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Russia’s invasion of Ukraine causes losses for Norway’s sovereign fund

Norway said Thursday its sovereign wealth fund, the world's largest, lost $74 billion during the first quarter of the year due to the market turmoil caused by the war in Ukraine.

Published: 21 April 2022 15:51 CEST

Oil refinery

The war in the Ukraine has meant a fall in revenues for Norway's oil fund. Pictured: A worker at the Mongstad oil refinery in western Norway. File photo by Pierre-Henry Deshayes/ AFP.

The loss of 653 billion kroner, or 68 billion euros, represents a drop of 4.9 percent in the value of the fund which Norway has built up with revenue from its oil exports, said the central bank.

“The first quarter has been characterised by geopolitical turbulence, which has also affected the markets,” said the deputy head of the fund, Trond Grande, in a statement.

The value of the fund’s equity assets, which account for just over 70 percent of the total, fell by 5.2 percent in the first three months of the
year. The bond portfolio, which accounts for a bit more than 26 percent overall, slumped 4.8 percent.

Unlisted property investments saw a 4.1 percent rise in value. Last month, the fund estimated that its Russian assets had been reduced to a tenth of their value, over the war in Ukraine and sanctions imposed on Russia.

According to a real-time ticker on the central bank’s website, the current value of the wealth fund is 11.47 trillion kroner, or 2.1 million kroner for each of the country’s 5.4 million people.

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Four key things to know about Norway's revised budget for 2024

The government continues to tap the oil fund for public spending

The current government isn’t the first to use the country’s oil and gas wealth to cover public spending costs. However, the revised budget will take public spending drawn from the oil fund close to the limit.

Subsequent governments have limited themselves to using 3 percent of the value of the sovereign wealth fund where Norway’s oil and gas revenues are invested to top up public spending.

The extra 9 billion kroner the government plans to spend from oil revenues will bring the total spending from the fund to nearly 419 billion kroner, which equates to around 2.7 percent of the fund’s value.

This also means that the use of oil money in Norway will be 34 billion kroner higher this year than last year.

Norway’s finance minister, Trygve Slagsvold Vedum, said that staying under the 3 percent threshold was important for the government.

“It has been important that we are now under the action rule, even though we are making a heavy defence and security lift. The oil fund must be a generational fund,” he said.

However, some analysts have previously suggested that the 3 percent limit is too generous and could deplete the fund.

The increase in oil spending comes after a couple of cautious years where the government tried to limit spending from the fund to curb inflation.

READ ALSO: Could Norway’s 1.3 trillion dollar oil fund run dry?

Significant increase in defence spending

The revised budget’s main focus is increased defence spending. The Norwegian Armed Forces will receive around 7 billion kroner more in defence spending as part of the revised national budget.

In the months leading up to the revised budget, PM Jonas Gahr Støre said that Norway would hit the NATO “two percent target”.

The two percent refers to member countries allocating at least two percent of their GDP to defence spending.

Some 2 billion kroner will increase immediate operational capability, while 5 billion would be spent on a long-term defence plan.

The cost of living increases to ease, but interest rates to remain high

The Norwegian government has noted that the economy had outperformed its expectations and forecasts from last autumn when the initial budget was presented.

Furthermore, unemployment has remained low at 1.9 percent and the government expects this to rise to 2 percent during the rest of 2024.

It also expects the consumer price index to rise by 3.9 percent for 2024. The good news for consumers is that a real wage rise, meaning salary increases outpace the cost of living, is looking more likely as the year progresses.

Looking ahead to 2025, inflation is expected to slow to 2.8 percent.

Overall, the government expects the mainland economy in Norway to grow by 0.9 percent this year.

Despite the optimistic outlook from the government, the figures are unlikely to move the needle regarding interest rate cuts.

Norway’s central bank has brought the key policy rate to a 16-year high of 4.5 percent to curb inflation, and it isn’t expected to cut rates until December at the earliest.

“Today’s budget gives no reason for Norges Bank to change the interest rate plans, which now point towards an interest rate cut in December,” DNB’s chief economist Kjersti Haugland told public broadcaster NRK.

The government doesn’t have a majority for its budget

The most interesting side plot of every budget and revised budget is that the minority coalition comprised of the Labour Party and the Centre Party will rely on the support of the Socialist Left Party to get majority support for its proposals.

This means the budget’s contents usually change throughout negotiations between the government and its budget partner.

The Socialist Left Party has said it will advocate for an increase in the child benefit for the oldest children and a new tax on oil companies that would fund investment in offshore wind.

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