Russia Launching Its Direct Investment Fund

Ashby Monk

The big news this morning: Russia will officially launch its new sovereign fund – known as the Russia Direct Investment Fund (RDIF) – at this week’s St Petersburg International Economic Forum.

As I’ve already noted, I think the RDIF is quite innovative and potentially an effective way for the Russian government to tap into foreign capital for development purposes. Why? Russia is a “challenging” environment for private equity investments, and the (not so) subtle sales pitch with the RDIF is to say that the individuals who might otherwise engage in corrupt practices with private investors in Russia wouldn’t dare mess around with the Kremlin. In short, RDIF investors can get a bit of relief from their corruption worries in Russia. Indeed, the RDIF will leverage the connections and credibility of the Kremlin to facilitate commercially viable private equity investments in the country. I think that’s quite cool. And, interestingly, this so-called “expert” from today’s Reuters piece agrees with me:

“It’s a very innovative and creative way to tap into long-term investors,” said Ashby Monk, co-director of Oxford University’s analytical Sovereign Wealth Fund Project. “If I were looking for a partner for private equity investments in Russia, the Kremlin would be top of my list.”

Yeah, I completely agree with that; clearly he’s a smart and undoubtedly nice guy.

Anyway, with the imminent RDIF launch, I have some more details that I can report on the fund’s structure and mandate:

  • It will receive $2 billion in state cash each year for five years.
  • It will make direct PE investments in the $50-$500 million range.
  • It will focus its investing in healthcare, technology and infrastructure; it will not be investing in energy assets.
  • The RDIF will only invest if a foreign investor matches its investment.
  • Vnesheconombank, which is the state development bank, will be the parent company of the RDIF.
  • The RDIF will have an independent Board and investment review process.
  • The fund will be headed by Kirill Dmitriev.
  • It will have a 30-person investment team.
  • The RDIF expects to do its first deals in either the fourth quarter of 2011 or the first quarter of 2012.

So there you have it. Now all we have to do is wait and see if any funds actually sign up to participate in this venture. Kirill Dmitriev apparently thinks the RDIF could attract as much as $50 billion!

“If we can show to foreign investors that they can consistently make a reasonable return in Russia, they will put in a dollar now, and in three or four years they will put in $10.”

That may be a bit optimistic because it turns out that Russia’s elites are of the opposite opinion, moving their money out of the country. According to Reuters,

“…the outflows exceeded $20 billion in the first quarter of 2011. Some of that, though not all, represents capital flight as oligarchs and officials seek safety abroad ahead of the presidential vote, when either Putin or Medvedev will run.”

Whoever wins, though, Putin and Medvedev are both big supporters of the RDIF. Perhaps the increasing political uncertainty adds to the value proposition of Russia’s new SWF.

3 Responses to “Russia Launching Its Direct Investment Fund”

  1. 1 jesseheath June 14, 2011 at 2:24 pm

    I agree that partnering with the Kremlin will reduce, but not eliminate corruption risks. I wonder also whether the interest from non-Russian SWFs is premised on the understanding that any investments in Russia will be reciprocated by Russian investments in their countries.

    • 2 Ashby Monk June 14, 2011 at 2:38 pm

      Thanks, Jesse. Yeah. That’s a good question. I’m fairly certain that won’t be in the prospectus though… Cheers, Ashby

  1. 1 These Returns Are for Locals Only! « Oxford SWF Project Trackback on June 20, 2011 at 10:44 am

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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