MOSCOW, Oct 17 (Reuters) - Russia will start spending 175 billion roubles ($6.64 billion) of its wealth fund on buying top quality shares and bonds from next week, while the central bank pledged to keep supporting the rouble.
“Today foreign investors are selling our shares. Russian banks and Russian companies are buying them and, as of next week, the National Wealth Fund (will join them),” Finance Minister Alexei Kudrin said on Friday.
“We will buy equities and bonds... with high ratings and it is important for us that the volume is normal and the paper is liquid. This is an investment of the national wealth fund into reliable and highly profitable securities.”
But the prospect of a cash injection was not enough to stop Russia’s bourses from setting fresh 3-year lows on Friday [.ME].
Protecting the rouble during the stock market slump and capital flight has already cost tens of billions of dollars of reserves, but the central bank said it would not change tack.
“In the near future we do not plan to review technical parameters of the rouble exchange rate support policy,” First Deputy Chairman Alexei Ulyukayev told Reuters [ID:nLH593951].
Russia has pledged a rescue package worth around $200 billion to support markets, including the share purchases.
But a high-level government source said it was not trying to stop stock market falls and that buying shares was in line with the wealth fund’s long-term strategy to be unveiled in November.
“We will enter (the market) for a long time, 10 to 15 years,” the source said.
State Development Bank (VEB) will act as Russia’s agent for the share purchases in the beginning, with the government providing a model portfolio and VEB paying interest based on the performance of that portfolio, the source said.
The arrangement is similar to how the central bank currently manages the National Wealth Fund for the Finance Ministry.
VEB is also the agent for the $50 billion Russia has allocated to help corporates refinance foreign debt as the global credit crunch has dried up external funding sources.
VEB has said demand has exceeded the funds on offer.
“Maybe the volume (of funds) will be increased, depending on how we judge the situation,” the government source said, adding that some of the demands — like those for loans taken out for foreign subsidiaries — may not be met.
The Russian power house of parliament, the Duma, approved on Friday the state budget for the next three years with the only amendment being made to include sums for stock purchases.
The second reading, which usually involves the biggest amount of amendments proposed by MPs, took place smoothly despite a plunge of global crude price below $70 per barrel, a level at which the budget for this year is balanced.
The government source noted that the $70 is average for the year, and even if the price of oil falls to $60 and stays there to year-end, the 2008 average would be around $96.
Next year’s budget is balanced at even higher levels of $95 per barrel but Kudrin has repeatedly said Russia can withstand the burden of high social spending combined with low oil prices for as long as three years due to its huge forex reserves.
The call on reserves, however, rises fast as they have already fallen to $530 billion from almost $600 billion earlier this year as the central bank supports the rouble around the 30.40 level against a euro-dollar basket.
To discourage speculation on the rouble, the central bank said on Friday it would set daily limits on currency swap operations from Monday.
Reserves will also flow toward bank bailouts, as the state has already pledged to spend $5.5 billion on the rescue four troubled institutions.
On Friday, state bank VEB said it would buy mid-sized bank Globex, which had acute liquidity problems, for just under two hundred dollars, although some $2 billion of state money would be needed to meet its obligations.
“We will consider each (problem) bank individually. If there is a chance to rescue it we will do it,” the source said, adding that the state could in theory boost private banks’ capital.
“We will ensure stability of the banking sector, at the same time undertaking consolidation.”
The financial market crisis will no doubt slow Russian economic growth and cut tax revenues, but even under the most negative scenario 2009 growth will be positive, the source said.
Ulyukayev said the central bank had revised its private capital flows forecast for this year to net outflows of $20 billion, having previously expected $40 billion of inflows.
Other market rescue measures include allowing the central bank to give collateral free funds to the banking sector.
The first auction, with a five-week tenor will be on Monday, for 700 billion roubles, the central bank said [ID:nLH522207]. (Writing by Toni Vorobyova; Editing by Ron Askew)