Russian sovereign fund sets up investment bank venture with CITIC

Emerging Markets, May 2015

 Russia’s sovereign wealth fund is to establish a joint investment bank with the Chinese bank CITIC Merchant, an institution that will be mandated to help ease further investment between the two nations.

The Russian Direct Investment Fund (RDIF)’s director, Sean Glodek, told Emerging Markets: “The rationale is very simple. The potential we see for investment and joint cooperation between Russia and China is huge, but relative to the flows of trade, investment is still minuscule.” The new bank, he said, would be “a third party that is a combination of two large, recognized houses in both countries, enabling transactions to take off.”

The institution promises M&A advisory focusing on Chinese investor equity into Russian companies; debt finance, including fundraising for Chinese banks and the placement of Russian corporate bonds on Asian capital markets; and capital market services. Asked if it should be seen as a western-style investment bank or a development bank, Glodek said: “a merchant bank. It is an investment bank, but with a co-investment principle mandate, and fundamentally it is a bank that enables transactions to help companies get together.” He said the bank would seek to be a profit-making entity, “with a market-based profit target,” but declined to announce the management and control structure of the bank.

Chinese capital has becoming increasingly important to Russia following the flight of foreign cash from the country under western sanctions, and the consequent closing of western capital markets to Russian entities. A joint private equity fund, the Russia-China Investment Fund, was established between RDIF and the China Investment Corporation in June 2012 to invest in opportunities arising from cooperation between the two countries; on May 8 it announced its participation in a $2 billion agricultural investment fund alongside the government of China’s Heilongiang Province, China’s largest commodity grain production base.

“The importance of the relationship is strategic and major,” Glodek said. “It should be looked at in the context of BRICS, a platform that has been building out for some time, representing a significant part of the overall global economy and population.” Asked specifically about the impact of sanctions on the fund’s policy, he said: “We on the ground have not experienced a tremendous impact of sanctions on our ability to invest in the flow of capital at profitable rates. For long-term investors, the timing is actually good. Where there might be some worries is the capital markets. We expect them to reopen, but when that happens, it’s hard to say.” He noted that exits from investments need not necessarily be through western strategic investors or exchanges, but increasingly to Chinese strategics or through the Hong Kong or Shanghai markets.

It has been suggested that China, recognizing Russian desperation for capital, has got the better of some joint deals involving Russian resources, notably in Siberia, but Glodek said “We have found our Chinese partners to be quite reasonable. As long as there is a clear understanding that our interests are aligned – the same approach to risk analysis and risk mitigation – they have been very receptive.”

Glodek said RDIF’s role was different to the Asian Infrastructure Investment Bank, the Chinese-led institution. “We are building institutional investor markets, that’s our core business. That’s different from AIIB, which is more about infrastructure development, taking risks where others might not necessarily. We might participate, but the situations are different.”

He said further announcements of Russia-China investment should be expected. “We expect the second half of the year to be busy and the pipeline is as full as it has ever been.”