Global Finance: Russian Fund Seeks Foreign Investment

By Gregory White, The Wall Street Journal, 06.04.2011

MOSCOW – Russia hopes to attract $60 billion to $90 billion in foreign investment over five years with a new government-backed fund that is aimed at private-equity investors now deterred by the country's rough business climate, according to a top official.

“Investors are simply scared,” Vladimir Dmitriev, head of Vnesheconombank, the state bank setting up the new fund, said in an interview. “Investors are ready to come only on [the] condition the government shares the risks with them.”

He provided the first detailed account of how the new venture, to be called the Russian Direct-Investment Fund, will operate. Unlike a traditional sovereign-wealth fund, which usually invests outside its home country, the new fund will put its capital into projects inside Russia. Foreign partners -- big international private-equity and sovereign-wealth funds – will be offered the chance to take stakes alongside it, but won't hold shares in the fund itself.

To be officially launched by President Dmitry Medvedev in June, the new fund is part of the Kremlin's new drive to woo the foreign capital it needs to overhaul Russia's outdated industry and infrastructure and stimulate growth. Contacts with major investors over the past few months have been something of a cold shower for the Kremlin, however.

“They told us directly that for the majority of investors, there's no more BRIC, just the BIC,” Mr. Dmitriev said, referring to the grouping of Brazil, Russia, India and China. Russia's oil-dependent economy was by far the hardest hit of the four by the global financial crisis.

Mr. Dmitriev said the Russian government will contribute $2 billion this year to start the fund, using excess tax revenues generated by high oil prices. Authorities have pledged to contribute $2 billion annually for five years, he said, but have dropped plans to tap Russia's existing sovereign-wealth funds for money.

The fund will take stakes of 15% to 25% in each project, spending between $50 million and $500 million, he said. The bulk of the investment in the projects – including controlling stakes – will come from the foreign partners. Typical for private equity, the fund and its partners will hold stakes for five to seven years, exiting through public offerings or other sales.

The fund will invest across Russia's economy, except in natural-resource sectors, which are already well-funded. Mr. Dmitriev declined to comment on specific potential projects, but said he expected to have about $1 billion invested by year end.

Returns of about 20% are expected over a five- to seven-year investment plan, he said. The fund's management will be independent, made up of professionals from the industry to allay any fears of political influence or conflicts of interest, Mr. Dmitriev said.