Russian fund's property deal put on ice after sanctions

By bne IntelliNews September 3, 2015

By Jason Corcoran in Moscow -


A $500mn deal involving Russian and Abu Dhabi sovereign wealth funds to invest in a huge logistics space in the Moscow region has been put on ice after the Russian Direct Investment Fund (RDIF) was sanctioned a little over a month ago, according to a source close to the negotiations.

Details of the project, which was to enable Russian retailers and manufacturers to reduce logistic costs in the Moscow region, were due to be announced this month. Negotiations between the RDIF sovereign wealth fund and its partners will take place in the next week as to how the project can proceed, if at all.

In late July, the US Treasury's Office of Foreign Assistance Control added the RDIF to its sanctions list, along with a number of entities linked to RDIF's state-owned parent Vnesheconombank and energy giant Rosneft. The US along with the EU has restricted Russia’s biggest lenders from international capital markets over the Kremlin’s involvement in the Ukrainian conflict.

Vnesheconombank, or VEB as it’s also known, was first sanctioned last year along with the other key state-owned lenders, but RDIF hadn't been explicitly targeted until the end of July.

The RDIF said at the time of the sanction that it was "essentially a technical repetition of sanctions imposed a year ago" on VEB. However, the direct prohibition against the RDIF may well have spooked some of its US and European co-investors.

RDIF said it remained committed to the project. “We are going ahead with this deal which we continue to progress alongside our partners and co-investors, in line with our plans," said a spokesperson. "We believe the Russian logistics sector presents a number of attractive investment opportunities and there has been no change to our strategy.”

Co-investor DG19, which will run the project, is headed by the American Bruce Gardner and was founded by partners who have more than 12 years of experience together, developing and managing retail and logistics facilities for leading Russian and multinational companies. The company acquires land in various stages of approvals or completion, and manages the development process.

A Moscow real estate insider said the Middle East partner is Mudabala, Abu Dhabi's sovereign fund. Mudabala already invests in Russia via a local partner Verno Capital, which manages its relationship with RDIF.

The development of logistics centres will enable Russian manufacturing and retail companies to reduce logistics costs. Russia is among the countries with one of the highest levels of logistics costs. Expenditure on logistics as a percentage of GDP is 19%, compared with 11.6% globally, according to a statement last year on the RDIF website.

Russia also significantly lags behind the majority of developed and many developing countries in terms of supply of quality logistics space. Because of underfunding in this sector, RDIF and its partners see "significant potential for value creation" in both the mid and long term.

US private equity titans Steve Schwarzman of Blackstone, David Bonderman of TPG, and Leon Black of Apollo Global Management all served as board members for RDIF when it was set up in 2011 to try to diversify the Russian economy. However, those names have since vanished from RDIF’s website.

The fund was established to co-invest in private equity punts in Russia. However, its investment remit has since been altered to invest in companies already listed on the stock market, such as the hypermarket giant Lenta and telecommunications company Rostelecom.

The fund, headed by Ukrainian-born banker Kirill Dmitriev, has also attracted funds from its co-investors to invest in several Russian IPOs. Blackrock, the world’s largest portfolio manager, has taken part alongside the RDIF in two Russian IPOs. Goldman Sachs and Franklin Templeton, two other partners in the RDIF’s "pre-IPO’" programme announced in 2012, have so far shied away from any investments.

However, Chinese, Asian and Middle East funds are more than making up the slack and now represent 90% of external funds committed.

Dmitriev is this week accompanying President Vladimir Putin to China for their Victory Day celebrations. In 2011, the RDIF announced it was setting up a $3bn-4bn fund with the China Investment Corporation (CIC), China’s sovereign wealth fund, to make equity investments primarily in Russia.

The CIC has since been one of the RDIF’s most prominent partners, investing alongside them in the retailer Magnit, the Moscow Exchange, Russian Forest Products and first ever railway bridge over the Amur river on the border between Russia and China, according to the RDIF’s website.

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