UPDATE 2-Russia SWFs banned from Fannie/Freddie investment

*Russia bans SWF investing in Fannie, Freddy

*Russia says needs more liquid assets

*Russia says change due to budget deficit

(Adds FinMin quotes, details, background)

By Gleb Bryanski and Yelena Fabrichnaya

MOSCOW, March 5 (Reuters) - Russia on Thursday banned investment of its $220 billion sovereign wealth funds in bonds of agencies such as Fannie Mae and Freddie Mac saying it needed more liquid assets to meet the needs of its own budget.

Russia had about $100 billion of its foreign currency reserves invested in U.S. government agencies at the start of 2008 as it sought to broaden its portfolio and chased higher yields.

It has now cut its holdings to zero while the foreign currency reserves, the world’s third largest, fell by a third to $384 billion as a result of heavy forex interventions to support the rouble in the recent months.

The Finance Ministry said it needs to shift the portfolios in favour of more liquid assets such as sovereign bonds as Russia plans to tap the funds to cover budget and pension fund deficits this year.

“The funds will be used for their direct purpose,” Pyotr Kazakevich, head of the ministry’s state debt department told Reuters.

President Barack Obama last month announced a housing rescue plan that heavily relies on Freddie and Fannie to stabilize the housing market, which is in its worst downturn since the Great Depression.


Major bond issues of $10 billion and more may become the norm for Fannie and Freddie in coming months as they face pressure to exit short-term issues piled on last year. Russia held only short-term bonds in Fannie and Freddy.

The Finance Ministry holds the funds in foreign currency accounts at the central bank, which manages them as part of its forex reserves and pays back returns in line with performance of an index, designed by the ministry’s portfolio managers.

The announced changes will affect the composition of the ministry’s index and experts say that the central bank’s foreign currency reserves’ portfolio, which is not publicly disclosed, is close to the ministry’s index.

Russia will this year run its first budget deficit in a decade and the deficit is expected to hit 8 percent of the gross domestic product, provided the price of oil, Russia’s main export commodity, averages $41 per barrel.

Russia plans to tap the $136.3 billion Reserve Fund for 2.7 trillion roubles ($74.54 billion) to cover the deficit.

Russia also plans to tap the $83.7 billion National Wealth Fund (NWF), initially earmarked for riskier high-yielding investments, to cover the pension fund deficit and also to support the banking system.

The new rules say 95 percent of the Reserve Fund should be kept in sovereign bonds with the remaining 5 percent corresponding to Russia’s position in the International Monetary Fund.

All foreign currency denominated assets in NWF should be invested in sovereign bonds. Bonds in both funds should be rated no less than “AA-” according to Fitch and S&P.

According to the latest U.S. Treasury data Russia in 2008 boosted its holding of U.S. treasuries to $116.4 billion from $32.7 billion, becoming the seventh largest holder of treasuries globally.

Prime Minister Vladimir Putin said in a speech at Davos economic forum in Switzerland that Russia as a major holder of the U.S. debt was concerned about the size of the U.S. fiscal deficit. (Reporting by Gleb Bryanski and Yelena Fabrichnay; Editing by Victoria Main)