Dmitry Pankin’s Sovereign Wealth Strategy

investment0614.jpgFor those who haven’t been listening, Russia’s got herself a new sovereign wealth fund – a $25 billion portfolio which will soon begin snapping up foreign company shares and corporate bonds all over the world, and no doubt raising some suspicion along the way. This fund, which is separate from the massive $130 billion stabilization fund overseen by the often-embattled Alexei Kudrin, has been the focus of much attention following highly public power struggles over access to the national piggy bank – climaxing with the jailing of Deputy Finance Minister Sergei Storchak on spurious charges. It’s still not clear whether the stabilization fund was split as a compromise to ease tensions among the feuding clans.

Europe has often expressed their fears of a Russian sovereign wealth fund, but I have argued several times that, despite legitimate concerns that need to be addressed, these fears and excuses for protectionism are largely unwarranted at this time. As others have argued, Russia’s SWF is nothing compared to private equity or even the political threat of Gazprom.However in a new Financial Times interview, the new deputy finance minister, Dmitry Pankin, is saying all the right things about Russia’s sovereign wealth strategy, with the goal of modeling it after that of Norway or Singapore. It’s time for us to come to terms with the fact that governments are now major players in the financial markets, and a new set of rules, best practices, and oversight need to be taken into account to keep the investment decisions far away from the leverage of the executive.From the FT:

Moscow to shift SWF’s investment focusBy Patrick Jenkins in LondonRussia is gearing up to invest a potential $25bn in foreign share stakes and corporate bonds starting next year, as outgoing President Vladimir Putin pushes ahead with plans to turn the country into a powerful sovereign wealth fund investor.Dmitry Pankin, deputy finance minister and the man who oversees Russia’s $130bn (£66bn, €83bn) reserve fund and its $32bn national wealth fund, told the FT that proposals on how to invest the smaller fund globally should be put before parliament by the autumn. “Investment of the fund should begin within one year,” Mr Pankin said.Consultancy firms, including Mercer, are already working on the detailed planning for how the fund should work and what its legal status should be. “Then the next step is to select an external [money] manager,” Mr Pankin said.Russian officials have spent recent months visiting peers in Norway and Singapore, two countries with some of the world’s biggest sovereign wealth funds.Norway, Mr Pankin said, was a good example of how to manage the transition from being a risk-free investor in government bonds to taking stakes in companies.“We would take holdings of no more than 3-4 per cent. There would be no controlling shareholdings. Maybe, after developing some experience, in a few years’ time we could do more.”The minister said the change in strategy reflected a desire to match the asset profile of the stabilisation funds with pension liabilities. “Some of it needs to be two-year money, which will be in government bonds. But our feeling is that at least part of the funds needs to be invested for the long term on a global basis.”The fund would buy into derivatives as well as shares and corporate bonds, in order to hedge risk.One person close to the government said between 70 and 80 per cent of the national wealth fund could be invested abroad, although the target had yet to be finalised. That would mark a turnaround on previous plans to invest the whole fund in foreign instruments.State banks are lobbying for part of the funds to be invested at home as a source of long-term funding for the banking system.Mr Pankin’s predecessor in charge of the sovereign wealth funds, Sergei Storchak, is in jail after being arrested last year on charges of attempted embezzlement in what critics see as a battle for control of the funds.