The Russian Oil Fund as a Tool of Stabilization and Sterilization

The favorable world oil price dynamics has resulted in mounting reserves in the Russian Oil Stabilization Fund (OSF). This has raised the issue of an adequate economic policy response. Initially, the OSF was set up to reduce the vulnerability of the budget to the oil price volatility and to sterilize the impact of oil-related foreign exchange inflows on the money supply. Our findings suggest that the OSF has been instrumental in achieving both goals: it has contributed to macroeconomic stability and has helped decouple the GDP growth rate from oil price dynamics. However, given the current size of the OSF and a widely shared expectation that oil prices will remain comparatively high, the present dilemma is whether the OSF should be increasingly spent or whether it should be saved as a wealth-generating vehicle. Spending from the OSF on a current basis has been resisted so far largely because of rampant corruption and fears of inflation. However, there are several arguments which may support a change in this policy stance. In particular, it seems that concerns about intergenerational solidarity are of minor relevance for Russia; investments in the country’s infrastructure are badly needed which, via productivity gains, might counteract the possible Dutch disease effects; moreover, spending on public sector wages could reduce incentives for corruption.