Thanks to higher than expected oil prices Russia has not had to touch its rainy day reserves funds so far this year to prop up budget spending. But the ministry of finance says it will have to dip into them in the second half of this year and expects to at least exhaust the $16.5bn National Reserve Fund.

It was only two years ago that Russia-bashers were predicting the Kremlin would run out of money as soon as 2015. That was a bad year for the ministry of finance, which didn't have the money to cover the deficit until at the last minute a 19% stake in state-owned oil major Rosneft was “privatised”. Since then unconfirmed reports have said that Rosneft has an option to buy the stake back and the deal was little more than an emergency loan by the Qatar sovereign wealth fund.

The Opec deal signed at the end of last year where Russia promised to cut production by 300,000 barrels a day has made all the difference, lifting oil prices but about $10 a barrel. That leaves Russia with a 1.9% GDP deficit estimate for this year almost all of which can be financed RUB1 trillion of local sovereign bond issues (which are increasingly being bought by foreign investors).

“Higher-than-expected oil prices have increased Russia’s budget revenues and Finance Minister Anton Siluanov notes that the government has up to now been able to finance budget spending out of pocket this year without resorting to oil funds,” Bank of Finland Institute for Economies in Transition (BOFIT) said in a note.

Under the recently revised budget estimate, the plan this year still calls for withdrawing a total of about RUB1.7 trillion to cover the federal budget deficit. The current plan sees draining the Reserve Fund entirely this year and funding most of the remaining deficit out of the National Welfare Fund. Siluanov expects the government to start dipping into fund assets sometime in the autumn.

The RUB1.7 trillion on call for budget spending is about twice what was in the National Reserve Fund (NRF) as of the end-May, but there is still plenty in the National Welfare Fund (NWF) if needed: the value of the NRF stood at RUB930bn ($16.5bn), while the NWF stood at RUB4.2 trillion ($74bn).

However, while most of the topping up of the budget has come from the NRF, which was specifically established for this purpose, not all the money in the NWF, which was set up to support future pension payments, is free. Slightly over a third of the NWF is invested e.g. in investment projects of Russian companies and long-term bank deposits.

Bofit estimates that the total liquid assets of the oil funds correspond to about 4% of GDP. The budget framework for 2018–2019 calls for a large part of National Welfare Fund assets to be used to cover budget deficits in coming years. The fund is expected to hold about RUB2.8 trillion at the end of 2019, of which RUB1.3 trillion would be held as highly liquid assets.

Meanwhile, TASS on June 19 quoted Siluanov as saying that his ministry is discussing whether to merge the NRF and NWF, as this would give greater fiscal flexibility and ensure "a single source of financing for the budget deficit".

"We believe that investment decisions of out NWF have to be carried out, but the remaining part should be used to finance federal budget spending, as with the NRF," Siluanov was quoted as saying.

In the preceding week, the government approved amendments to the budget law that would allow a merger of the two sovereign funds.

Still, there is no chance that Russia will run out of money as the gross international reserves have been growing steadily and cross the $400bn mark in May. The central bank has recently started to talk about rebuilding the hard currency reserves back up to $500bn in the next few years.