The former Soviet nation offers superior returns for Gulf investors.
GCC companies with a firm eye on the Russian energy and mining markets have sent a steady stream of investments into the country in recent years; a move bolstered by the announcement of tax exemptions for UAE investors and government privatization plans. But it’s not just the burgeoning energy market that has caught their eye; Gulf investors are quickly expanding to cover the hotel, automotive and private equity industries.
Last summer saw Russia enter into the World Trade Organization after 18 years of negotiations, which is expected to make the country a more accessible market for investors as the government lowers its import and export duties.
Sharjah-based Gultainer, the Middle East’s largest private ports operator and a subsidiary of Crescent Group, is a heavyweight shareholder in Russia. Together with Russian partners Gultainer set up a $500 million logistics and port fund following a $275 million deal concluded last year to co-develop and operate Russia’s Baltic port of Ust-Luga.
Russia’s commercial potential for port operations is huge, as only five ports currently manage 86 percent of the country’s total container traffic.
Last year UAE investors and sovereign wealth funds became exempt from taxation in Russia, having previously paid 20 percent tax on stock profits, 15 percent on interest profits, and 20 percent on capital gains. But long before this exemption came into effect, Mubadala, Abu Dhabi government’s investment arm, had pumped $100 million into funds managed by Verno, a specialist fund manager in Russia’s capital markets, indicating the long-standing potential of Russia’s economy.
The Russian Direct Investment Fund (RDIF), a $10 billion Russian sovereign fund launched in 2011, managed to secure multiple deals with GCC funds within a short time. “The first benefit (of the RDIF) is obviously risk-sharing, as there are challenges associated with investing in Russia, as in any emerging market,” explained Jafar. The RDIF is being capitalised with $2 billion a year over the next five years, injecting between $50-$500 million in deals as long as outside investors at least match it, dollar-for-dollar.
“The optional co-investment nature has many benefits because it allows the investors to tailor the investments to their specific risk-return objectives,” says Edward Eisler, head of global securities at Goldman Sachs.
Kuwait Investment Authority (KIA) is the latest investor in the RDIF, having signed a $500 million co-investment deal in Russian companies through the fund. Like Crescent Group, KIA is interested in well-structured, long-term business. “This is not a short-term investment in the stock market prone to volatility; it is an excellent and fair partnership with the RDIF and there is Russian government support for this partnership,” notes Bader Al-Saad, KIA CEO.
To stimulate greater foreign investment, the government plans to privatize a dozen state-owned companies by 2016. The government will reduce stakes in lucrative assets, like oil giant Rosnef and Moscow’s Sheremetyevo International Airport, with an aim of raising $33.5 billion.
It’s not just the power and logistics sectors that are drawing investments. General Motors recently said it was spending $1 billion over the next five years to ramp up car and component production in Russia. The country was described as “one of the fastest-growing auto markets in the world” by Tim Lee, head of international operations at GM.
According to HSBC Qatar, the Russian market has proven to deliver returns far superior than other markets because of the extra risks involved with the country.
Russia was called a key hotel market at the 2012 International Hotel Investment Forum, where Michael O’Hare, managing director of Howarth HTL Russia, highlighted the undersupply of hotels in the country, especially in the midmarket and budget sectors.
These conditions have created one of the few hotspots for hotel development outside of the Asia Pacific. “It’s no secret that there is a chronic undersupply of rooms in Russia and that demand will have to be met over the coming years. Add to the mix the 2014 Winter Olympics in Sochi and the World Cup and you have all the conditions for sustained growth,” he explains. Dubai’s Damac Group has already spent $300 million in 2010 on property projects in Sochi.