Russian Government approves a number of documents on the allocation of National Wealth Fund assets.
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In particular, on 5 November, 2013, Resolution No. 989 amending the Government Resolution On the Procedure for Managing National Wealth Fund Assets was issued. The latter resolution was drafted by the Ministry of Finance. The document aims to create pre-requisites for converting National Wealth Fund assets into debentures and liabilities of Russian issuers, linked with the implementation of high-priority and self-recouping investment projects, hereinafter referred to as Projects, and to expand the range of authorised foreign financial assets.
The resolution calls for increasing the maximum share of legal entity debentures and liabilities in the National Wealth Fund portfolio from 30% to 50% and reducing minimal long-term solvency rating levels of Russian issuers of debentures and liabilities, linked with the implementation of the Projects. Moreover, the document states expressly that specific requirements for the shares of Russian issuers, such as their inclusion in the listings of at least one stock exchange and in the lists of securities being used to calculate the RTS Index or the Moscow Inter-Bank Currency Exchange Index stock market indexes, do not apply to the shares of Russian issuers that are linked with the Projects.
The document, which aims to co-finance the Projects at the expense of other investors, states expressly that the share of National Wealth Fund assets being converted into debentures and liabilities, linked with the implementation of any specific Project, cannot exceed 40% of total project funding volumes at the expense of all sources.
Under Russian budgetary legislation, National Wealth Fund assets are to provide long-term support for the national pension system. In this connection, the resolution includes a clause noting that the profitability of investment in debentures and liabilities, linked with project implementation, should at least be equal to current inflation levels plus 1%. This will ensure minimal profitability during the allocation of National Wealth Fund assets.
It is possible to convert National Wealth Fund assets into bonds, with subsequent debt amortisation, as well as into debentures and liabilities, with their owners having the right to buy or redeem them ahead of maturity. Therefore debt instruments being used to finance specific projects will become more attractive for private investors.
Moreover, it is possible to ensure the non-public (private) placement of debentures and liabilities, linked with the implementation of the Projects.
Specific requirements for authorised financial assets also include changes to more fully activate the various tools being used by the Bank of Russia during the placement of international (gold and currency) reserves. In order to increase the profitability of allocating National Wealth Fund assets and to diversify investment risk, the list of authorised currencies shall be expanded, and this list shall include the Australian dollar, the Canadian dollar, the Swiss franc and the Japanese yen. The document also expands the list of countries, whose government debentures and liabilities can be converted into National Wealth Fund assets. This list will now include Australia, Switzerland and Japan. Moreover, it is possible to convert National Wealth Fund assets into the debentures and liabilities of foreign issuers with floating rate notes.
In order to prevent unjustified losses during investment in debentures and liabilities, due to the reduced ratings of their issuers, the debentures and liabilities of foreign issuers can be retained pending sales or redemption, provided that the risk of issuers total not less than A level ratings, under the Fitch-Ratings or Standard & Poor’s rating scales (A2 levels for Moody’s Investment Service rating agency).
On 5 November, 2013, the Government also passed Resolution No. 990 on the procedure for converting National Wealth Fund assets into the securities of Russian issuers, linked with the implementation of self-recouping infrastructure projects, hereinafter referred to as Projects, Procedure and Securities.
Under the Resolution, which was drafted by the Ministry of Finance, the conversion of National Wealth Fund assets into Securities includes the following stages:
· the issuer (Project initiator) shall compile securities issue documents, and coordinate these documents with the Ministry of Finance;
· the Ministry of Finance shall purchase Securities using National Wealth Fund assets;
· the Ministry of Finance shall own the securities;
· the Ministry of Finance shall sell the securities purchased by it.
Under the document, the issuer and a federal executive agency, which is authorised by the Government to monitor the implementation of the Project and the targeted allocation of National Wealth Fund assets, shall sign an agreement requiring the issuer to report on the implementation of the Project and on the allocation of National Wealth Fund assets for project funding purposes.
The Ministry of Finance is authorised to own Securities on behalf of the Russian Federation. For example, the Ministry of Finance shall have the right to decide on the sale of securities, if National Wealth Fund assets are being misused and/or if project implementation risks have increased appreciably. The Ministry of Finance shall also have the right to sell securities, if the issuer’s ability to fulfill obligations with regard to Securities has been impaired and/or if it is necessary to allocate National Wealth Fund assets, which have been invested in Securities, for purposes being stipulated by Russian legislation.
On 5 November, 2013, the Government also passed Resolution No 991, which was drafted by the Ministry of Economic Development. This document sets forth regulations for assessing the advisability of financing investment projects at the expense of National Wealth Fund assets and/or pension savings being managed by a state trust company on a payback basis.
These regulations stipulate a two-stage procedure for selecting investment projects, which includes an assessment of a strategic feasibility study (first stage) and a comprehensive feasibility study (second stage), the purpose of which is to determine the advisability of financing investment projects at the expense of National Wealth Fund assets and/or pension savings.
Each assessment is followed by a joint report by the Ministry of Economic Development and the Ministry of Finance on the advisability (positive assessment) or the non-advisability (negative assessment) of financing investment projects at the expense of the above-mentioned assets.
The regulations stipulate a list of substantiating materials being submitted by project initiators, as well as the relevant procedure and deadlines for examination by authorised federal executive agencies.
The regulations also stipulate a simplified project selection procedure involving the Russian Direct Investment Fund.
In addition, on 5 November, 2013, the Government issued Directive No 2044-r, which was drafted by the Ministry of Transport. This document deals with the list of self-recouping investment projects, whose financial assets receive those of the National Wealth Fund and/or pension savings being managed by a state trust company, on a payback basis.
The directive approves a list of such investment projects, which receive National Wealth Fund assets, the volume of these assets, the type of securities, into which National Wealth Fund assets are being invested, as well as the profitability rates of assets being invested in the projects.
The directive aims to implement such projects as construction of the Central Ring Road and upgrading the Baikal-Amur and Trans-Siberian Railways.
To complete the Central Ring Road project by 2018, it is necessary to attract an additional 155.2 billion roubles, including 150 billion roubles’ worth of National Wealth Fund assets. The issue of corporate bonds by the Russian Motorways State Company, Avtodor, is an optimal scenario for attracting National Wealth Fund assets to this project.
High-priority projects to expand and upgrade the railway infrastructure will cost an estimated 562 billion roubles, including 150 billion roubles’ worth of National Wealth Fund assets. The Russian Railways sovereign rating minimises the investment risks, and the assets will be repaid by channeling guaranteed dividends into the budgetary system.