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By Samuel R. Avro on Mar 6, 2009 with no responses

Russia Bans Investment of Fannie Mae, Government Agency Bonds


The sliding ruble and dwindling reserve funds from Russia’s oil wealth, is causing the country to pull out of its riskier investments.

Russia banned investments of its $220 billion oil wealth funds in bonds of foreign government agencies such as Fannie Mae and Freddie Mac, citing the needs of its own budget and pension system.

The Finance Ministry said on Thursday, that it had imposed restrictions on the use of the country’s $136.3 billion Reserve Fund, permitting only investments in debt instruments of foreign states and international financial institutions.

“The funds will be used for their direct purpose,” said Pyotr Kazakevich, head of the ministry’s state debt department.

At the start of 2008, Russia had about $100 billion of its foreign currency reserves invested in U.S. government agencies as it sought to broaden its portfolio and chased higher yields.

According to U.S. Treasury data, Russia boosted its holding of U.S. Treasuries in 2008 to $116.4 billion from $32.7 billion, becoming the seventh-largest holder of Treasuries globally.

But as government reserves fell by a third to $384 billion, due to lower oil prices and the plunging ruble, they have now cut their holdings to zero.

Russia is expected to face it’s first budget deficit in a decade, and the deficit is expected to hit 8 percent of the gross domestic product on the expectation that the price of oil, Russia’s main export commodity, averages $41 per barrel.

The government plans to cover that deficit by tapping into more than half of its remaining reserve fund.

According to the new rules, 95 percent of the reserve fund must remain in sovereign bonds.