Will China Save Russia With Investment?

May 15 2014, 5:24am CDT | by

Western capital has shunned Russia – officially to the tune of at least $50 billion, according to Russia’s own ministries, but anecdotally perhaps four times that much. And while Russia likes to think of itself as largely self-sufficient, it’s not entirely true, not when there’s infrastructure to be built, and a World Cup to host, and commodities to sell. It needs investment. So who can it go to when it’s annoyed everyone else in the world through its behaviour in Ukraine? It can go to China.

Yesterday I interviewed Sean Glodek, Director of the Russian Direct Investment Fund; as revealed in my exclusive story for Emerging Markets this morning, he disclosed that Russia and China will announce four joint investments next week at the St Petersburg International Economic Forum. These four deals will be in Russia infrastructure, real estate and minerals, and will be made through a vehicle called the Russia-China Investment Fund.

This fund, seeded with $1 billion apiece from the RDIF and China’s sovereign wealth fund, the China Investment Corporation and with the hope of further expansion to $4 billion of assets, actually dates back to 2012, and these deals have clearly been a long time coming together (only one previous deal has been done from this venture, a $200 million investment in Russia Forest Products, a forestry company in Siberia). But the timing, from Russia’s point of view, could not be better:  an illustration that capital will still come to Russia no matter how much it has riled the west.

Glodek said that so far 10% of the fund’s capital had been deployed, and that “including the deals that we will be announcing, we would get to another 15% to 20%” of total assets being invested. This suggests up to $400 million of new investments will be announced next week. They are likely to focus on the Russian Far East, since that’s the area with the closest geographical and infrastructure links to China, although CIC has also previously invested in Moscow Exchange, outside the joint venture structure.

China-Russia investment has actually been surprisingly modest to date. “It’s actually more words than actions so far,” says Vladimir Kolychev, chief economist for Russia at VTB Capital. “If you look at FDI it’s been pretty small both ways: from China into Russia accounts for only $2 billion over the last five years, and Russia doesn’t have any meaningful FDI into Russia.”

But that’s not the full picture, as cooperation between the two doesn’t necessarily take the form of FDI. A huge deal was struck between Rosneft and China, for example, that involves a reported $70 billion upfront payment from China to Rosneft. RDIF told me, in written communication after my interview with Glodek, that trade volumes between China and Russia are expected to hit $100 billion in 2014, a year ahead of a target set by leaders from the two countries; and that China has promised to pump $20 billion of investment into domestic projects in Russia, focusing on transport infrastructure, highways, ports and airports. RDIF also said that China was aiming to increase investment in Russia four-fold by 2020.

Glodek said that co-operation between China and Russia through the venture and other co-investments dated back several years now, and that the timing of the deals, just as Russia is being starved of western capital, is a coincidence. “But I would agree there is more focus in Russia to explore opportunities with China, and with Asia in general,” he says. In truth, Chinese investment is going to take a different form to the western investment that has left; the capital that has gone is in portfolio flows, which China, with a limited institutional investor base, won’t replace; China instead will provide direct investment into projects.

Nevertheless, it’s a useful reminder that the west does not hold a monopoly over investment, and that sanctions, though they will clearly hurt Russia, will not cripple it. RDIF is made up of over $10 billion in investment capital through various joint ventures and funds, the vast majority of it from the Middle East and Asia, not the west. “It’s not all bad,” Glodek says. “Russia is not as reliant on western Europe as some investing in public markets would expect.”

Be that as it may, expect Russia to court China more than ever. “Given the strained Russia-west relations,” says Kolychev, “this will be given even more priority by the government now.”

 
 

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