A landmark new venture by the state-backed Russia Direct Investment Fund (RDIF) and the Japan Bank of International Cooperation — to be officially unveiled today — is analysing potential projects and hopes to make its first allocations early next year.
The fund will invest mainly in Russia to support Japanese companies in deploying capital and facilitating market access and bilateral trade. It will typically focus on deals of up to $100 million, but potentially also larger projects, said Konstantin Ryzhkov, a deputy CEO at RDIF. Moscow has presented a significant number of potential projects to Japan, of which RDIF is already analysing 15-20, he told FinanceAsia.
The hope is that the venture — the first joint Japan-Russia venture to invest largely in Russia — will further strengthen commercial and political relations between the two countries. It has come on the back of growing rapprochement between Moscow and Tokyo in the past couple of years.
“Political cooperation helps significantly,” noted Ryzhkov (pictured below). “We’ve seen very positive and beneficial signs from the Japanese establishment towards Russia. They obviously want to make Russia a key business partner.”
Aiding market access
Japanese companies have been present in Russia for quite some time, noted Ryzhkov, but they are very careful about putting a lot of money to work in a short period. So it takes quite a while for them to establish a presence and develop and implement ideas.
One reason for this is lack of partner equity capital and expensive debt financing, he said. Companies such as trading firm Mitsui & Co always want a strong local partner to advise and provide capital.
It is along these lines that RDIF, which has $10 billion in proprietary assets under management and has attracted $27 billion from its international partners, has been working with JBIC since 2013.
In the past year the Japanese government has developed an extensive strategic investment programme covering a wide range of different areas where Japanese companies see development potential in Russia, said Ryzhkov. They include energy efficiency, healthcare, agricultural commodities and industrials.
“We are thinking of extending even beyond those areas and looking at development opportunities that can help increase bilateral trade between the two countries,” said Ryzhkov.
The future of the venture will depend on the outcome of the initial projects, he noted. “We will probably see within a year or two years how successful the opportunities being presented are. That may change the whole attitude of Japanese business to Russia and vice versa.”
M&A activity between Japan and Russia has been virtually non-existent since the end of 2013, Dealogic data shows. Indeed, over the past decade Japanese M&A investment into Russia has been dwarfed by that from China and India.
He said he could not provide clarity about timeline of investments, but hoped that some of the opportunities would get to execution stage in the earlier part of 2017.
Initially investments will be made exclusively by RDIF and JBIC – along similar lines as RDIF’s partnership with other major sovereign wealth funds. But once it has demonstrated a successful track record, it will look to add more capital commitments by bringing in other investors.
The new Japan fund and partnership follows the approach that RDIF has taken with other public institutions, such as state funds in the UAE and Saudi Arabia, Korea Investment Corporation, Vietnam’s State Capital Investment Corporation and France’s Caisse des Dépôts.
Japanese interest rising
The RDIF-JBIC venture appears timely. It comes as Japanese investors have shown increasing interest in Russian assets in recent months, bankers told FinanceAsia.
“The biggest new source of liquidity for the Russian market [both for potential privatisations and for the secondary market] in the coming year could be Japan,” said a Russian equity specialist at a foreign investment bank, who asked not to be named. “I see more and more high-profile delegations from Tokyo coming to Moscow and talking to bankers, think tanks and local corporates.”
Mitsui & Co has been among the more active investors recently in Russia’s energy sector. For example, it is reportedly in talks with a state utility, RAO ES Vostoka, to jointly build wind farms in the country’s Far East at an estimated cost of Y20 billion ($194 million).
But Japanese interest also extends beyond energy to sectors from forestry to technology to retail, said bankers. Russian investment bank VTB Capital is in talks to help a Japanese company finance the building of a medical centre in Moscow to the tune of about €100 million ($106.5 million).
