securities.

Finance Minister Anton Siluanov wants to save both funds and introduce a so-called fiscal rule that would stipulate that the budget should balance based on a 10-year average for oil prices.

However, Economy Minister Elvira Nabuillina recently proposed that part of the Welfare Fund should be spent on investment projects, while officials from her ministry argue the fiscal rule should run for a shorter, three-year period.

Spending money from the fund would reduce the size of Russia's fiscal reserves.

"It's probably not a good idea ... because of Russia's dependence on oil prices. If [the fund] is spent it increases the vulnerability," said Tim Ash, head of emerging market research at RBS in London following Putin's remarks.

Putin's comments come a few days after former Finance Minister Alexei Kudrin warned that investing too much of Russia's oil wealth domestically would also damage Russia's economy by causing an overvalued real exchange rate.

"When they say - let's build factories with these resources - this is a less effective form of modernisation than creating low interest rates and a more stable exchange rate," Kudrin said at a recent economic conference.

In a sign of the issue's sensitivity, Putin said that any decisions on the Welfare Fund would require a consensus among experts.

Departing from his prepared remarks, Putin told deputies that spending funds from the Fund should be considered "very carefully".

"Russia is a special case. To end up without reserves is very dangerous," Putin said.

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