Russian President Vladimir Putin listens to Kirill Dmitriev, CEO of the Russian Fund for Direct Investment, during a meeting with foreign investors at the 2018 Saint Petersburg International Economic Forum.
The Russian Direct Investment Fund was the toast of Wall Street until the 2014 Crimea invasion put an end to the party. Now Russia’s war in Ukraine has sent state-controlled funds from Japan, France and Italy scrambling, leaving investors from China, Saudi Arabia and the United Arab Emirates to keep afloat what the U.S. has called President Vladimir Putin’s “slush fund.”
On February 28, the Biden administration slapped sanctions on the RDIF, a $10 billion sovereign wealth fund, and its CEO, Kirill Dmitriev. The fund was launched in 2011, a time of relative thaw in relations between Russia and the U.S. It was seen, optimistically in hindsight, as a way to promote market capitalism in Russia while Dmitriev, a budding financial star, could work with top fund managers around the world forging mutually beneficial relationships. The sanctions are not only emblematic of the speed with which Western countries moved to punish Putin for his war, but also the dashed hopes for a more friendly economic future that Moscow would share with the democracies of the world.
The RDIF was created to make it easier for foreign firms to co-invest with the Kremlin in Russian companies. However, less than 10% of the money has come from Russia, according to statements on the now-offline RDIF website. In all, the RDIF facilitated over $40 billion in foreign investment across 100 deals, according to the World Economic Forum and data from PitchBook.
“When it was launched, the RDIF had an interesting mission to help modernize the Russian economy with the promise that they would remove politics and government interference from the actual business operations,” said Matthew Murray, a professor at Columbia University’s School of International and Public Affairs who lived in Russia for over two decades and advised the RDIF on business ethics during its early days.
The sanctions don’t appear to directly affect the Japan Bank for International Cooperation, and two sovereign funds, the French Bpifrance and Italy’s Cassa Depositi e Prestiti. All three investment vehicles said, however, they are pausing all investments and partnerships with the RDIF.
JBIC’s investments do include Sovcombank, one of Russia’s largest banks, currently under sanctions from the U.S., E.U. and U.K. The Japanese bank didn’t comment on whether it plans to divest from Sovcombank and other Russian holdings, which include a local subsidiary of Tokyo-based bank SBI Holdings, a methanol project in Volgograd with Russian firm Aeon Corp., telemedicine firm Doctis and pharmaceutical company R-Farm. The website of the Russia-Japan Investment Fund, the umbrella under which the JBIC invests, went dark after Forbes emailed questions about its Russian investments (but can still be viewed here).
In a statement, the JBIC said that even though the bank’s investments in Russia, aside from Sovcombank, aren’t subject to sanctions, “we believe that it is not possible to make new investments through this framework under the current circumstances.”
Bpifrance partnered with the RDIF in 2016 with the goal of $325 million in shared investment between the two countries. Under the framework, Bpifrance signed letters of intent to invest in Russian companies and the Russian fund bought bonds of France-based glassmaker Arc International, which operates in the U.S. and generates an estimated $6 billion in annual sales.
“According with the sanctions regime in force, no more investment projects will be studied,” a spokesperson said in a statement. “Bpifrance will not make an investment in Russia.” Bpifrance never completed intended Russian investments and “complies with sanctions,” the spokesperson added. Arc International told Forbes that RDIF no longer holds any of its debt.
ST PETERSBURG, RUSSIA – MAY 24, 2018: Caisse des Depots Group General Director Laurent Vigier, ORPEA Group CEO Yves Le Masne, Russian Direct Investment Fund CEO Kirill Dmitriev (L-R front), France’s President Emmanuel Macron and his Russian counterpart Vladimir Putin (L-R back) at a ceremony to sign a strategic document on Russian-French partnership in atomic energy. Mikhail Metzel/TASS (Photo by Mikhail MetzelTASS via Getty Images)
Cassa Depositi e Prestiti, the Italian fund, signed separate memorandums of understanding with the RDIF in 2013, and then again in 2019, to promote deals between Russia and Italy. The group has not yet completed any known Russian investments, but a company it controls, Ansaldo Energia, was in talks with Russia’s NordEnergoGroup about a joint venture shortly before Russia invaded Ukraine, Bloomberg reported.
The RDIF is “widely considered a slush fund for President Vladimir Putin and is emblematic of Russia’s broader kleptocracy,” according to the U.S. Department of Treasury.
The RDIF appears to retain the support of its biggest backers–China, Saudi Arabia and the United Arab Emirates–who have supplied the majority of capital under the RDIF’s joint-investment framework. A source familiar with the UAE’s Mubadala fund said no changes to its RDIF partnership have been made. China Investment Corporation, China’s sovereign wealth fund, and Saudi Arabia’s Public Investment Fund did not respond to requests for comment.
