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Russia rainy day fund shrinks by $38 billion as government plugs deficit

St. Petersburg International Economic Forum (SPIEF)

(Reuters) -Russia's National Wealth Fund shrank to $148.4 billion as of Jan. 1, down $38.1 billion in a month, as the government took out cash to plug its budget deficit, data showed on Wednesday.

The ministry said it had spent 2.41 trillion roubles ($35.1 billion) from the NWF, a rainy day fund that accumulates oil revenues, to cover the deficit in December.

Along with heavy state borrowing at domestic debt auctions, the NWF - which was originally intended to support the pension system - has become the main source of financing for the budget deficit since Russia invaded Ukraine last year and was hit by waves of unprecedented Western sanctions.

The government also drew on it last year to prop up struggling state companies including Russian Railways and the airline Aeroflot.

Analysts have said Russia's attempts to plug its budget deficit by selling foreign currency reserves could lead to a vicious circle that pushes the rouble higher and further reduces the Kremlin's crucial export revenues from oil and gas.

The size of the NWF at Jan. 1 was equivalent to 7.8% of Gross Domestic Product, the finance ministry said. But only $87.2 billion, or 4.6% of GDP, was in liquid assets.

At Feb. 1 last year, three weeks before the invasion, the total fund stood at $174.9 billion, or 10.2% of projected GDP.

Finance Minister Anton Siluanov said last week that Russia recorded a budget deficit of 2.3% of GDP last year, having targeted a surplus of 1% before the start of the war.

According to the budget law, the finance ministry can spend another 4.2 trillion roubles, currently worth around $61 billion, over the next two years to plug the deficit.

As a result, according to the ministry, NWF liquid funds in accounts with the central bank could fall to 2.3 trillion roubles or 1.4% of GDP by the end of 2024, which the Accounts Chamber said would be the lowest ratio for 20 years.

In a further indication of pressure on the budget, finance ministry data showed that tax revenues from imports, which are subject to duties and value-added tax, fell by 20% or almost 1 trillion roubles in 2022.

Imports plummeted last year as a result of Western sanctions and an exodus of Western firms from Russia, though they began to recover in the second half of the year. ($1 = 68.6950 roubles)

(Reporting by Reuters; Writing by Mark Trevelyan; Editing by Kevin Liffey)