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Russia to provide financial guarantees for foreign companies

June 2011

The President ordered that special officials at a level of at least vice prime ministers be put in charge of welcoming the guests. In bureaucratese this means that they must ‘monitor the quality of state services provided at points of entry to Russia, during the issuance of visas and work permits and during the registration of foreign nationals at the place of their stay or residence in Russia’. Every region will get a special investment representative, most likely a vice governor, whose job will be to facilitate the implementation of private investment projects. Once the guests have been given a warm welcome and put up, some of them will be granted access to strategic industries. For the time being this will only apply to international financial companies as well as Russian companies or foreign business structures controlled by Russian citizens. These types of organisations will no longer have to get approval of the special governmental commission to conclude their deals. However, the president noted that this is only the first step in the narrowing down of the jurisdiction of the commission for control over foreign investments in the strategic sectors of the Russian economy.

But the main incentive for the most careful investors who risked coming to Russia and invest their hard-earned cash in production here will be a sort of insurance somewhat reminiscent of state guarantees. As soon as this summer a Russian fund of direct investments (RFDI) should be established as a classic private equity fund. There has already been quite a bit of progress in the construction of this gargantuan financial institution which is supposed to amass at least USD 50 billion within one month after President Medvedev’s speech in Magnitogorsk. The idea for this fund was first made public at the World Economic Forum in Davos in January 2011 but it began taking shape quite soon.

The State will not be directly involved in the operation of RFDI. Even though it will be established by the largest government-owned financial institution, Vneshekonombank, which now has the status of a state development corporation rather than just merely a bank. The new equity fund will be managed by a team of top investment professionals operating independently from the state. Furthermore, a large portion of the management team of the new fund’s managing company will be foreigners. But according to Arkady Dvorkovich, an assistant to the President of the Russian Federation, the government will monitor how well the fund adheres to the standards. And it is no wonder that the government will want to keep tabs on the new structure; Vneshekonobank will be funnelling the budget funds into RFDI and by the end of this year the state plans to have invested at least USD 2 billion and over the next five years the government guarantees to increase its investment to USD 10 billion. According to Prime Minister Vladimir Putin, very soon the USD 360 million of extra revenue added to the budget from the unexpectedly high oil and natural gas prices is going to be directed to the new fund as well.

It is presumed that RFDI will become partners with the world’ largest investment structures and the President expects that their total investment must exceed at least five times the amount of money put in by the Russian state. Interest in the new fund has already been expressed by such companies as Apollo Management, Blackstone, Carlyle, pension funds, Middle Eastern National Welfare funds. President Medvedev even discussed the possibility of partnership in RFDI with the head of Goldman Sachs Lloyd Blankfein during the personal meeting on March 15, 2011.

The new fund will act as a co-investor in any industrial projects that large foreign companies may want to implement in Russia provided the projects in question are deemed beneficial for the Russian economy. Vladimir Dmitriev, the head of Vneshekonombank, cited the power industry, including the nuclear power industry, aerospace industry, agriculture and deep processing as priority sectors. The fund will not participate in projects aimed at the extraction of mineral resources. Investments in a single project will vary between USD 50 and USD 500 million. Thus, over the next decade, the fund will provide support to between 30 and 50 projects. RFDI’s interest in each project will be limited to 10-25%. The State also guarantees that in seven to eight years, ‘or perhaps a bit longer,’ as President Medvedev put it, RFDI will sell its interest in the new company to its strategic partner.

The fund is also expected to be a good profitable investment itself. Mr Dmitriev estimates that it should be generating an annual return of at least 15% and on average about 20%. It has to be said, however, that this level of profitability is only expected to be achieved in about five to seven years. According to the Vice Prime Minister and the Minister of Finances of Russia, Alexei Kudrin, in order to prevent the state funds from losing value as well as from putting an inflationary pressure on the market, until investments in specific projects begin to be made, Vneshekonombank will invest the fund in various foreign assets such as bonds of international companies and blue chip shares.

In his address to the lower chamber of the Russian parliament, Prime Minister Vladimir Putin stated that the Russian government aims to reach a level of USD 60-70 billion in direct foreign investments per year. According to Dmitriev, the Fund is expected to make between USD 4 and USD 9 billion worth of investments in various projects, of which about USD 1 billion will be the money provided by the State.

On April 22, the Supervisory Board of Vneshekonombank, headed by Vladimir Putin, approved the organisational structure and the Articles of Association of RFDI. This started the registration of the fund as a private equity fund and a 100% subsidiary of Vneshekonombank. The registration should complete by June 1, 2011. It is expected that by that time a candidate for the position of the chief executive officer of the new fund will have been selected. President Medvedev intends to personally present the fund at the Economic Forum in Saint Petersburg.

Andrei Susarov,
Tax columnist for the Moscow news
Exclusively for Russian Survey