The West is going to impose sanctions against the NWF: experts are perplexed

The sanctions policy of the West is beginning to resemble a huge rebus that cannot be deciphered. According to Bloomberg, the EU intends to include restrictions on the Russian National Wealth Fund in its tenth package. But what exactly it is, one can only guess.

The European Commission also proposed “strengthening reporting obligations on frozen assets associated with sanctioned Russian companies and individuals,” Bloomberg reports. Failure to provide information will result in a fine of up to €50,000 for individuals and 10% of annual turnover for businesses.

In addition, according to Reuters, the United States is going to expand the list of banks in the Russian Federation against which sanctions can be imposed. Actually, there is almost nowhere to expand further: according to the coordinator of the American sanctions policy, James O’Brien, the United States has already blocked about 80% of the assets of the Russian banking sector that were in their jurisdiction. In February 2022, official Washington banned American legal entities and individuals from carrying out transactions with the Russian Central Bank, the Ministry of Finance and the National Welfare Fund.

However, how terrible are these threats for Russia’s main reserve fund, the National Welfare Fund?

Last year, the Ministry of Finance of the Russian Federation excluded the euro, yen and pounds sterling from the NWF currencies in order to place up to 60% of the fund in yuan and up to 40% in gold in 2023. Account balances in pounds sterling and yen at the Central Bank have been reset to zero, and before the end of this year, assets in euros will suffer the same fate. The Ministry of Finance believes that “the currency structure of the NWF has become better adapted to the challenges facing the Russian Federation in the current macroeconomic and geopolitical conditions.”

“The sanctions actions of the European Union are becoming more and more mechanistic and demonstrative, losing their internal logic and practical meaning,” says Nikita Maslennikov, a leading expert at the Center for Political Technologies. – The planned restrictions against the National Welfare Fund seem to be a kind of counter reaction, a “response” to the intentions of the RF Ministry of Finance to withdraw from the “toxic currencies” – the dollar, euro, pound, yen – completely.

It is not very clear what levers of influence on the NWF Brussels has left, because all operations with the fund’s funds are carried out within the framework of Russian jurisdiction, our legal field.”

Obviously, large-scale sanctions against the National Welfare Fund cannot be imposed by definition; only some individual assets can be hit. In particular, argues Mikhail Belyaev, Candidate of Economic Sciences, part of the fund’s resources were invested in securities denominated in foreign currency with a high long-term credit rating. Each of these bonds has its own maturity and its own interest. But the asset structure of the National Welfare Fund is not transparent; there is no available data on the list of foreign securities held there.

“While there is no specifics, it is difficult to judge the consequences of the measure planned by the European Union,” says Artem Deev, head of the analytical department at AMarkets. – The Ministry of Finance has already taken several steps to protect the NWF from potential sanctions costs – the structure of reserves has been changed, to compensate for the budget deficit, the department is selling Chinese yuan and gold from the fund. But for the largest Russian commercial banks that got into the tenth package of the EU, the consequences are quite clearly visible: disconnection from SWIFT, the inability to carry out transactions with European banks.”

Sanctions against the NWF will change little, since the funds of the fund are placed on the accounts of the Central Bank and actually belong to the Russian government. It is the regulator that acts as the government’s agent for the purchase of assets in the NWF, which means that any actions of the West in relation to the Central Bank are much more important, notes TeleTrade analyst Alexei Fedorov. The Bank of Russia is already under sanctions that block its access to the currencies of “unfriendly” countries, and also make it impossible to conduct transactions with them. Accordingly, measures regarding the NWF will not improve or worsen the current situation, the amount of frozen funds will remain the same. They will not interfere with the process of filling the NWF under the new structure (up to 60% in yuan and up to 40% in gold), because China does not support the sanctions policy of Western countries.

“The NWF may come to a new “golden yuan” structure, even if assets in the currencies of “unfriendly” countries remain blocked. To do this, within the Russian gold and foreign exchange reserves, the Central Bank can carry out appropriate operations, accounting for transferring the “toxic” assets of the NWF into yuan and gold,” Fedorov clarifies.

If the NWF independently placed funds in assets, then, based on the experience of sanctions against the Central Bank, one would expect a similar blocking of the fund’s correspondent accounts in banks of “unfriendly” countries. That is, Fedorov explains, the reserves of the National Welfare Fund in euros, pounds and yen would have been frozen not through blocking the accounts of the Central Bank, but by a separate legislative act. This means that even if sanctions were lifted from the Bank of Russia, the funds of the National Welfare Fund in “unfriendly” currencies would still remain inaccessible, as well as the fund’s operations in them. But since the FNB carries out all operations with assets through the Bank of Russia, there is no practical sense in sanctions against the fund. Rather, it is a consolidation of the already established status quo.