Management of the Reserve Fund aims at capital preservation and stable level of return in long-term perspective. In pursuing aforementioned purposes asset management allows possibility of negative return in short-term period. [1]
Management of the Reserve Fund assets is executed by the Ministry of Finance of the Russian Federation in accordance with procedure and terms established by Government of the Russian Federation. Bank of Russia may act as operational manager. [2]
Reserve Fund assets can be invested in following ways (in one or both of them simultaneously) [3]:
1) purchase of foreign currencies (US dollars, euro, GB pounds) and allocation to the Federal Treasury’s accounts with the Bank of Russia which pays interest on them according to bank account agreement;
2) purchase of foreign currencies and financial assets denominated in foreign currencies. List of eligible financial asset classes is determined by the Russian legislation.
The Fund assets are invested according to the first alternative (allocation to the Federal Treasury’s accounts with the Bank of Russia) in the following way. According to calculation and transfer procedure of interest payments approved by the Ministry of Finance the Bank of Russia pays interest equivalent to yield of total return indices comprised of financial assets complying with requirements approved by the Government of the Russian Federation.
In accordance with the Budget Code of the Russian Federation assets of Reserve Fund can be allocated in foreign currencies and financial assets denominated in foreign currencies.The Government determines broad limits of strategic asset allocation of Reserve Fund. In order to enhance efficiency of management the Ministry of Finance is authorized to establish strategic asset allocation within the limits determined by the Government.
Government of the Russian Federation established following requirements to the mentioned financial assets: [8]
1. Reserve Fund assets can be invested in debt securities of foreign states, foreign state agencies and central banks of following foreign states:
· Austria;
· Belgium;
· Canada;
· Denmark;
· Finland;
· France;
· Germany;
· Ireland;
· Luxembourg;
· the Netherlands;
· Spain;
· Sweden;
· the United Kingdom;
· the USA.
2. Debt securities shall comply with the following terms:
- issuer of debt securities shall have a long-term credit rating AA- or higher according to scale of rating agencies Fitch Ratings and Standard and Poor’s, or Aa3 or higher according to classification of rating agency Moody's Investors Service. In case the issuer has different ratings by mentioned agencies then the lowest of them shall be applied;
- debt securities shall have fixed maturity date, shall not be redeemable or callable, with no put option;
- requirements related to maturity of debt securities set by Ministry of Finance are mandatory;
- coupon rates and face values of debt securities shall be fixed;
- face values of debt securities shall be denominated in US dollars, euro or GB pounds, payments related to debt securities shall be made in currency of face value;
- outstanding amount of issue of debt security shall be not less than $1bln. for debt securities denominated in US dollars, not less than 1bln. euro for debt securities denominated in euro and not less than 0.5 bln. GB pounds for debt securities denominated in GB pounds;
- Not for private placement.
3. Reserve Fund assets can be invested in supranational debt securities and instruments issued by following institutions:
- Asian Development Bank (ADB);
-Council of Europe Development Bank (CEB);
-European Bank for Reconstruction and Development (EBRD);
-European Investment Bank (EIB);
-Inter-American Development Bank (IADB);
-International Bank for Reconstruction and Development (IBRD);
-International Finance Corporation (IFC);
-International Monetary Fund (IMF);
-Nordic Investment Bank (NIB).
Reserve Fund assets can be invested only in one IMF instrument - Special Drawing Rights (SDR), comprising reserve position of Russian Federation in IMF. Overall assets transferred to build the reserve position shall not be less than the minimum level determined by IMF required to pay interest for use of these funds. Requirements mentioned in item 2 do not refer to investments in SDR[9].
4. Depositing Reserve Fund assets in foreign banks and depository institutions shall comply with the following requirements:
- foreign bank or depository institution shall have a long-term credit rating not lower than AA- level according to scale of rating agencies Fitch Ratings and Standard and Poor’s, or not lower than Aa3 level according to scale of rating agency Moody's Investors Service. In case the bank or depository institution has different ratings by mentioned agencies then the lowest of them shall be applied;
- requirements related to minimum and maximum deposit period in foreign banks and depository institutions set by Ministry of Finance are mandatory;
- overall amount of Reserve Fund assets deposited in one foreign bank or depository institution shall not be more than 25% of total assets of Reserve Fund that are deposited in foreign banks and depository institutions.
5. The Ministry of Finance is authorized to establish additional requirements to debt securities and deposits in foreign banks and depository institutions within the limits established by the Government of the Russian Federation.
In compliance with authority vested by the Government of the Russian Federation the Ministry of Finance constituted:
1.Currency composition of the Reserve Fund[10]:
US dollars - 45 %;
Euro - 45 %;
GB pounds - 10 %.
2. Period to maturity of debt securities[11]:
- for debt securities denominated in US dollars and euro:
Minimum period to maturity – 3 months
Maximum period to maturity – 3 years
- for debt securities denominated in GB pounds:
Minimum period to maturity – 3 months
Maximum period to maturity – 5 years.
Aforementioned periods are applicable at the purchase moment or at the moment of setting up indices for calculation of interest payments on Federal Treasury’s accounts with the Bank of Russia.
3. Following list of foreign government agencies – issuers of debt securities eligible for Reserve Fund investments (subject to approval by the Bank of Russia)[12]:
- Autobahnen- und Schnellstrassen- Finanzierungs- Aktiengesellschaft (ASFINAG), Austria;
- Bank Nederlandse Gemeenten (BNG), Netherlands;
- Caisse d’Amortissement de la Dette Sociale (CADES), France;
- Credit Foncier de France (CFF), France;
- Dexia Group, France;
- Export Development Canada (EDC), Canada;
- Federal Farm Credit Banks (FFCB), USA;
- Federal Home Loan Banks (FHLBanks), USA;
- Federal Home Loan Mortgage Corporation (Freddie Mac), USA;
- Federal National Mortgage Assosiation (Fannie Mae), USA;
- Instituto de Credito Oficial (ICO), Spain;
- Kreditanstalt fur Wiederaufbau Bankengruppe, Germany;
- Landwirtschaftliche Rentenbank, Germany;
- Network Rail MTN Finance CLG (Plc)), Great Britain;
- Oesterreichische Kontrollbank Aktiengesellschaft (OKB), Austria.
4. notional volume of purchased debt securities of one issue shall not exceed 10% of notional volume of that issue [13].
[1] Budget Code of the Russian Federation, chapter 13.2, article 96.11, clause 2.
[2] Budget Code of the Russian Federation, chapter 13.2, article 96.11, clause 1.
[3] Regulation of the Government of Russian Federation No.955 dated 29 December 2007 “Procedure of management of Reserve Fund”, clause 1.
[4] Budget Code of the Russian Federation, chapter 13.2, article 96.11, clause 3.
[5] Regulation of the Government of Russian Federation No.955 dated 29 December 2007 “Procedure of management of Reserve Fund”, clause 2.
[6] Order of the Ministry of Finance No.3 dated 16 January 2008.
[7] within determined limits Reserve Fund assets can be invested only in IMF instruments.
[8] Regulation of the Government of Russian Federation No.955 dated 29 December 2007 “Procedure of management of Reserve Fund”.
[9] Regulation of the Government of Russian Federation No.805 dated 6 November 2008.
[10] Order of the Ministry of Finance No.4 dated 16 January 2008.
[11] ] Order of the Ministry of Finance No.11 dated 17 January 2008.
[12] ] Order of the Ministry of Finance No.5 dated 16 January 2008.
[13] Order of the Ministry of Finance No.11 dated 17 January 2008.