Russia is hungry for investment but, because of its ugly stand-off with the West, few investors have much appetite for Russian stocks – even if they are unusually cheap and dynamic at the moment.

But not so the Chinese, who are taking a longer view. China’s sovereign wealth fund has partnered with Russia’s, and since the start of this year they have been actively investing into the shares of some of Russia’s most interesting companies.

The Russian Direct Investment Fund (RDIF) was originally conceived as a way to coax Western investors into the country. The RDIF provided expertise, contacts and a measure of protection against political risk and aggressive oligarchs.

“The idea is eventually we will invest $1 out of every $10,” RDIF CEO Kirill Dmitriev explained to bne IntelliNews in 2011 when the fund was established.

But the fund has now dropped its Wall Street investment bank partners and has turned instead to Arab and Chinese sovereign wealth funds, which are slower to move, but invest big bucks once they do.

The RDIF and the China Investment Corporation (CIC), the Chinese sovereign wealth fund, created the Russia China Investment Fund (RCIF) in June 2012 with $2bn of capital as a general investment vehicle to support their cooperation and make some money in the process. It aims to make 70% of its investments in the CIS countries and 30% in China.

Today the RDIF still has its initial $10bn of Russian capital, but has commitments for another $30bn from its partners – mostly sovereign wealth funds, including China, Qatar and France – and has achieved its target of contributing $1 out of every $10 in their co-investment deals.

More to come

Early projects included a bridge over the Amur river in Russia’s far east to physically link Russia and China, the purchase of a 42% stake in RFP Group (Russian forest products group), also in the far east, and an investment into the White City exclusive office complex at the top of Tverskaya, Moscow’s main thoroughfare.

RCIF’s activity than petered out in 2014 and 2015 as trade between the two countries plummeted during Russia’s economic downturn. There was some talk about investing into high-tech industrial parks and setting up a $2bn agricultural fund but the real action only restarted this year, after Russia emerged from its recession.

In February the RDIF formed a consortium of investors to participate in the SPO of equity market darling, the fertilizer producer PhosAgro. Together with the RCIF and leading funds from the Middle East, the consortium bought 3% from the 4.5% on offer, worth $200mn.

In the same month the RDIF cashed out some of its profits from an investment into Russia’s premier children’s store Detsky Mir during its IPO. RCIF held a 23.1% stake in Detsky Mir but sold up to 10% during the IPO for an estimated $35mn in cash – equivalent to an internal rate of return of more than 90% in dollar terms, a source close to the placement told Reuters.

It also participated in the partial privatisation for the Alrosa diamond monopoly, which has been a rare example of an extremely successful privatisation. RCIF also partnered with Abu Dhabi's state fund Mubadala in March to buy a stake in Russia's largest drilling company, Eurasia Drilling Company.

In May RCIF was mooting an investment into Yandex.Taxi, which has taken the market by storm. Yandex, the largest internet company in Europe and one of Russia’s best performing stocks so far this year, is looking to raise $150mn-$200mn from selling a stake of 12.5%-16.7%, according to bankers.

And there is more to come. The Russian government intends to transfer at least another $1bn to the RDIF this year from the National Welfare fund for infrastructure investments.

And at the same time international portfolio investors are getting interested in Russian stocks again; the market returned 50% in 2016, but has been one of the worst emerging markets (EM) performers in the first quarter. Now stock prices have fallen to the point where they are cheap again. With economic growth back these could turn out to be the vintage years for a private equity investor with a bit of patience to spare.

This is part of a series looking at the implications of China's growing interest in Central and Eastern Europe and Eurasia.