Russia fund to invest abroad

14-Oct-2012

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It plans to invest its capital over the next five to seven years and will exit its investment within 10-12 years.

Russia’s Kremlin-backed new sovereign wealth fund will invest up to 20% of its capital abroad — with Ukraine, Kazakhstan and Belarus the initial focus — and seeks partnerships in Asia and the Middle East, its chief executive Kirill Dmitriev told Emerging Markets.

An early initiative has been to tap into burgeoning trade links with China. In June — underlining the Russian Direct Investment Fund (RDIF)’s remit to promote Russian interests — the Russian and Chinese presidents were present to witness the launch of its $2-4 billion Russia-China Investment Fund with CIC.

“This is a really key transaction, very fundamental as it has attracted other sovereign wealth fund interest,” Dmitriev said. Asian funds are a target for RDIF, which is “very keen” to build links with Japan and Singapore like it has with China and South Korea.

Arab funds are also target partners. KIA has made its largest single investment in a fund, contributing $500 million to co-invest in projects – giving it a 5% stake in every RDIF transaction.

But for now its effort is focused on Russia, and especially on projects that serve the fast-growing middle class and infrastructure development. It plans to invest its capital over the next five to seven years and will exit its investment within 10-12 years. Only then does Dmitriev think the government will decide how to use its profits — whether it will all go back to the state, or if some will be used for reinvestment.

Stanford and Harvard Business School-educated Dmitriev — who worked at McKinsey, Goldman Sachs and the US government’s successful Delta private equity fund — has gathered a team of 30 investment professionals, which will rise to a maximum 40-45.

While the RDIF has a clear remit to strengthen and diversify the Russian economy, “we aim to make a good return on our investments and by doing so attract co-investment from some of the world’s leading investment institutions,” Dmitriev said.

Established in 2011, the RDIF will receive $2 billion annually for five years; its first year tranche is in place and the next is expected by end-year.

Tying up with co-investors who can bring expertise and finance is a key element in the RDIF model. “We cannot invest unless the co-investor comes in for the same sum” as RIDF wants to commit, Dmitriev said. Co-investors can include private equity firms and SWFs.

RDIF’s advisory board includes China Investment Corporation (CIC), Korea Investment Corporation (KIC) and Kuwait Investment Authority (KIA). Highlighting its international orientation, the supervisory board also includes foreign heavyweights like Harvard Business School professor Josh Lerner. Its heavyweight political backing is represented by President Vladimir Putin’s chief of staff Sergei Ivanov and presidential economic advisor Elvira Nabiullina.

Russian investment initiatives have faltered before as political and economic winds change. “We’re realistic about volatility,” Dmitriev said, but added that times have changed and RDIF can play a role in changes to meet Putin’s goal of putting Russia into the top 20 countries for ease of doing business, he said. It currently is 120th.

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