Why Arab funds are stepping up investments in Russia

Russia Beyond the Headlines, 24.11.2015

The sovereign investment fund of Kuwait will invest an additional $500 million in projects in Russia in partnership with the Russian Direct Investment Fund (RDIF). Experts say Arab sovereign funds are hedging against falling oil prices by investing in Russia.

The Kuwait Investment Authority will invest an additional $500 million in the Russian economy. On Nov. 10, it signed an agreement to that effect with the Russian Direct Investment Fund (RDIF), a special investment fund set up by the Russian government in 2011 to attract foreign investment into the fast-growing sectors of the Russian economy. Thus, the amount of Kuwaiti investment into Russian projects will double. The Kuwaiti fund had already invested $500 million in Russia in 2012.

“The RDIF is the first and only fund to have raised over $20 billion worth of long-term investment into Russia from major Middle East sovereign funds,” a RDIF spokesman told RBTH.

Funds from all Gulf Cooperation Council (GCC) countries are investing in Russia.  RDIF works together with the Mubadala fund from the UAE, the Mumtalakat fund from Bahrain, Qatar Holding, and the Saudi Arabian Public Investment Fund.

Growing interest in Russia

Arab investors have largely developed an interest in Russian assets due to the falling oil prices. “Increasingly, their national wealth funds are acting as saviors of their economies,” says Vladimir Rozhankovsky, head of research at the Okey Broker investment company. He adds that classic investment instruments, like Western stock exchanges, no longer ensure high yields.

The nearly 50-percent depreciation of the ruble in the second half of 2014 has considerably increased the rate of return offered by industrial projects in Russia, adds Pavel Salas, managing director of еТоrо. According to him, over the course of five to seven years, return on investment in Russia may touch 120-130 percent.

Arab funds also look at strategic interests when investing in Russia. “In recent years, Arab funds have been investing mainly in infrastructure projects and sectors that are related to the processing and transportation of oil,” says Denis Belyaev, partner with DS Law. According to him, Arab investors become aware of price forecasts for Russian energy products and therefore can adjust the price of their own oil and gas.

Promising sectors

For religious reasons, Arab funds cannot invest in certain sectors, such as banking or debt instruments, says Anton Tabakh, director of regional ratings at the Rusrating rating agency. They mainly invest in transport infrastructure, construction, real estate and retail, he adds.

“Investment in infrastructure may prove extremely lucrative thanks to China’s Silk Road Initiative, a large part of which will be running through Russian territory," says eToro’s Pavel Salas.

Another popular area for investment is high-tech projects and commercial real estate, since the return on investment is higher in these segments in Russia when compared to Europe, says Daniil Karikov, managing partner of the Karikov Group. He adds that the distribution costs are also lower in Russia.

Arab funds started investing in Russia six years ago. In 2010, UAE port operator Gulftainer set up a $500-million fund for investment in infrastructure projects in partnership with the Rostec state corporation. As a result, Gulftainer became a co-owner of a terminal at the Ust-Luga port.

Rostec also partnered with the UAE’s Damac development holding to launch a $300-million fund for investment in real estate projects.