The Central Bank intends to return to the sale of funds from the National Welfare Fund: what will happen to the ruble

The fund’s reserves are used to maintain the exchange rate of the national currency.

Officials are again going to gut the National Welfare Fund (NWF). From 2024, the Central Bank will return to exchange transactions for the distribution of export currency within the framework of the budget rule. If the country receives more than $60 per barrel, then additional funds will be used to purchase yuan to replenish the treasury; if the “barrel” falls below this mark, then the reserves from the “jug” will be spent on current needs. This prospect does not bring anything good for the ruble exchange rate: the “wooden” exchange rate can either remain at the current level of 88-90 rubles or risk falling to 100 rubles per dollar.

The regulator is going to begin conducting operations on the domestic market related to the replenishment and spending of foreign currency funds of the National Welfare Fund on January 1. Purchase and sale transactions, the Central Bank reports, will occur in the amount of additional or lost oil and gas revenues “within the framework of the budget rule,” and their daily volume will be indicated in monthly reports published by the Ministry of Finance “in the prescribed manner.”

The decision to abandon currency trading (primarily the yuan), which was carried out within the framework of the budget rule, was made by the Bank of Russia in early August. Initially, this condition worked according to the following principle: the financial institutions of our country tried to accumulate excess income from the export of energy resources for a “rainy day” and determined in advance the forecast level of prices for raw materials. If quotes for foreign supplies exceeded the established level, then additional revenue from sales went to the National Welfare Fund and formed state savings, which are intended to protect the budget from fluctuations in hydrocarbon prices in the future.

This year the rule has been slightly modified. According to the proposed model, the National Welfare Fund was to receive all export revenues received in excess of the basic amount of oil and gas revenues, defined at the level of 8 trillion rubles per year. Moreover, trade transactions (both purchases and sales) had to be carried out in Chinese monetary units. In 2024, the budget rule will return to the old version – the cut-off price limit, allowing the use of reserved funds, will increase from $44.2 to $60 per barrel of Urals. Proceeds from exceeding these quotations will be used to purchase currency within the country, while in the event of a fall in commodity prices, the sale of currency from the National Welfare Fund is envisaged.

“The Central Bank’s summer decision to a certain extent helped strengthen the ruble, as it limited the supply of currency on the market,” notes BitRiver financial analyst Vladislav Antonov. Russian banknotes have been rising in price for seven weeks in a row (since mid-October, the dollar has fallen in price from 101 to 88 rubles). However, such dynamics were, rather, due to the authorities’ decision on the mandatory sale of foreign currency earnings by exporters, as well as a noticeable increase in the Central Bank’s key rate.

It is still difficult to judge what oil exchange prices will be in 2024, when the Central Bank returns to market transactions with incoming funds from hydrocarbon trading. Much will depend on the collective decision of the participants in the OPEC and OPEC+ summits scheduled for November 30: if they agree to extend the voluntary reduction in oil supplies to the world market, then quotes promise not only to remain at the current levels in the corridor of $82-85 per barrel, but and even rise to $90. This will be very beneficial for Russia, since then revenues to the National Welfare Fund will increase (now our oil, contrary to Western price “ceilings,” sells above $60 per barrel). If the Middle Eastern powers do not come to a compromise, then quotes risk falling below $40, which will contribute to more active spending from the National Welfare Fund.

“The Central Bank has not bought foreign currency since the summer of 2023: the low exchange rate of the ruble made such operations irrational,” explains Natalya Milchakova, leading analyst at Freedom Finance Global. Now the situation has changed: the monetary policy of states has had a positive impact on the market exchange rate of the ruble. However, as the expert believes, from January the Bank of Russia will have to sell much more currency than it buys. In 2023, funds from the National Welfare Fund were spent. This means that the Central Bank must sell a volume of foreign funds equal to what was previously spent in rubles. Since August, the National Welfare Fund has not been replenished with new foreign exchange receipts. By January, market conditions will most likely be more favorable both for the acquisition of yuan for the National Welfare Fund and for their sale. By the beginning of 2024, Russia will approach an equilibrium exchange rate of 86-88 rubles per dollar (12.1-12.5 rubles per yuan), Milchakova is sure. This will be the reason for the Central Bank, as before, to find itself in the role of a “net exporter” of accumulated export revenues.

“In any case, a return to currency transactions will help maintain liquidity and ensure balance in the financial market, which will help mitigate exchange rate volatility,” Antonov said. The Central Bank will choose the time to implement such transactions, and daily purchase and sale volumes will be small and will not cause sharp fluctuations in the exchange rate. According to preliminary forecasts, for the entire 2024, the amount of currency purchases from the National Welfare Fund will not exceed the equivalent of 500 billion rubles.