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Russia To Use Pension Money To Aid Companies In Midst of Sanctions

Russia is planning to take billions from its pension fund and use the money to aid banks and other companies that have been targeted by Western sanctions.
From BusinessWeek:

During flush years of high oil prices and economic growth, Russia salted away more than $80 billion in a sovereign wealth fund to ensure the long-term health of the country’s pension system. Now the Kremlin is raiding the fund to bail out Russia Inc.

Russian companies and banks are lining up for aid as Western sanctions, capital flight, and the plummeting ruble curb their ability to invest and repay debt. Finance Minister Anton Siluanov told the Itar-TASS news agency last month that state-controlled oil giant Rosneft (ROSN:RM) and private gas company Novatek (NVTK:RM), both headed by close associates of President Vladimir Putin and hit by sanctions, could get as much as $4 billion apiece from the fund, whose current balance is $83 billion.

Although the exact amount of aid to the two companies hasn’t been confirmed, Vice Premier Arkady Dvorkovich said today that the government is ready to use the fund to support both public and privately owned energy companies. “The funds will be provided for a long term,” he told Itar-TASS.

Russia has diverted $30 billion from its pension fund since 2013 to plug holes in its general budget.

Russia’s Economy Minister indicated last month that taking money from the country’s pension fund to shield ailing companies from U.S. sanctions was a distinct possibility.

Russia’s Pension Put-Off Could Have Consequences

Since 2013, Russia has diverted more than $30 billion worth of pension contributions to plug holes elsewhere in the country’s budget.

Pension360 covered a brief, abrupt press conference earlier this month where Russia’s Economy Minister hinted the country could take money from the pension fund to assist companies hurt by Western sanctions.

Now, that has come to fruition – Russia will withhold over $8 billion from its pension fund, and much of that money will go to a “reserve fund” to aid state-owned companies affected by sanctions.

But there are consequences to this decision, writes Mark Adomanis, a Forbes contributor. From his editorial in the Moscow Times:

Rather than long-term improvements to Russia’s economic competitiveness, this money will be spent, in business parlance, “just to keep the lights on.”

…The costs [of withholding pension payments] will grow exponentially more severe the longer they are incurred.

Due to demographic changes that have seen the number of young adults halved, one of two things will happen: Russia’s pension system will need a lot more money, or pensions will become a lot less generous. There is simply no other way to make the math work. Maybe there is a better example of the tension between the short and long terms, but I can’t think of a more illustrative example than raiding the pension fund to give a bunch of money to Rosneft.

Russia can get away with such short-term-focused policies for a while. As Adam Smith noted, there is a lot of ruin in a nation, and even with all of the mounting difficulties Russia will likely find a way to stumble through. But in mounting such a panicky and reactive response to U.S. and EU sanctions, Russia is setting itself up for some really serious difficulty a few years down the line.

Earlier this year, a decision by Russia to freeze its pension contributions caused “deep disagreement” among government officials. The money was used to plug budget holes elsewhere.

Russia May Compensate For U.S. Sanctions By Pulling Money From Pension Fund

Russia’s Economy Minister said Friday that the country would consider pulling money from its national pension fund and using the money to aid firms damaged by Western sanctions.

Other options are on the table as well, including pulling money from Russia’s National Wealth Fund.

From Reuters:

Russia will support companies affected by Western sanctions and it may divert funds from its National Wealth Fund (NWF) or from pensions to do so, local news agencies cited Economy Minister Alexei Ulyukayev as saying on Friday.

“Of course we will show support to our companies hit by sanctions … There are different forms of support including various custom tariff regimes, possibly direct budget support (and) the possibility of using pension funds or the National Wealth Fund,” RIA quoted Ulyukayev as saying in Brussels.

The move wouldn’t be surprising; Pension360 has previously covered Russia’s willingness to take money from its pension fund to plug budget shortfalls elsewhere.

Since 2013, Russia has frozen more than $30 billion of its pension payments.

