GCC investors eyeing opportunities in Russia

ArabianBusiness, 20.02.2016

The Gulf’s investment tentacles have stretched across the globe for years, to Europe, North Africa and the Far East. But there is one huge market the region has been slow to target: Russia.

To date, Gulf investors have been more likely to look towards the stable returns, developed economies and secure political environments of Western markets — deemed safer havens for their assets.

But with the oil price at an all-time low and a recognition that traditional investment instruments such as European stocks and shares are no longer providing guaranteed high yields, many are cashing in on their European investments and looking to new geographical markets such as the US, India, China and Russia, for opportunities to diversify their income.

The diversification coincides with Russia’s need for foreign investment as it buckles under the pressure of low oil revenues — which account for about half the state budget — and crippling sanctions imposed by the US and European Union in response to its illegal occupation of Crimea.

It equals a match made in heaven, says Kirill Dmitriev, CEO of the Russian Direct Investment Fund (RDIF), a fund set up by the Russian government with an initial $10bn in 2011 to make equity investments in high growth sectors of the Russian economy, including healthcare, energy, agriculture, logistics and retail.

Since its inception, the RDIF has secured more than $25bn through long-term strategic partnerships with global investors, 90 percent of whom are from Asia and the Middle East.

Speaking to Arabian Business, Dmitriev says he has witnessed a “dramatic” increase in Middle Eastern investment with the RDIF over the past three years, particularly from sovereign wealth funds (SWFs).

He points to the Kuwait Investment Authority (KIA), which was one of the first Gulf funds to co-invest with the RDIF since 2012 and which doubled its investment from $500m to $1bn last November.

Abu Dhabi’s Department of Finance has committed up to $5bn to co-invest with the RDIF in Russian infrastructure since 2013, and the UAE’s Mubadala has a $2bn joint investment venture with the RDIF. Last month, Dubai’s DP World launched a joint venture with the RDIF, called DP World Russia, to develop ports and logistics operations in Russia.

Bahrain’s Mumtalakat has invested about $250m with the fund, as revealed by Russian foreign minister Sergey Lavrov during a trip to Russia by the king of Bahrain Hamad bin Isa Al Khalifa this month. The Qatar Investment Authority (QIA) plans to invest up to $2bn.

Meanwhile, Saudi Arabia’s Public Investment Fund (PIF) last year agreed to invest $10bn — the largest foreign direct investment yet in Russia. The Saudi Arabian General Investment Authority (SAGIA) has also partnered with the RDIF to explore investment opportunities in Saudi Arabia itself.

Officials from the UAE, Bahrain and Qatar have either visited or hosted their Russian counterparts during the past six months. The Emir of Qatar Sheikh Tamim Bin Hamad Al Thani travelled to Moscow to meet with President Vladimir Putin on January 19, for what an RDIF spokesperson told Arabian Business was to discuss “further investment cooperation” between the two countries.

For its part, the GCC sees Russia as offering long-term growth potential in sectors perceived as key for economic diversification.

A spokesperson for Mubadala says: “Mubadala has established sovereign investment partnerships with Russia [and others] as a method of establishing active presence with experienced local partners in markets that offer long-term potential and across sectors that align with our global platforms.

“Mubadala and the RDIF established the investment partnership in 2013, and to date we’ve successfully deployed capital across a number of sectors, including energy, IT, retail and infrastructure. We continue to review an active pipeline of potential investments.”

Announcing the launch of DP World Russia last month, DP World chairman and CEO Sultan Ahmed Bin Sulayem, said: “Russia has always been an attractive origin and destination market for us with huge long-term growth prospects.” A DP World spokesperson was quoted as saying at the time that the company is actively looking at other opportunities in Russia.

Dubai real estate developer Damac Properties had held talks with Russia’s Rostec over the possibility of launching a $300m real estate investment fund some years ago but vice-chairman Niall McLoughlin says the venture has not been pursued. The company is, however, “continuously evaluating opportunities” in Russia, he says.

The UAE government has officially identified Russia as a key economic partner. There are about 3,000 Russian companies based in the UAE and bilateral trade amounted to $2.7bn (AED10bn) in 2014. According to figures cited by Bin Sulayem as he helped launch DP World Russia last month, non-oil bilateral trade between Dubai and Russia grew by a staggering 131 percent between 2010 and 2014, from $1.1bn to $2.6bn. Dubai-Russia trade reached $1.42bn in the first nine months of 2015, local media quoted him as saying.

Dr Igor Egorov, chairman of the UAE-based Russian Business Council, says interest in Russia from the Gulf has been heightened by the weak ruble, which fell to 76 against the US dollar in January, swinging investments in favour of the UAE, whose dirham is pegged against the dollar.

“Privatisation of large state companies also opens up opportunities for private investors, while the visit of foreign minister Sergey Lavrov to the UAE [this month] emphasised a strengthening of economic ties between the two countries,” he says.

