Russia Recalling $245 Million From IFC Fund After Sanctions

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Russia is pulling $245 million from a fund run by the International Finance Corp. as sanctions imposed over Ukraine halt investment by the member of the World Bank Group.

Vnesheconombank anticipates the return of $203 million by the end of June after requesting its money back from the IFC Russian Bank Capitalization Fund last October, the state development lender known as VEB said April 10 in an e-mailed reply to questions. The Finance Ministry this year asked the government to allow it to withdraw about $42 million, Sergey Storchak, a deputy finance minister, said in an interview.

With its finances squeezed by sanctions and an almost 50 percent drop in the price of oil in the past year, Russia is extricating itself from the $550 million fund created in partnership with the IFC in 2012 to invest in local banks. The move marks the first time that Russia pulled its money from a “multinational” fund since sanctions were imposed and the crisis began, according to Igor Lojevsky, a former deputy chairman at Deutsche Bank AG for eastern Europe who now works at a New York-based fund.

“If the fund isn’t finding areas for investment -- the money is usually returned to investors,” said Lojevsky, who’s also a supervisory board member at Russia’s diamond monopoly OAO Alrosa. “There’s nothing surprising.”

VEB also expects to get back the remainder of its $200 million contribution to the Macquarie Russia & CIS Infrastructure Fund after its investment period ends in August, according to the Russian lender. The IFC and the European Bank for Reconstruction and Development are among investors in the fund.

On Hold

The spreading fallout from the conflict in Ukraine limited access to global financial markets for Russian banks under sanctions, including VEB. The development lender, which estimates its loss at 140 billion rubles ($2.6 billion) last year, has asked the government for 330 billion rubles of financing in 2015.

The IFC fund has made no investments since funneling $82 million into two banks in 2012. Nezhdana Bukova, a spokeswoman for the IFC in Moscow, declined to comment further.

Without suspending its operations in Russia, the IFC hasn’t approved financing for any projects in the country since last May. The World Bank said in September that there was no agreement to proceed with any plans in Russia.

Bank Investment

“This year isn’t the best time to attempt to earn money investing in medium-sized banks,” Dmitriy Monastyrshin, an analyst at PAO Promsvyazbank in Moscow, said by e-mail. “The increasing borrowing costs are limiting margins, non-performing loans are rising and profits are declining.”

The Group of Seven nations have more than 40 percent of votes on the bank’s board. Russia was suspended from the Group of Eight major industrial powers a year ago for its actions in Ukraine.

“Shareholders have made it clear to them and the World Bank that no work should take place in Russia for now,” probably as a result of the sanctions, Storchak said. The money “isn’t working, so why is it there?”

Russia is at risk of running its biggest budget deficit in five years as the economy slides into its first recession since 2009. The government unsealed one of its two sovereign wealth funds this year to cover a shortfall projected to reach almost 4 percent of gross domestic product. Investment has dropped every month from a year earlier since the start of 2014 and was down 6.5 percent in February.

While VEB is pulling out its money, it’s not planning to withdraw from the fund completely.

VEB is prepared to extend resources in the future “in case a suitable project is identified,” the bank’s press service said in a statement. It’s asked for the IFC fund to expand its mandate to allow investment beyond the banking industry to “keep its strategy effective in crisis conditions.”

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