Russia Lines Up New Gold Buying Through Its Sovereign Wealth Fund
In a significant and strategic development for monetary metals, the Government of the Russian Federation has just introduced legislation which will allow Russia’s giant National Wealth Fund (NWF) to invest in gold and other precious metals. The NWF is Russia’s de facto sovereign wealth fund, and has assets of US$185 billion.
Introduced as a resolution to the procedures for managing the investments of the National Wealth Fund and signed off by the Russian prime minister Mikhail Mishustin on Friday 21 May, the changes will allow the National Wealth Fund to buy and hold gold and other precious metals with the Russian central bank, the Bank of Russia. In a note accompanying the gold announcement, the Russian government refers to gold as a traditional protective asset, and says that the move to add gold will introduce more diversification into NWF’s investment allocation, while promoting overall safety and profitability for the fund.
Up until now, the National Wealth Fund, through its 2008 investment management decree has been allowed to allocate funds to all main financial asset classes, such as foreign exchange, debt securities of foreign states, debt securities of international financial organizations, managed investment funds, equities, Russian development bank projects, and domestic bank deposits. The latest amendment now adds gold and precious metals to that list. While Russia’s National Wealth Fund is sizable (at US$ 185 billion), it is not that widely known internationally. So here’s a quick recap. In its current structure, the National Wealth Fund emerged in February 2008 when its precursor, the Stabilization Fund of the Russian Federation, was split into two parts, namely a Reserve Fund and a Future Generations’ Fund (later renamed the National Wealth Fund). The original Stabilization Fund, which was established in 2004, was launched so as to stabilize the Russian federal budget and insulate it against the volatility of international oil prices and oil export earnings.
The Reserve Fund then grew into a general fund to top up the federal budget, while the National Wealth Fund was designated as a fund to support the Russian Federation pension fund, for co-financing the state pension fund, and to guarantee the long-term stable functioning of the pension system. Then in early 2018, the Reserve Fund was rolled into the National Wealth Fund. When active, the Reserve Fund had an investment remit of investing in low-yield securities, while the National Wealth Fund then and now invests in a broader set of asset classes. While the National Wealth Fund is managed by the Russian Ministry of Finance based on investment procedures and terms established by the Russian Government, the operational investment of the NWF is carried out by the Bank of Russia.
The NWF is financed in the following way. Each year, the Russian Federation earns oil and gas revenues (from production taxes and duties on oil and gas), a portion of which are then applied to finance the federal budget, and the remainder of these oil and gas revenues are transferred to the National Wealth Fund. As its basically a multi-asset investment fund, the National Wealth Fund also increases in size based on positive returns from the existing assets that it manages. As the NWF soon will begin to buy and hold gold as part of its investment remit, it will be interesting to watch the NWF’s asset allocation reports, which can be found in the statistics section of the NWF pages of the Russian Ministry of Finance website here.
If this recent news about the NWF investing in gold look familiar, that’s because it is. Back in November 2020, the Russian government proposed a plan to allow the NWF to buy and hold gold, at the time introducing draft legislation for that purpose. It is this draft legislation which has now been signed into law on 21 May by Prime Minister Mikhail Mishustin.
However, nearly a year earlier in December 2019, Russia’s Finance Minister Anton Siluanov had originally raised the idea that the National Wealth Fund should invest in gold, saying at the time that he saw gold “as more sustainable in the long-term than financial assets.”
It’s therefore interesting that following more than a decade of aggressively buying of domestic gold mine production and boosting Russia to one of the largest sovereign gold holders in the world, the Russian central bank stopped buying gold in April 2020, saying that it had suspended gold purchases in the domestic market.
When at the end of March 2020, the Russian central bank announced that it would suspend purchases of gold in the domestic market, it also said that “subsequent decisions on gold purchases will be made subject to financial market developments."
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https://www.zerohedge.com/commodities/russia-lines-new-gold-buying-through-its-sovereign-wealth-fund