The RDIF’s Dmitriev notes: “The Gulf is becoming more familiar with the Russian market. In the past the country was perceived as a difficult market for investors — it has gone through an important transition from being a socialist economy only 25 years ago and a lot of institutions needed reforming.

“There was also the perception that in very strong performing sectors such as financial services Russian firms would get all the good deals. This is not the case, but there were a lot of issues, as with other emerging economies, that needed ironing out.”

Post 2008 in particular, Russia saw an influx of foreign investment as troubled Western markets sought to move investments elsewhere. “When global markets were in decline, we saw economic growth in Russia, as wages and so on became more competitive,” says Dmitriev.

Fast-forward several years and Russia’s economy is struggling. EU sanctions and a persistently low oil price have taken their toll and in January the International Monetary Fund (IMF) reduced its economic growth forecast for Russia, predicting in its World Economic Outlook that the country’s economy would contract by 1 percent in 2016. That compares with the IMF’s previous forecast in October of a 0.6 percent contraction. Similarly, the World Bank predicts that the Russian economy will contract by 0.7 percent in 2016.

Meanwhile, the Economic Expert Group, an independent firm of analysts based in Moscow, calculated this month that Russia will have lost between $160bn and $170bn as a result of financial sanctions, depending on the oil price, $400bn from lost oil and gas revenues and around $280bn in gross capital inflows over the past four years, including $85bn of direct investments.

“The reduction in foreign direct investment, reduced opportunities for loans, reduction of inflow of capital into the market of public debt, all increase the immediate effect of the sanctions,” the report states.

It is no surprise, then, that institutions such as the RDIF are intensifying efforts to court the Gulf, and, as Dmitriev admits, “bring in much needed capital to the Russian economy”. They also point out that, while it is arguably at a low ebb at present, Russia remains the world’s sixth largest economy by GDP — the economy is expected to grow to $4 trillion by 2020 — it has one of the largest domestic markets in the world, ranking seventh among 144 countries, and one of the lowest proportions of public debt of any major economy (17.9 percent of GDP in 2014).

Dmitriev says investing in the RDIF gives GCC countries exposure to different sectors of the huge Russian economy. The fund counts investments in more than 20 holdings in its portfolio, including the Moscow Exchange, energy provider ENEL Russia, private healthcare conglomerate Mother and Child Group of Companies, national cinema chain Karo, Tigers Realm Coal, state diamond mining company Alrosa, and state telco Rostelecom.

According to Dmitriev, the GCC has particular interest in companies that are specific to Russia and less impacted by global conditions. These include agriculture, private healthcare and retail. “Gulf investors like companies with predictable dividends and cash flows and good, healthy balances.”

Dmitriev declines to provide a detailed breakdown of which companies the GCC has investments in but lists seven RDIF interests with “GCC participation”. The first is Moscow Exchange, from which he says capitalisation has doubled and total dividends have achieved more than 50 percent of net profit.

Private healthcare group MDMG is another — its network includes four hospitals and 25 clinics in 14 regions of Russia. Telecoms provider Digital Inequality provides high-speed internet access for small towns across Russia; utilities project Smart Grids aims to increase energy efficiency by up to 30 percent by identifying sources of electricity loss and automating metering accordingly, and Lenta is one of Russia’s fastest growing hypermarket chains.

GCC countries also have investments in the Ust-Luga port terminal on the Baltic Sea — a development project to increase the ports’ capacity for handling shipments of liquefied petroleum gas (LPG) and light oil; and ZapSibNefteKhim, an integrated petrochemicals complex in Tobolsk.

Dmitriev says: “[The GCC countries] are very successful investors that understand global trends and the opportunities presented by [global economic fluctuations]. We understand that oil prices are low, which creates a challenge for the GCC economies — for Russia as well — but also the devaluation of the ruble makes many of our industries highly competitive for Gulf investors compared to domestic markets.”

Dmitriev says he believes oil prices will start to stabilise by the end of 2016 but does not foresee a situation where Gulf investors seek to minimise their investments overseas with a negative impact on Russian foreign direct investment — all GCC countries are looking to diversify their revenue streams and plan for a non-oil-dependent future, he says.

He also says Russia has had “positive indications” from the US and EU that sanctions will be lifted within the next 12 months — and, in any case, the current sanctions do not apply to the GCC or RDIF.

In the meantime, Gulf and Russian foreign officials will continue regular tête-à-têtes aimed at stimulating bilateral trade and encouraging cooperative investments.

Egorov notes: “The Russian-Emirati intergovernmental commission met back in November and identified cooperation in finance and banking, in particular Islamic finance, cost-efficient oil exploration, increased export of food products from Russia to the UAE (chicken, turkey and other halal-standard meat), and nuclear energy as the key priorities.”