The conflict in Ukraine and the effects of sanctions on Russia have dealt a major blow to Russia’s National Wealth Fund (NWF), which saw its total assets under management plunge 11.5% to US$154.8 billion, and is likely to freeze the ability of the Russian Direct Investment Fund (RDIF) to secure inward investment.
NWF: Facing a War of Attrition
The depreciation of the rouble was the main reason for the US$20 billion drop in NWF’s value over just four weeks. The rouble lost nearly a quarter of its value against the US dollar over the month of February. The impact on NWF’s AUM was cushioned by its hard currency holdings, including EUR38.6 billion (US$43.6 billion), GBP4.2 billion (US$5.6 billion), JPY600.3 billion (US$5.2 billion), CNY226.8 billion (US$35.9 billion) and 405.7 tonnes of gold (US$25.5 billion). Roubles represented just a quarter of NWF’s holdings, largely tied up in domestic companies.
Last June, the NWF decided to ditch its US dollar holdings, which totalled US$41 billion and represented 35% of its foreign currency and gold holdings, and increase investments in euro to 40%, Chinese yuan to 30% and gold to 20% with the remainder comprised equally of yen and pound sterling. By March, the fund had approximately 37% allocated in euro, 31% in renminbi, 22% in gold, 5% in sterling and 5% in yen, indicating it was close to its targets, albeit tilted more towards the Chinese currency and gold.
As well as depreciation, the fund’s value has been hit by the impact of sanctions on its public equity stakes in Russian firms. Its stake in Sberbank lost half its value in rouble terms, ending February at RUB1.5 trillion, and the value of shares in flag carrier Aeroflot fell 35% to RUB30.7 billion; in US dollar terms, the stakes were down 61% and 50%, respectively.
There are further pressures on the fund with plans to invest RUB1 trillion in Russian stocks to prop up the Moscow stock exchange, which has seen limited trade this week after a period of suspension; foreign entities are barred from selling their shares to prevent capital flight caused by sanctions. The federal government is also looking to utilize funds to address the fiscal issues caused by difficulties in accessing global financial markets and the junk status of Russia’s sovereign debt. As such, NWF’s asset base will continue to suffer rapid attrition caused by global isolation and likely economic recession.
RDIF: Strategic Investment and Sputnik Vaccine in Jeopardy
Russia’s strategic investment fund is also feeling the heat, finding itself under sanctions and engaged in a war of words with the US government. In a statement, The US Department of the Treasury said the RDIF is “a slush fund for President Vladimir Putin and is emblematic of Russia’s broader kleptocracy.” It also targeted RDIF CEO Kirill Dmitriev, who it claims “is a close ally of Putin”. Similarly, the EU followed up with its own set of sanctions in mid-March prohibiting European involvement in projects financed by RDIF.
In late February, days after Russia’s intervention in Ukraine, the RDIF issued a strong retort to those claiming it was implicated in the conflict and condemned sanctions levelled at it by the US and its NATO allies. In its statement, RDIF said the sanctions “demonstrated that the US has picked the course to destroy constructive dialogue between countries.” It pointed to its support for the Sputnik V and Sputnik Light vaccines that have saved “millions of lives by supplying vaccines and facilitating their production in Russia and other countries.” It added that “RDIF will use all available means to protect its rights, reputation and lawful interests, including seeking judicial recourse in relevant jurisdictions,” although it appears the fund’s powers to challenge the sanctions regime are highly limited.
With RDIF reliant on inward investment partners, its ability to draw in strategic capital is severely crimped, and many foreign businesses are reassessing or freezing their relationships with the fund. At the same time, approval and manufacture of its prized vaccines are disrupted, posing problems for developing countries that had contracted to use it as part of their inoculation programs.
RDIF itself is not a legal entity and its legal nature is comparable to mutual funds in common law jurisdictions with RDIF acting as a general partner. It was established in 2011 to make equity co-investments in Russian companies with reputable international financial and strategic investors and act as a catalyst for direct investment in Russia. Under these deals, RDIF's equity in any given project may not exceed 50% of the equity investment funded by one or more foreign investors in the same project.
The Fund plays an important role in Russia’s industrial policies and it has attracted over US$40 billion into joint funds from 16 different countries. It has created joint investment plants with: Saudi Arabia's Public Investment Fund (PIF), the Kuwait Investment Authority (KIA), the Korean Investment Corporation (KIC), Abu Dhabi’s Mubadala, the Qatar Investment Authority (QIA), the China Investment Corporation (CIC), Bpifrance, and Bahrain’s Mumtalakat. The most recent joint venture secured by RDIF was in January when Russian data center firm IXcellerate completed a new round of US$190 million of financing to fund its expansion plans with backing from Mubadala, RDIF and SberInvest. While memoranda have pledged billions of investments in joint platforms, they have often fallen short of capital targets and in some cases have failed to progress.
