The Russian government is buying the government’s share in a government-owned bank. What’s going on?

The Russian government is preparing to buy the Central Bank’s share in Sberbank. This means a 50-percent stake plus a single share will be transferred to the Russian state from its own bank’s stake in a state-owned bank. However, the transaction isn’t just about moving money from one government pocket to another: It’s a strategy to free up trillions of rubles in state funding for welfare payments.

This complication stems from a Russian legal measure called the “budget rule,” which states that all oil profits above a $42.4/barrel rate must be channeled into the National Wealth Fund (FNB) rather than the government budget. Then, the FNB has the right to invest up to 50 percent of its own value in Russian companies. The FNB’s money can be spent only if the total size of the fund exceeds seven percent of the country’s GDP. At the moment, the fund is approaching that figure, but even after it surpasses the seven percent mark, the government will only be able to spend any newly available funds on roads, bridges, ports, and other infrastructure projects.

However, the government has other high-cost expenditures to worry about: In January, Vladimir Putin sent a formal message to the Federal Assembly asking for increased welfare payments, including increased funds for mothers and impoverished families. Executive branch officials estimate that the welfare expansion will cost about four trillion rubles ($63.2 billion) by 2024, with only half of that sum already accounted for in state budgets. To cover at least part of the remaining expense, federal bureaucrats have devised a workaround for the budget rule: While the rule limits FNB expenditures quite severely, it does allow those funds to be invested in liquid assets such as Sberbank shares.

Right now, the government’s stock in Sberbank is contained within the Central Bank’s balance, where the shares are valued at a significantly lower price than their current market rate. The Russian executive branch will buy those shares using FNB funds at the market rate for a total exchange value of about 2.8 trillion rubles ($44.2 billion). No law prevents such a purchase from taking place: The Central Bank and the executive branch are legally separate from one another, and it is not uncommon for them to buy assets from one another.

The difference between the market price and the assessed value of the Sberbank shares will yield a 1.6-trillion-ruble ($25.3 billion) profit for the Central Bank. By law, 75 percent of that profit (about 1.2 trillion rubles, or $19 billion) must be transferred to the federal budget. That will enable the Russian government to spend the excess funds on Putin’s social welfare projects.

Executive branch officials have argued that the increased welfare payments will speed up economic growth by pulling Russia out of a “low demand trap” caused by several years of stagnant disposable income. According to government estimates, expanded welfare programs will increase Russians’ income by 0.5 percentage points in 2020, speeding up GDP growth by 0.2 or 0.3 percentage points. However, increased demand under a bolstered welfare regime could also have negative side effects, including increased inflation.