20 June 2011, 17:21

Russia’s wallet ready for sharing investments

Russia’s wallet ready for sharing investments

Having attended the St.Petersburg Economic Forum last Friday and Saturday where they listened to the speech President Dmitry Medvedev made at the opening of the forum, foreign investors may have taken home the promise of many good things to come their way.

Having attended the St.Petersburg Economic Forum last Friday and Saturday where they listened to the speech President Dmitry Medvedev made at the opening of the forum, foreign investors may have taken home the promise of many good things to come their way.

Opening the forum proceedings, Russia’s Minister of Economic Development and Trade Elvira Nabiullina spoke of global leadership passing to emerging markets because of their high growth rates and the anaemic economies and huge debt of the developed countries in the West.

One of the highlights of the speech president Medvedev was launching the much awaited-for $10 billion Russian Direct Investment Fund. The goal of the fund that has been attracting the attention of international commentators for months now is to attract the world's leading funds to co-invest in major projects, destroying the myth of excessive risks of doing business in Russia.

To quote Reuters’ the RDIF is designed to attract direct foreign investment into local and international development projects with the Russian state providing financial backups or guarantees.The fund is being set up to kick-start direct investment in Russian growth companies operating in sectors like IT, healthcare and infrastructure -but not energy - that are a play on the emergence of Russia's middle class. The RDIF will be capitalised with $2 billion a year over the next five years.

The head of the fund is Kirill Dmitriev, oneof Russia’s new generation of rising business leaders, who began his career as a manager at Delta Private Equity Partners, a US-government backed investment fund designed to promote capitalism by financing the growth of independent business in Russia.

He then set up the highly successful Icon Private Equity – a $1 billion fund that invested in projects across the CIS. At the same time, he founded the Russian Association for Venture Capitalists and advised the government on the creation of the Russian Venture Company promoted by Prime Minister Vladimir Putin to start the country's venture capital sector.  

To make the fund as attractive as possible to investors, the state finance will be limited to a minority role of no more than 50 percent minus one share in any project. It means the co-investor doesn’t have to invest into anything they don’t believe will earn returns. I don’t see the RDIF as a political initiative, however the political goals of the government will be achieved from these investments – but as a by-product. 

The state will release its first $2 billion in September. The first investment is anticipated by the end of the year, according to Dmitriev. After that the state-owned debt agency and de facto development bank Vnesheconombank (VEB) will release another $2 billion each year over the next four years. The Kremlin hopes that the fund will also attract $90 billion from private co-investors. 

“Russia is a very attractive investment destination and people have to some extent lost sight of what the country has to offer,” said Dmitriev. “It is the sixth largest economy in the world (even Russians forget this fact) and the number of people that are earning more than $10,000 a year has tripled in the last six years. I am not saying that everything is good, but the rising incomes have led to an incredible amount of change in a remarkably short time.”  

A major focus for the fund, then, is to offer major investment firms some reassurance. With the state limited to a minority stake, investors will not only have the security of a controlling stake, but more importantly, the state will share the risks and be subject to the same rule of law and corporate governance practices as its co-investors.  

As experts view it, the structure of the fund is also designed to allow it to tap into the expertise of what are planned to be the best investors in the world. An investment committee, which will meet whenever needed, can approve deals up to $250 million and will feature professional investors from both Russia and around the world.  

“For example, we have talked to a private equity fund that is a global leader in health sector investments in the U.S. and Europe. Very few private investors in Russia have invested into private-sector health care, but clearly there is need for them. So this is potentially a very profitable investment. The same is true of the pharmaceuticals sector. Russia has the fastest growing market in the world, but 80 percent of the products are still imported,” said Dmitriev.  

Among the international investors that have already expressed an interest - and will probably end up on the international advisory board - are Goldman Sachs, Blackstone, the Abu Dhabi Investment Authority, Kuwait Investment Authority, China Investment Authority, Permira and Caisses des Depots.

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