Russia’s sovereign wealth fund is set to announce a series of new deals with China next week, reflecting the increased importance that Chinese investment will hold in the Russian economy as Western capital flees the country.
Emerging Markets has learned that the Russian Direct Investment Fund will announce the four investments including one each in infrastructure, real estate and minerals at the St Petersburg International Economic Forum. The investments will be made through the Russia-China Investment Fund, a vehicle set up with the China Investment Corporation in 2012.
The fund was set up with $1bn commitments apiece from the Chinese and Russian sovereign funds, and it is understood that to date, roughly 10% of that capital has been deployed, through a $200m investment in Russia Forest Products, a forestry company in Siberia. It has the potential to reach $4bn.
“Including the deals that we will be announcing, we would get to another 15%-20%” of the total assets being invested, Sean Glodek, director at RDIF, told Emerging Markets. “We’re now fully staffed and have a full pipeline of deals.”
It is possible the infrastructure deal may be the first bridge to join Russia and China across the Amur River, which RDIF has confirmed it is investing in through the Russia-China Investment Fund. Most deals so far have been in Russia’s far east. “That makes sense,” said Vladimir Kolychev, chief economist for Russia at VTB Capital. “It’s the closest region to China, with the closest trade and infrastructure links.”
While these new investments have clearly been some time in the making and predate the annexation of Ukraine, their announcement will be a timely reminder that Russia has other sources of capital beyond the West.
“The co-operation with China has been in place for a couple of years now, and the fact that we are announcing deals is more of a reflection that we have put in place the funds, resources and structure to deploy capital,” Glodek said. “It just coincides with the general mood. But I would agree there is more focus in Russia to explore opportunities with China, and with Asia in general.”
FDI between the two countries has so far been surprisingly modest. “It’s actually more words than actions so far,” said Kolychev. “If you look at FDI it’s been pretty small both ways: from China into Russia accounts for only $2bn over the last five years, and Russia doesn’t have any meaningful FDI into Russia.”
“I think we will see much more diverse investment flows from China to Russia,” Kolychev said. “This fund [the RDIF/CIC venture] will only be part of it, and I’m not sure it’s going to be the largest part.”
But it is unlikely China can fully replace the funding that has been lost from the West, particularly since the two blocs have tended to invest in different ways. “It will be hard to imagine China can replace the entire funding gap,” Kolychev said. “Some of it will be covered, mostly in the form of direct investment rather than portfolio. The institutional investor sector in China is not as developed as that in the West.”
While agreeing that “nobody wants to minimise the environment” regarding Ukraine, Glodek stressed that the environment for seeking deals in Russia has improved in recent months. “It’s not all bad,” he said. “When you look at the funding structure of RDIF, we lined up over $10bn of investment capital in joint ventures and funds, and pretty much all of this was from China, Asia and the Middle East. Russia is not as reliant on western Europe as some investing in public markets would expect.”
Nevertheless Kolychev said that “given the strained Russia-west relations, this [China investment] will be given even more priority by the government now.”
Glodek agreed investment cooperation with China was broader than the joint venture. “The relationship with CIC goes beyond just the Russia-China fund,” he said, citing the example of CIC’s investment in the Moscow Exchange, which jointly bought 5.375% of the bourse in December 2012 with RDIF but outside the scope of the venture.