“The RDIF still does have a geopolitical value for the Putin government,” said David Szakonyi, a George Washington University professor who has written about the fund. “It’s a strategic tool to develop relationships with a whole host of governments that maybe the West isn’t paying as much attention to.”
When the RDIF was launched in 2011 under then-Russian President Dmitry Medvedev, the fund’s inaugural advisors included three of America’s wealthiest private equity tycoons–Blackstone’s Stephen Schwarzman, TPG’s David Bonderman and Leon Black of Apollo–as well as executives from buyout firms Warburg Pincus, Apax Partners and Permira. Representatives for all three private equity billionaires said they stepped down from their advisory positions after Russia’s 2014 invasion of Crimea; a spokesperson for TPG said the firm no longer holds any Russian assets.
“All those private equity groups were looking for a way to invest in the modernization of the Russian economy and were attracted by this unique formula – that the [Russian] state would match their investment 50-50,” Murray said.
Kirill Dmitriev, the RDIF’s CEO, was a source of reassurance for skittish American and European investors. “He was very well regarded and had strong ties to the U.S.,” Murray said. He’d studied at Stanford and Harvard Business School and worked at Goldman Sachs and McKinsey & Co. Patricia Cloherty, the CEO of a U.S.-Russia fund where Dmitriev also worked, described him in testimony to the U.S. Senate as “a valued partner” who was “poised to be an international leader in private equity.”
In 2011, Russia was looking to join the World Trade Organization. It “was a different time,” Murray said. “Russia was, generally speaking, seeking constructive ways to open its market to foreign investment in a way that would derisk that investment, and in particular reduce the risk of corruption and expropriation.”
MOSCOW, RUSSIA MAY 26, 2018: Japan’s Prime Minister Shinzo Abe and Russia’s President Vladimir Putin (L-R back) look on as Katsuya Kawashima, Co-Chief Operating Officer and Senior Executive Vice President of SBI Holdings, and Russian Direct Investment Fund CEO Kirill Dmitriev (L-R front) sign an agreement following Russian-Japanese talks at the Moscow Kremlin. Mikhail Metzel/TASS (Photo by Mikhail MetzelTASS via Getty Images)
Putin’s return to the presidency in 2012 after a term as prime minister and Russia’s annexation of Crimea two years later were turning points in the RDIF’s trajectory. Sanctions in 2014 against the fund’s parent bank, Vnesheconombank, spooked RDIF’s American private equity advisors, who disappeared from the fund’s website and quietly stepped down. The fund became more focused on “reducing Russia’s dependency on Western finance and technology,” said Szakonyi of George Washington University. Saudi Arabia’s Public Investment Fund committed $10 billion in 2015. China, which had already committed several billion dollars, committed another $10 billion in 2017.
“They started making these alliances with China and other countries that were not going to hold them to basic corporate governance, business ethics and anti-corruption standards,” Murray said.
The RDIF also strayed from its mandate of attracting foreign investment. In late 2015, it funneled $1.75 billion of Russian pension money from the country’s National Welfare Fund to Sibur, a petrochemical giant owned by Russian oligarchs, in the form of a low-interest rate bond. That’s when the fund devolved into a political tool for Putin, according to Murray. “He was looking for a way to use Russian state money to build alliances around the idea of a state-sponsored oligarchy,” Murray said.
According to Murray, the RDIF’s loss of support from democratic countries reflects its evolution – and Russia’s – as Putin has consolidated his power. “Unfortunately, for the Russian Direct Investment Fund, it wasn’t able to escape the fate of President Putin’s failed economic leadership over the past decade,” he said. “It could not escape the fate of Putinism.”
UPDATE: RDIF did not respond to Forbes’ request for comment pre-publication, but shared the following statement with Forbes on March 9:
“The Russian Direct Investment Fund (RDIF, the sovereign wealth fund of the Russian Federation) was never involved in politics and strictly adheres to the world’s best investment practices, the fact acknowledged by all its international partners as well as by national regulators. Over the years, RDIF has received numerous domestic and international professional awards recognizing its role as one of the world’s leading and innovative investment funds. RDIF always fully complies with laws of the countries where it conducts its investments. Defamatory and denigrating statements made by the Biden Administration about RDIF have absolutely no basis and represent blatant violation of the Fund’s rights. RDIF will use all available means to protect its rights, reputation and lawful interests, including seeking judicial recourse in relevant jurisdictions. RDIF supports restoration of peace and hopes negotiations between representatives of Russia and Ukraine are successful. RDIF and its international partners believe that only diplomacy can end this conflict and save human lives.”