Russia’s sovereign fund head struggles to stay above politics

Financial Times, 21.09.2014

By Anne-Sylvaine Chassany in London and Henny Sender in Beijing

Kirill Dmitriev, the 39-year-old, boyish-looking head of Russia’s sovereign wealth fund, was supposed to change the face of Russian capitalism.

Mr Dmitriev was going to overcome western funds’ reluctance to invest in a country many viewed as corrupt, prone to state meddling and plagued by a law-of-the-jungle legal system. In return, Russia’s economy would become more vibrant and less reliant on oil and gas.

At least that was the plan three years ago when President Dmitry Medvedev entrusted the Harvard and Stanford-educated former Goldman Sachs banker with $10bn of government cash to start the Russian Direct Investment Fund.

Now, as Russia’s relations with the west plummet to a post-cold war low amid Moscow’s intervention in Ukraine, Mr Dmitriev is battling to preserve the fund’s mission. As much as he strains to keep the RDIF above politics, it threatens to become caught up in an escalating economic war that has seen western economic sanctions met by retaliatory closures of McDonald’s branches across Russia, a raid at Ikea’s Moscow headquarters and Russian import bans.

“In our complex world, people do not like nuances, it’s very dangerous to paint everything in Russia in black,” Mr Dmitriev told the Financial Times. “There are forces in Russia that are good for the world economy. We are one of them.”

The RDIF’s 50 investment professionals focus “on transactions that make good financial returns,” the financier said.

Mr Dmitriev pointed to the fund’s work so far: $1.3bn spent and another $6bn raised from co-investors to buy stakes in companies including a cinema chain, a commercial laundry specialist and a private clinic operator. Foreign partners have included BlackRock, One Equity Partners, Goldman Sachs and Deutsche Bank. The fund does not disclose its returns, but Mr Dmitriev noted it made a 23 per cent return on its stake in Moscow’s stock exchange, which went public last year.

“We’re not a humongous player and we have no political agenda. We’re not violating sanctions. Co-investing with us is not prohibited,” he pleaded.

The fund’s ties with state entities makes this message difficult to hear.

Kirill Dmitriev in focus

Kirill Dmitriev, a Russian citizen born in Kiev, will not be drawn into the politics of the Ukrainian crisis: “I don’t have any views on politics, I only have views on the economy,” he says, diplomatically. Unlike many of his peers within Russian state entities, Mr Dmitriev has not risen from the ranks of the administration.

He turned to the US for his college education, earning a bachelor’s degree in economics from Stanford, followed by a master of business administration from Harvard.

His early career is that of a typical Ivy League university graduate: a stint as junior consultant at McKinsey and investment banking at Goldman Sachs in New York, during the technology boom.

He returned to Russia in 2000, where he went on to do private equity deals, starting Moscow-based firm Icon Private Equity, before being appointed head of the Russian Direct Investment Fund by President Medvedev in 2011.

The RDIF itself is not subject to sanctions, but its parent – state-owned bank VEB – is on the list, as well as one of its supervisory board members, Sergei Ivanov, President Vladimir Putin’s chief of staff. This has prompted Harvard professor Josh Lerner to resign from the board, which now counts only two foreigners, including former IMF boss Dominique Strauss-Kahn.

Every year in the spring in St Petersburg, Mr Putin dines with the fund’s international advisory board, a who’s who of global finance. What was chiefly a communications exercise – the board has no decision-making power – is now proving a headache. One of the advisers, Kurt Björklund, co-CEO of London buyout firm Permira, stepped down earlier this month.

It is unclear whether US private equity billionaires Stephen Schwarzman of Blackstone, Leon Black of Apollo and David Bonderman of TPG Capital are still on the board: A few weeks ago, the fund erased the members’ list from its website because, according to Mr Dmitriev, of “the excessive attention” it was receiving. Meanwhile, the US financiers are keeping silent.

“It may be unfortunate but the fund’s political affiliation has overshadowed its work,” said Sven Behrendt, managing director at GeoEconomica, a Geneva-based political risk research firm. “This is a case of geopolitical events taking over the economy.”

The house arrest last week of the chairman of Russian conglomerate AFK Sistema in a money laundering case has sent shockwaves through the global investment community, further tarnishing Russia’s reputation. But it may also prove Mr Dmitriev’s independence, albeit in a somewhat embarrassing way, observers say: the arrest came only days after RDIF bought a minority stake in one of Sistema’s companies.

“Because it’s Russia, people draw conspiratorial lines when in reality it is just a big institutional investor,” said Drew Guff, a Moscow-based partner at US private equity firm Siguler Guff, which invested with RDIF in private clinics group, MD Medical.

Firms already operating in Russia such as Siguler Guff or Baring Vostok tend to salute RDIF’s “professionalism” and appreciate that having a state-backed friend as co-investor can “open doors” and help secure regulatory approvals.

But the large international investors such as Blackstone and Apollo have largely remained unconvinced.

“We looked at an ice cream company that had kiosks in strategic locations but we couldn’t get comfortable with the ownership structure or how they secure their locations,” said a senior executive at a large US buyout group. “Often an apparently independent enterprise has links to government entities.”
This has led Mr Dmitriev to turn to Asian and Middle Eastern sovereign wealth funds – at the risk of reinforcing the perception that the RDIF’s fate is dictated by geopolitics.

“All investors face constraints and for RDIF those constraints are exogenous and geopolitical,” said Peter Yu, managing partner at New York-based private equity firm Cartesian Capital, which co-invested in Moscow’s stock exchange alongside RDIF and was instrumental in getting China’s sovereign fund CIC in on the deal, too.

By Mr Dmitriev’s own admission, “from the beginning – even before Ukraine – 90 per cent of the capital we raised came from Asia and the Middle East. They are long-term investors like us.”

CIC’s business dealings with RDIF coincide with a closer political embrace between resource-poor China and resource-rich Russia. CIC has used the $2bn Russia-China Fund jointly set up with the RDIF to make seven investments, including a $100m bet in Sistema’s children’s retailer Detsky mir.
Other state funds are less enthusiastic. A person close to the Kuwait Investment Authority said: “We have not invested much in Russia so far and it may be a blessing.”

Mr Dmitriev still hopes peace talks over Ukraine will lead to sanctions being lifted, helping restore his original mission. “Sanctions are not just negative for Russia,” he says, “they are negative for Europe and the US. They just lead to slowing down the Russian economy, the European economies and the world economy.”