Russia to diversify oil fund gradually

MOSCOW (Reuters) - Russia will diversify its $133 billion oil stabilization fund investment portfolio towards riskier assets only gradually due to global financial turbulence, a senior Finance Ministry official told Reuters.

"I think this turbulence is not over," Pyotr Kazakevich, the ministry official in charge of overseeing the stabilization fund, said at the Reuters Russia Investment Summit on Tuesday.

"That is why we will try to diversify our investment strategy towards including more risky assets such as equity and corporate bonds in our investment universe, very slowly and carefully."

The global liquidity crunch, which originated in the U.S. subprime mortgage sector, has led to a selloff in equities and a decline in major world indexes in recent months.

Russia plans to split the oil fund on February 1 into two sub-funds -- a Reserve Fund, designed to cushion the budget from oil price shocks, and a National Welfare Fund, which will make more growth-oriented investments in risky assets.

"The situation in the markets provides good confirmation for our idea that the beginning of operations with equities should be well prepared," Kazakevich said.

The split, due to take place one month ahead of the election of a successor to President Vladimir Putin, will draw a line under the four-year existence of the fund, created just before Putin assumed his second term in office.

During that time Kazakevich's boss, Finance Minister Alexei Kudrin, the architect of the fund, has consistently fought off populist calls to spend Russia's oil wealth on social welfare.

WELL-BALANCED

The fund collects mineral extraction tax and export duty from oil prices exceeding $27 per barrel. Kudrin argued the fund, which will be renamed Oil and Gas Fund after February 1, 2008, should also collect gas export revenues.

Kazakevich said the current investment strategy of allocating the fund's money in AAA-rated instruments in line with the currency structure of 45 percent dollars, 45 percent euros and 10 percent sterling has worked well.

"Our portfolio has been performing very well in the current turbulent environment," Kazakevich said, adding that he still wanted to lower rating requirements for the fund's investment instruments to the "AA" level.

Kazakevich said he saw no immediate changes to the currency structure of the stabilization fund, which currently makes up part of the central bank's gold and forex reserves.

"We consider our currency structure well-balanced. It reflects the main trends on the financial market. That is why we currently feel OK with this structure. I do not think we will change it in the nearest future," he said.

Kazakevich said oil fund managers are looking at the yen and Swiss franc for the Reserve Fund's asset allocation but needed more time to prepare. He said Russia could use external as well as Russian managers for the Welfare Fund investment.

Kazakevich sought to allay fears expressed by some European politicians that equity investment by sovereign funds could be used to snap up strategic firms, saying the Welfare Fund would be a purely portfolio investor.

"We will have limits on a maximum stake we can build up in one company," Kazakevich said.

Kazakevich said commodities would not be "the first choice" for the fund investment, while real estate and private equity may be included on the list.