Direct Investment Fund to Be Set Up in June

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Apr. 18 – Russia will set up a US$10 billion Direct Investment Fund in early summer to aid foreign investors, President Dmitry Medvedev said in Hong Kong on Sunday, RIA Novosti reports. The fund will co-finance foreign investment in Russian companies, he said.

“Already in summer, the direct investment fund will be created. It will co-finance capital investment by foreign funds and companies in Russian projects,” Medvedev said at a launch with business circles in Hong Kong.

Russia’s Direct Investment Fund is expected to be established as a closed-end unit investment fund to be managed by state-run Bank of Development and Foreign Economic Activity (Vnesheconombank, VEB).

Russia’s Direct Investment Fund, which is sometimes wrongly called a sovereign fund, will have a capital of about US$10 billion contributed by the federal budget, is expected to attract from US$60 billion to US$90 billion in foreign investment within five years.

“Modern Russia is pursuing a policy aimed at its modernization and innovative development. Foreign investment plays a special role in this process. Recently I outlined a whole number of measures intended to improve the business and investment climate in the country,” Medvedev said.

“We’ll continue measures to de-bureaucratize our economy and we’ll continue resolutely fighting corruption. In this sense, the experience of Hong Kong looks very useful,” he said.

According to the Minister of Economic Development Elvira Nabiullina, the fund management company will be a 100 percent subsidiary of the VEB. The Minister also announced that co-financing from the state will occur at a rate of 10 percent to 15 percent.

On March 21, Dmitry Medvedev at a special meeting on this topic complained that “today the volume of attracted FDI remains at an unacceptably low level.”

Russia has a relatively poor track record in attracting FDI, weighed down by a reputation for bureaucracy, sleaze and poor corporate governance.

While the levels of FDI started to recover to US$40 billion in 2010, the second highest among all emerging markets, it is still half that of 2008. However, the pace picked up fast at the close of last year.

A third of global M&A deals were struck in emerging markets last year, but Russia closed US$34 billion of transactions in the last quarter of 2010 alone, on a par with China’s US$38 billion and well ahead of Brazil and India.

In terms of foreign investments, Brazil is valued at US$30.2 billion in 2010, US$23.7 billion for India and around US$100 billion for China.

According to the VEB chairman Vladimir Dmitriev, Abu Dhabi Fund, China Investment Corporation and a number of private funds have welcomed the intention to create the Direct Investment Fund in Russia and expressed their interest in close cooperation on designing and creating this fund.

“Foreign investors understand that co-investment is one of the main principles behind the creation and operation of such a fund and they are ready to take part in it,” he said during the meeting chaired by President Dmitry Medvedev at the end of March.

“Co-investment can be made both foreign and Russian investors, but foreign investors’ participation in the projects is needed,” Elvira Nabiullina said.

“We believe that the plan is aggressive but it is absolutely realistic,” Vladimir Dmitriev said about the project timeframe. Investment fund announced to be submitted in June this year.

“Russia must stop waiting for Godot,” Professor Bruno Sergi from London Metropolitan Business School.

“Everyone agrees that Russia’s recent decade-long oil bonanza will end sometime in the future and that the country must look for a long-term, firmly-rooted economic and social improvement. And should Russia make headway with this ambitious development program, FDI would once again start flowing into the country, greatly adding to domestically sparked growth.”

Other experts agree that FDI inflow in country economy is not just a capital. Foreign investors can also bring in more efficient management, expertise and technology. At the same time, they bring competition to spur growth.

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