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© RIA Novosti. Ruslan Krivobok

State fund looks to plug gaps

by at 30/05/2011 20:55

As Russian corporate debt swells to over $500 billion and foreign loans become more expensive due to the strengthening rouble, the Kremlin is hoping that its new state-led private equity fund can plug some of the gaps left by a dearth of foreign direct investment.

The $10 billion Russia Sovereign Direct Investments Fund, a brainchild of President Dmitry Medvedev, in May appointed as its CEO Kirill Dmitriyev, a 36-year-old Stanford and Harvard graduate who has run the Icon and Delta private equity funds in Russia.

While Russia’s fund can so far claim support from sovereign wealth funds such as the China Investment Corporation, which has $300 billion under management, and Kuwait Investment Authority, with $250 billion, it has yet to strike any deals with private equity funds. The Kremlin fund will aim to recruit foreign partners as co-investors on a case-by-case basis.

While Russia hopes to make a big splash at the fund’s official launch at the St. Petersburg International Economic forum in June, it comes at a time of massive global volatility and continued aversion by investors towards Russia’s shaky investment climate.

Dmitriyev, who will head a management company currently being formed by state development bank VEB to administer the fund, is aiming to recruit a team of 25-30 managers by October. The fund’s $10 billion start-up capital will come from the National Wellbeing Fund’s reserves.

VEB chairman Vladimir Dmitriyev told RIA Novosti that Kirill Dmitriyev had been chosen “considering the opinion of foreign partners”.

Lou Jiwei, the chairman and CEO of China Investment Corporation, told the Xinhua news agency that he hoped his fund would participate in a new round of privatisation in Russia and would like to diversify the fund’s portfolio with the help of Russian “stocks and bonds, commodities, infrastructure and real estate projects”.

Perfect storm

Beyond global volatility, the Russian fund will have to navigate an investment climate that Kremlin economic aide Arkady Dvorkovich recently said “couldn’t be worse”.

This sober mood was ref lected by a group of Russian economists, the Moscow-based Nikitsky Club, which on Thursday complained at a roundtable about the problems faced by investors amid the “perfect storm” of global volatility and local risks.

Pavel Medvedev, Russia’s financial ombudsman and chairman of the State Duma’s Banking Committee, said that Western investors tended to misunderstand the difference between state corporations and the government.

“The West thinks that lending to state corporations is the same as landing to the state itself,” Medvedev said, adding that only structural reforms would be able to help business start-ups here.

The difficulty in attracting foreign debt deals is driving Russian companies towards equity financing. Despite several cancelled IPOs, raising equity capital remains top of many companies’ “to do” lists – as they know that Russia’s statecontrolled banks won’t bail them out again (as they did during the crisis).

Focus on domestic borrowing

Oleg Vyugin, chairman of MDM Bank, told The Moscow News that Russian companies were now looking to borrow inside the country, as they owe more than $500 billion to foreign lenders who are now asking for too high rates of interest.

“Loans in foreign currencies, considering the rouble risk, have now become more expensive than borrowing domestically,” Vyugin said.

Vitaly Tambovtsev, an economist at Moscow State University, told the roundtable that economic and political uncertainty were contributing to capital outflow from Russia, which reached $7.8 billion in April.

Nikitsky Club experts also complained that despite Russian assets being a better value than those in debt-laden European countries, investors were still staying away from Russia.

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