Ben Aris in Moscow -

Russia's regions will be the country's engines of growth in the years to come, and hoping to tap into the shifting centre of economic gravity, veteran Russian fund Wermuth Asset Management launched the first ever environmentally focused fund in February, targeting Russia's most investor-friendly region Tatarstan.

One of Russia's autonomous regions, Tatarstan is virtually a country within the country, complete with its own president, parliament and sovereign wealth fund (that is fed by the local government's ownership of oil company Tatneft).

The local government has seeded the Tatarstan Cleantech Fund with €100m, to which Wermuth contributed another €10m and committed to raise an additional €90m by next summer. The mandate is to invest into anything that will improve Tatarstan's environment - and make a profit of course. "Tatarstan has a very progressive government and is actively working to improve its investment climate through the use of special economic zones and other incentives," says Dieter Wermuth, formerly chief European economist at Mitsubishi UFG in London, who now works with his son Jochen, who founded the eponymous investment firm in 2000. "We have a very broad brief and can invest in companies anywhere doing anything - provided they contribute in some way to Tatarstan's local economy, either by providing products or setting up production in the region.

Cleaning up

The Tatarstan Cleantech Fund is the first international clean-technology fund with a specific mandate to focus on Russia's needs, and the Republic of Tatarstan in particular. The fund will mature after 10 years, but start to wind down after six, and has a target return on investment of 30% per annum. And it is offering to double the returns for investors that set up production in the region.

And there is a lot of do. Russian industry is 11-times more energy intensive than somewhere like Germany, and is one of the biggest producers of greenhouse gases in the world.

The new fund also represents a new lease of life for Wermuth, which was badly wounded in the 2008 crisis. At its peak before the crash, Wermuth had some $1bn of assets under management, but a mixture of redemptions and value destruction reduced that to $300m. With 5% leverage from international hedge funds, the fund nearly went bust in the depths of the meltdown when it suddenly needed to find $15m at the start of 2009. "We only survived as our investors recapitalised the fund. If we hadn't received that money, there would have been a fire sale. We were lucky," says Wermuth.

Tatarstan Cleantech Fund could be a harbinger for things to come for Russia. Following Vladimir Putin's return to the presidency on March 4, the talk is already turning back to talk of the need to modernise Russia, but it is still not clear what Putin is planning.

Wermuth is pragmatic about Russia's prospects over the next six years. "Russia has been talking about modernisation since the time of Peter the Great, but no one is saying just what they mean by this," says Wermuth. "Russia remains a pothole economy - you dig a hole, the oil comes out and you have money. But that is good enough to keep things moving. Russia will grow by 4% against the 2% in Europe, which means the opportunity is good - the risks maybe high, but the assets are cheap."