Sovereign-Wealth Funds Threatened by Government Spending / THE WALL STREET JOURNAL

2017-01-13 10:39:52

A quarter of a century since gaining independence, the Central Asian country of Kazakhstan is using up its sovereign-wealth fund as it struggles, like other petrostates, with sharply lower oil prices. Simon Clark/The Wall Street Journal

Kazakh President Nursultan Nazarbayev says the country’s sovereign-wealth fund has the money to help wean the central Asian nation off its dependence on oil revenues and build an economy of entrepreneurs.

The 76-year-old president, who led Kazakhstan to independence from the Soviet Union 25 years ago, earlier this year told visitors to the new capital city he built that “Kazakhs have never lived as well as they live today” and the nation’s savings help maintain living standards.

But since Mr. Nazarbayev created the so-called National Fund in 2000, his government has withdrawn $83 billion from it, according to a Wall Street Journal analysis of data from Kazakhstan’s central bank that was corroborated by the International Monetary Fund. The National Fund has a balance of $61 billion as of Nov. 30, down 21% from its peak in August 2014.

The Bayterek tower in Astana, Kazakhstan's new capital city, with the presidential palace in the background.
The Bayterek tower in Astana, Kazakhstan’s new capital city, with the presidential palace in the background. Photo: SIMON CLARK/THE WALL STREET JOURNAL

Leaders of petrostates from Kazakhstan to Azerbaijan, Russia and Venezuela have spent billions of dollars from sovereign-wealth funds as the relatively low price of oil has pressured government budgets. Spending the money deposited in these funds—rather than just the investment income they generate—is threatening the funds’ long-term viability.

“It’s really important for Kazakhstan and other oil-producing developing nations to convert these savings into a permanent windfall,” said Angela Cummine, an Oxford University academic and author of “Citizen’s Wealth,” a book examining sovereign-wealth funds. “It is very unwise to draw down the fund until it is depleted because then the major windfall from oil will be gone but economic problems will remain.”

Kazakh Prime Minister Bakytzhan Sagintayev acknowledged the problem in December. “If we continue spending in this way, we won’t have a National Fund soon,” he told business leaders.

The government in November published a draft decree “to prevent further reduction” of the National Fund. The government proposes spending less of it and investing more of the fund’s money in higher-yielding assets such as stocks and private equity rather than bonds, according to the draft. On Dec. 22, an official at the central bank said that the president has signed the new decree.

The scale of spending from the fund has prompted some people to express concern. That can be a risky move in a nation where, according to New York nonprofit Human Rights Watch, criticism of the government is regularly suppressed.

“It was a wise idea to create the National Fund,” Rakhim Oshakbayev, a former deputy minister for investment and development, said in an interview. “When we started spending the money in the National Fund, it was like opening Pandora’s box.”

Information on how the fund is spent isn’t readily available, Zauresh Battalova, a former Kazakh senator and democracy campaigner, said in an interview. Marek Jochec, an academic at Nazarbayev University, earlier this year published an article in a Kazakh magazine saying that the fund risks losing significant income because of its investment strategy.

Money from the fund has helped finance the construction of Astana, the new capital city, according to the government. At the center of the city’s futuristic layout is Bayterek, a gold-orbed tower that stands as a monument to Mr. Nazarbayev, containing his metallic handprint on a plinth encrusted with silver and gold.

Through a spokesman, Mr. Nazarbayev declined to comment for this article.

Sovereign-wealth funds are state-owned investment funds usually created to save surplus revenues, often collected from natural-resource exports.

Kazakhstan’s National Fund transfers billions of dollars each year to the government budget and projects, according to the central bank.

The handprint of Kazakh President Nursultan Nazarbayev on a plinth encrusted with gold and silver in the Bayterek tower in Astana, the new capital of Kazakhstan.

The handprint of Kazakh President Nursultan Nazarbayev on a plinth encrusted with gold and silver in the Bayterek tower in Astana, the new capital of Kazakhstan. Photo: SIMON CLARK/THE WALL STREET JOURNAL

The governments of Russia, Azerbaijan and Venezuela have also spent billions from their sovereign-wealth funds in this manner.

Venezuela’s Fund for Macroeconomic Stabilization is essentially empty after the government spent almost $7 billion from the fund since its inception in 1998, according to the Venezuelan government.

Russia, the world’s biggest oil producer, has spent about $195 billion from its Reserve Fund since it was created in 2008, leaving $31.3 billion in it as of Dec. 1, according to the government. Russia also has savings in its National Wealth Fund. It has spent about $1 billion of this fund since 2008, leaving it with $71.3 billion as of Dec. 1, according to the government. A Russian government spokesman declined to comment.

Azerbaijan has spent $89.7 billion from a sovereign-wealth fund created in 1999. The fund said it had $35.8 billion left as of Oct. 1. Money was used for “strategically important infrastructure and social projects,” a spokeswoman said. The government plans to draw less money from the fund as it develops new industries, she said.

Middle Eastern nations are also under pressure to tap savings. The Saudi Arabian Monetary Authority, the nation’s central bank, said its reserves fell more than 25% to $543 billion in the two years through the end of October. Spokesmen for the Saudi and Venezuelan governments didn’t respond to requests for comment.

The size of the withdrawals threatens the existence of the funds, potentially leaving oil-producing nations more vulnerable to an extended period of low oil prices. Norway, which owns the world’s largest sovereign-wealth fund, has a rule that the government shouldn’t spend more than the fund earns from investments, to “lessen the risk of overspending.” Norway has so far spent less than 1% of its fund. There is no such rule in Kazakhstan.

Mr. Nazarbayev, Kazakhstan’s president, wrote in his autobiography that the fund he created is a “particular source of pride.” It was inspired by Norway’s fund, he wrote, and “its aim was to safeguard the country’s stable social and economic development by accumulating financial funds for future generations.”

Write to Simon Clark at simon.clark@wsj.com and Selina Williams at selina.williams@wsj.com