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18 February, 2013Financial Times Beyondbrics, February 15 2012
The investment by China Investment Corporation in Friday’s flotation of the Moscow Exchange carries several messages for observers seeking to understand the investment approach of China’s sovereign wealth fund.
Friday’s IPO raised $499m. The Kremlin-backed Russian Direct Investment Fund RDIF put in $80m and attracted a further $200m from other direct investors, according to comments by RDIF’s chief executive officer Kirill Dmitriev broadcast by Russian state media. It is understood that CIC, through its Chengdong Investment Corp unit, at least matched the RDIF investment.
In some respects, the stake seems out of character. CIC’s major landmark investments in recent years have been in commodities and infrastructure. In its earliest days, CIC invested in western financials like Morgan Stanley and Blackstone but, after suffering considerable paper losses on those investments in the global financial crisis (though they eventually turned positive), its focus shifted.
Since 2009, its landmark investments have been in JSC KazMunaiGas Exploration Production, an oil and gas corporation in Kazakhstan; SouthGobi Energy Resources, a Mongolian coal miner; PT Bumi Resources, an Indonesian commodity group; Noble Group, an agricultural and energy supply chain enterprise; energy businesses AES, GCL-Poly Energy and Penn West Energy; GDF Suez; and, more recently, developed world infrastructure plays Thames Water and Heathrow Airport Holdings.
In that context, the Moscow Exchange deal looks like a return to earlier financial services priorities. But in fact, data from December 31, 2011 – the most recent to be disclosed by the CIC – show that, at that stage, financial services represented the largest chunk of the fund’s diversified equities portfolio (19 per cent). Commodities exposure tends to be held through the CIC’s long-term investments arm, which accounts for 31 per cent of the group portfolio, while financial exposure comes through the diversified equities team, representing 25 per cent of the fund. CIC’s total assets at that date stood at $482bn, although this figure includes the assets of its Central Huijin subsidiary, which principally holds domestic bank stakes.
Moscow Exchange also makes sense in the context of an agreement struck between CIC, RDIF and Vnesheconombank, Russia’s state development bank, in October 2011 to launch a Russia-China Investment Fund. The memorandum of understanding signed then committed CIC to $1bn of contributions to a $3bn fund, with RDIF and related parties putting in the same amount. A further MOU on June 5 last year signified the full launch of the fund, by then described as aiming to raise $2bn to $4bn. This is not the first investment in Russia by CIC – it put $424.5m into Polyus Gold in May 2012 – but is the most visible, with a sense of clear partnership with its Russian sovereign fund counterpart. It is not clear whether the Moscow Exchange investment comes out of the pooled fund, but it would make sense that it does.
Sino-Russian cooperation through the sovereign funds suggests an intriguing political friendliness. But it will be interesting to see if this bonhomie is matched by Russia being permitted to buy into Chinese assets at a state level. The RDIF is a far smaller sovereign fund than CIC, and has built its investment approach on a co-investment model rather than the big direct investment or capital market holdings of CIC. As it evolves, will it get the same access that China is now receiving in Russian energy and finance?
