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Russian pension reforms may flounder

RUSSIA – Pension assets in Russia will serve merely as a means of directly financing the federal budget deficit, warns Mikhail Dmitriev, scholar in residence at the Carnegie Moscow Centre and co-chair of the Post-Soviet Economies in Transition project, in an interview to the Rossiyskaya Gazeta, Russia’s official daily state newspaper.

In an interview, reported by the Tacis/East West Institute, Dmitriev says that a series of consultations and meetings have taken place this month in Russia to try and find a way to break the deadlock caused by the “endless coordination and refinements” to the country’s draft investment law on pensions.

Dmitriev says the law should be implemented this year if Russia is to avoid creating a pensions system whereby the ministry of finance could potentially receive pensions assets and use them to invest in their own debentures.
This would represent a pay-as-you-go system with added bulk, the report says.

Dmitriev hopes that the problems can be resolved by means of compromise and thus the Duma, the lower house of the Russian legislature, will be able to accept the pensions reform draft and launch it on time.

The compromise centres around a transition period of approximately two years to allow for the pension assets to be invested providing for certain investment constraints.

Initially the assets were to be invested in federal debentures or placed with commercial banks during this period.

However, a restructuring of the transition period could leave 80% to be invested in federal debentures in the absence of the investment mechanism as envisaged in the reform, and the mechanism itself being refined on the remaining 20%.

Looking further ahead, some observers would like to see more involvement on the part of private and international businesses in the asset allocation process. Igor Jurgens, vice president of the Russian Union of Industrialists and Entrepreneurs (RUIE) proposes placing 75% of the assets with Russian securities and domestic companies and 25% on international financial markets.

Alexander Shokhin, head of the committee for financial markets and banks, has criticised the government for holding back on its promises to make adjustments to the investment law in line with RUIE research. “I would like to remind the government that RUIE set up a pensions reform taskforce for the primary purpose of involving private business in the pension asset investment business. Yet it remains unclear whether the government is going to submit the investment law and the law regarding occupational schemes which essentially provide for involvement of non-government organisations,” he commented.

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