Domestic capital may be leaving Russia in staggering amounts but the government launched a $10 billion Russian Direct Investment Fund (RDIF) on Friday hoping to attract long-term foreign investment and help stop capital outflow.
Russia is notoriously reliant on oil and gas, which accounts for about two-thirds of the country's exports and constitutes over half of the budget revenues. However, the energy sector propelled economic growth until the international financial crisis of 2009 demonstrated that companies' overdependence on foreign loans depleted their investment programs, slamming the brakes on economic expansion.
That was the conclusion drawn by the author of the RDIF concept and strategy Viatcheslav Pivovarov, who returned to Russia from stints with U.S. investment funds to advise the government on the creation of RDIF, which is similar to France's strategic investment fund FSI, in the full swing of the global financial crisis.
"The goal was to create a mechanism to help attract smart long-term capital to Russia," Pivovarov told RIA Novosti in an interview.
However, the decision to launch the fund came at a time when the country is bleeding capital, with $50 billion leaving the country in the last 7 months.
U.S. Ambassador to Russia John Beyrle quoted World Bank figures, which showed that capital outflow had exceeded $30 billion in 2011.
"This figure should alarm, should frighten everyone in this room, because this is an indicator that things are not moving in the direction we need them to go," Beyrle said during a Russia-U.S. business roundtable held within the framework of the St. Petersburg International Economic Forum.
But Vladimir Dmitriev, head of state development corporation Vnesheconombank, said capital leaving the country was "hot" money, while Russia needed serious long-term investment.
"You speak about capital outflows. This is speculative capital. We are speaking about an absolutely different subject. We are speaking about strategic long-term investment in the real sector of the economy, not stock market instruments," Dmitriev argued.
Capital outflow spiked in fall, when President Dmitry Medvedev sacked long-serving Moscow Mayor Yury Luzhkov. Analysts say capital will flee Russia ahead of the December parliamentary elections and March presidential polls.
But Sergei Belyakov, investment department head at the Economic Development Ministry, said the RDIF would help stop the outflow.
"Many investors ... do not make decisions in favor of Russia, partly due to the unsatisfactory investment climate and risks ... The RDIF creation will help overcome the capital outflow tendency," he said.
The Kremlin hopes foreigners will invest $50 billion in addition to the government's $10 billion and targets a 20 percent return on investments. The RDIF is conceived as a co-investment fund which will help foreigners invest in Russia with the state sharing risks with them.
Among target investment sectors are five priorities of Medvedev's modernization program, including the efficient use of energy resources, the nuclear industry, telecommunications, space technologies and pharmaceuticals, as well as the other five basic sectors, such as infrastructure, deep mineral extraction, housing construction, agriculture and transportation.
"The fund's declaration sets out 10 sectors for investment, but the fund does not limit itself to these sectors. If the supervisory board decides that investment may be put in other sectors, it may do this," Pivovarov said, adding the fund may invest in energy as well.
There are no concrete co-investors yet, but such sovereign investors as China Investment Corporation, the Kuwait Investment Authority, and France's CDC show interest in it, RDIF manager Kirill Dmitriev, founder of Icon Private Equity Fund, said, adding that the fund hopes to strike the first deal this year.