Photo credit: “Flag-map of Russia” by Aivazovskycommons. Licensed under Public domain via Wikimedia Commons

McDonald’s Has Sued Russia Pension Fund 8 Times Since 2013

Russian McDonald’s employees are having trouble adding recent wages to their future pension calculations. As a result, McDonald’s has sued the Russia Pension Fund 8 times since the problem started in the third quarter of 2013. Reported by RIA Novosti:

McDonald’s has filed at least eight lawsuits against Russia’s Pension Fund, saying it refused to accept relevant documents from the company, as a result of which McDonald’s Russia employees’ pensions have not been accumulated since 2013, Russian Izvestia newspaper reported Friday.

“Starting from the third quarter of 2013 and until today, in response to submitted documentation, McDonald’s company receives refusals from Russia’s Pension Fund to accept these documents, which is a direct violation of McDonald’s employees’ rights,” Izvestia quoted McDonald’s Russia Director for Public Relations Svetlana Poliakova as saying.

But the Russia Pension Fund says McDonald’s submitted documents with too many errors, including misspelled names and incorrect wages. From RIA Novosti:

Poliakova argued that the company submits the documentation to the Pension Fund in accordance with all the requirements.

However, Russia’s Pension Fund representatives explained that the responsibility for McDonald’s employees’ rights violations lies within the company itself, as the majority of submitted documents contained mistakes, including in the names of employees, and the sums of their wages, Izvestia reported.

According to Russia’s Pension Fund, in 2013 the number of mistakes in the documents reached its maximum. The Pension Fund argues that it has repeatedly called on McDonald’s managers to correct the mistakes and resubmit the papers, but the company ignored its all requests. So, the accounts on the basis of which the pension rights are formed, were not ready.

There are currently over 400 McDonald’s restaurants operating in Russia.

Photo by Roadsidepictures via Flickr CC

Russia Diverts Pension Contributions To Plug Other Budget Holes

pensii_941 — CREDIT: Natalia Mikhaylenko, RBTH

For the second straight year, Russia has decided to freeze its contributions to its pension funds and instead use the money to plug budget holes elsewhere.

Russia says the money will be used for more pressing needs elsewhere in the budget. But critics claim the action could be a costly one. Russia Beyond The Headlines reports:

For the second year in a row, the Russian government has decided to freeze the portion of pension contributions allocated for investment.

Contributions for 2013, amounting to some 550 billion rubles ($15.2 billion), have already been frozen, with the government intending to do the same with a further 700 billion rubles’ worth of pension savings for 2014.

The move, which the Ministry of Labor and Social Protection says is necessary in order to finance current pension payments, will leave major Russian companies without investment and will force banks to raise interest rates.

The negative effects are already being felt by ordinary Russians: At the end of last year, minimal interest rates for individuals started at 8 percent, whereas in 2014 loans have become 2 percent more expensive, with interest rates starting at 10 percent.

This year’s situation will be further exacerbated by the departure of foreign investors, Baranov adds.

“This will result in the cost of loans and debt refinancing growing in 2015 for banks and corporations, for the federal and regional finance ministries. It is hard to estimate the exact figure that they will have to pay extra, but it will be comparable with the amount of frozen funds, i.e. the very same 700 billion rubles or maybe even more,” Baranov says, predicting the potential consequences.

Russia’s pension funding is experiencing turbulence due to a demographic shift that has more people retiring and less people contributing to the system. From RBTH:

Sergei Khestanov, an economist for the ALOR Group, explains that the deficit in the Pension Fund has occurred because of the country’s demographic decline. The population is aging, and while 20-30 years ago there were 6 workers to one pensioner, now there are fewer than two, and their contributions do not cover current needs.

That demographic shift won’t be reversing itself anytime soon. So while the pension freeze helps plug current shortfalls, it only exacerbates future problems.

Reuters reported earlier this month that there was “deep disagreement” among Russian officials regarding the contribution freeze.