Russia will invest money from its Reserve Fund and National Wellbeing Fund into 15 government bond funds in Europe and the United States, including those in Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). Russia will also purchase government bonds in the U.K., Germany, France, Austria, Canada, and the Netherlands, Bloomberg News reported.
Both Fannie, down 56 cents $29.27, and Freddie, down 80 cents to $27.94, moved lower Thursday afternoon; however it should be noted that the declines occurred during a broad market sell-off, with the Dow down 159 points to 12,267.
U.S.: subprime defaults weigh
Over the past year, sovereign wealth funds have provided a needed infusion of capital to investment-strapped U.S. corporations, many of which are in the midst of trying to rebuild balance sheets following losses sustained during the surge in subprime mortgage and related asset defaults. To-date, sovereign funds have invested about $60 billion in the U.S., according to data compiled by the U.S. Federal Reserve.
Further, part of that foreign sovereign fund wealth stems from increased oil revenue, with oil-producing Russia being a classic example. A cash-strapped country a decade ago when it had to default on its government bonds in 1998, record-high oil prices and privatization have helped propel an economic boom in Russia, including soaring hard, foreign currency reserves. Russia has amassed more than $700 billion in foreign currency reserves as amid an economic expansion that's featured a growing middle class, a thriving domestic commercial sector, and broadening trade ties with the E.U. and China.
Russia's postmodern stance
Russia's decision came one day after Arkady Dvorkovich, President Vladimir Putin's chief economic advisor, told financial officials that "Russia can attract investments and can also use this opportunity to expand Russian investment abroad and stabilize the situation in other countries with our money," Thomson Financial News reported.
Further, Dvorkovich said there should be no concerns about Russia attempting to exert political influence or pressure in exchange for the nation's increased stake in western financial markets.
"There should be no fears about this contribution to stability. We will be transparent and reliable investors," Dvorkovich told Thomson Financial News. "We do not want any upsets on the market. We don't want Russia to be seen as aggressive. We want everything to be as transparent as possible."
Economist David H. Wang called Russia's decision a logical extension of its economic development, and "one of the shots in the arm that will help maintain liquidity in international markets."
"Russia's decision is both a boost for U.S. and European markets and also a statement that they seek a larger role in international financial markets. It's also a good move for them from a diversification standpoint," Wang said. "This action, and other sovereign wealth fund decisions, is exactly what the financial markets need. It sends a signal to financial institutions that there are major players out there who are willing to commit money. Given what the credit markets have experienced these past six months, that's no small statement."
Wang added that Russia's decision may have the additional consequence of telegraphing to other sovereign funds, particularly those in China and the Middle East, that if they hesitate longer regarding increasing investment in the U.S., they may lose out.
"If they hesitated before for risk reasons, they now have to consider the other side of the equation. Now, they may see that a failure to deploy some of that capital will cause them to miss out, and enable Russia or others to snap up some smart investments," Wang said. "Now they can see that there is an opportunity cost to not investing."