Money from the National Welfare Fund will be used to finance Vneshekonombank's infrastructure projects, an arrangement that is profitable for the Finance Ministry and the state corporation but also carries significant risk.
In December, the ministry closed ahead of schedule a 175 billion ruble ($5.9 billion) deposit at VEB — which the state corporation received in October 2008 to support the stock market — and opened a foreign currency deposit. It deposited $2 billion from the National Welfare Fund (which totaled $91.56 billion, as of Jan. 1) at a rate of 2.75 percentage points above the London interbank offered rate.
The loan must be returned July 1, 2011, and VEB must make interest payments every six months.
The funds were placed to diversify and earn a higher return for the National Welfare Fund, the ministry said in a statement. "It's a profitable investment. The rate is higher than at the Central Bank, especially since LIBOR is going to rise," a high-level Finance Ministry source said.
The six-month dollar LIBOR rate was 0.4 percent Tuesday.
Besides the placement at VEB, the ministry does not have any other real options for diversifying its investments, the ministry source said. "Although the ministry is also allowed to invest in blue chips, it doesn't take that risk because of the undeveloped financial infrastructure — for example, imperfect settlement systems."
The funds will form a resource base for VEB and are needed to finance the bank's own lending and investment activity, the corporation's press service said. VEB will use the money in line with its memorandum on financial policies, the press service said, declining to comment on specific investment projects.
"There are projects that began at the end of last year or are starting this year. The money will be used for them," the high-ranking Finance Ministry source said. The ministry's agreement with VEB does not contain a list of projects, the source said.
"The decision to place a part of the National Welfare Fund money with VEB is undoubtedly political, which means VEB needs the money for something," said Sergei Aleksashenko, a former deputy finance minister and first deputy Central Bank chairman who is now director of macroeconomic research at the Higher School of Economics.
He said he thought that it did not make sense for VEB to use some of the funds to buy blue chips since the return would be low.
The state corporation has been complaining about a lack of funds for some time.
In the fall of 2008, it asked for additional capital, and last fall, VEB experts wrote in a report for the presidential control department and prosecutors about how expensive it had been to bail out collapsed banks.
In December, VEB was left with 100 billion rubles that it earned from supporting the market by buying stocks and bonds from top-tier companies, such as Gazprom, Sberbank, Rosselkhozbank, VTB, LUKoil, Surgutneftegaz and Russian Railways. VEB returned the ministry's deposit with 7 percent annual interest.
There is currently no point in boosting VEB's capital since its debt-to-equity ratio is about 5-to-1, the senior Finance Ministry source said. "That's not much. [Banks] can have 10-to-1," the source said.
Thus, VEB could double its borrowing. As soon as the situation becomes more conducive, the state corporation will begin raising funds on the international capital market, the source said, adding that an early return of the deposit by VEB had not been discussed.
The National Welfare Fund was created to support the pension system, and this is the first time that it will be used to finance investment projects, said Igor Nikolayev, of FBK, and Sergei Guriev, of the New Economic School.
Nikolayev said he thought that the investments came with high risk, since VEB will be taking short-term liabilities and transforming them into long-term assets: mid- to long-term investment projects.
If VEB "loses" the money, then the state corporation will have to be saved using budget funds, Guriev warned. He added, however, that foreign countries with sovereign wealth funds, such as the China Investment Corporation, are eagerly investing in specific projects.
Even if projects were listed in the agreement between the Finance Ministry and VEB, the public is unlikely to find out what the National Welfare Fund money, specifically, is being used for, said Oleg Buklemishev, of consulting company MK-Analitik.
He said it looked like a direct way to support a specific state corporation at taxpayers' expense. "There was something similar in the 1990s, when the Central Bank placed a deposit at Vneshekonombank that was later transformed into a targeted loan to the ORT television station. The scheme was controversial, but in form it was legal. Just like now."
VEB Gets Welfare Fund Cash for Infrastructure
