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China’s CIC to Invest $1 Billion in Kremlin-Backed Fund

Russia's President Dmitry Medvedev
Dmitry Medvedev, Russia's president. Photographer: Alexander Zemlianichenko Jr./Bloomberg

China Investment Corp., the nation’s sovereign-wealth fund, agreed to contribute $1 billion to a Russian private-equity vehicle, the first foreign commitment to a project championed by President Dmitry Medvedev.

Beijing-based CIC, which oversaw $409.6 billion by end-2010, plans to invest in a new Russia-China Investment Fund, Kirill Dmitriev, head of the Russian Direct Investment Fund that will co-manage the new vehicle, said by phone from Beijing yesterday, where the agreement was signed during a visit by Prime Minister Vladimir Putin.

CIC has been raising allocations to infrastructure, real-estate and private-equity assets as well as increasing investments in emerging markets since 2010 to help boost returns, according to its annual report. Its international investments returned 11.7 percent last year, compared with the 9.6 percent gain in the MSCI World Index.

“It’s a strategic move and a form of support by China,” said Zhao Qingming, a Beijing-based senior analyst at China Construction Bank Corp., the nation’s second-largest lender, said by telephone. “China has demand for energy resources and technology. Russia is lacking money, especially on the energy side, and $1 billion isn’t a lot for China and CIC.”

The investment in the fund is a “fresh approach” for China compared with its loan-for-oil agreements, according to Zhao. The bulk of the sovereign fund’s investments are in emerging markets, Ken Fan, an executive, said at a conference in Moscow on Oct. 6.

Russia’s Potential

“Only four months after we were set up, we have shown that investors want to put money in Russia, and believe in Russia’s investment potential,” Dmitriev said. “CIC is one of the biggest and most respected investors in the world.”

The sovereign fund may be planning more investments in the country. The 21st Century Business Herald reported today that CIC is preparing to participate in the privatization of Russia companies, including state-owned oil producer OAO Rosneft. CIC and Rosneft are in initial talks on the investment outlook for Russian oil assets, the newspaper said, citing a person familiar with the situation it didn’t identify.

A Beijing-based CIC spokeswoman, who declined to be identified because of company policy, declined to comment on the report. Rustam Kazharov, a spokesman for Moscow-based Rosneft, declined to comment by phone today.

CIC said two years ago it paid $300 million for 45 percent of Russia’s Nobel Oil Group.

Cutting Rosneft Stake

The Russian government may cut its stake in Rosneft, which produces almost a quarter of the nation’s oil, to less than 50 percent, Arkady Dvorkovich, Medvedev’s economic adviser, said in June. The president is urging a bigger state-asset sale program to lure investors and speed up the lowest rate of growth among major emerging economies.

The Kremlin established the Russian fund in June to co-finance international investment amid efforts to deepen capital markets and wean the economy off its dependence on energy exports. Russia relies on energy sales for about 17 percent of its gross domestic product, while commodities make up 8 percent of Brazilian GDP, according to government data.

Russia will contribute $1 billion and will seek $1 billion to $2 billion from other Chinese investors for its new fund, Dmitriev said yesterday.

Reassuring Investors

The private-equity fund set up by Medvedev is trying to reassure those wary of investing in the country by putting government money alongside their capital in pursuit of returns of as much as 30 percent, Dmitriev said in a Sept. 22 interview.

The Russian government will pump about $10 billion into the fund in the next five years, and aims to attract an additional $50 billion of co-investments from foreign buyout firms, sovereign wealth funds and companies seeking to expand in the country, he said at the time.

It’s in talks with a major foreign pharmaceutical company seeking to expand in Russia and expects to complete some of the 20 deals it’s working on, with a combined value of $5 billion, by early next year, according to Dmitriev.

Blackstone, Apollo

The Russian fund appointed Lou Jiwei, chairman of CIC, to its international advisory board in September, alongside Stephen Schwarzman, Blackstone Group LP’s chief executive officer, and Leon Black, CEO of Apollo Global Management LLC.

The fund was in talks with a Chinese group about making joint investments in deals that benefit from the Russia-China relationship and trade, Dmitriev said in the Sept. 22 interview.

The Russia-China fund will invest at least 70 percent of its capital in Russia, Belarus and Kazakhstan, and expects to make its first transaction by the end of the year. As much as 30 percent may be invested in China, according to a statement.

The Russian Direct Investment Fund will own 60 percent of the company managing the joint investment vehicle with China, Quinn Martin, the fund’s spokesman, said today by e-mail.

CIC was set up in 2007 with $200 billion in initial capital. It is the world’s fifth-biggest country fund, according to the Sovereign Wealth Fund Institute.

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