March 7th, 2011

Russia announces $10 billion fund to attract overseas private equity firms to the country

The Russian government is setting up a $10 billion fund aimed at boosting foreign investment by overseas private equity firms in the country.  According to Bloomberg data, so far this year Russian companies received $1.5 billion in investment from foreign private equity firms, about half the amount that China received in the same period. Despite the new Kremlin initiative, PE firms are wary. Co-Founder of Carlyle Group David Rubenstein was quoted last week saying,

Russia has not proven to be a place where Western private equity investors can have the returns and realize the profits commensurate with the risks they’ve had to take.

One reason the Russian government is trying to perk up foreign investment of all kinds is that capital outflows continue in 2011. The central bank’s first deputy chairman Alexei Ulyukayev explained that the outflow by Russian corporates investing abroad, as well as by some investor caution towards global emerging market risk.

Finance Minister Alexei Kudrin chalked it up to political risk:

Whenever there are elections in a country such as ours, in which a lot depends on the leader, there are higher risks, so investors are hedging their risks.

Russian businessmen are familiar with these political risks and have chosen to invest outside of Russia. That leaves the leadership tandem to think of new ways to get foreign investors back in the Russian investment groove. President Medvedev announced the creation of “special sovereign funds” at Davos in January a month ago. It is unclear if the private equity firms would be investing in these funds or something different all together.

With oil approaching two year highs, the Russian government is still facing budget shortfalls and looks to foreign investors to shore up the budget. One drain on the economy is Russia’s pension system. With parliamentary elections coming up in 2011 and presidential elections in 2012, Putin needs to increase pension payments to maintain his hold on power much like the authoritarian Middle East regimes looking to prevent political change.

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