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Russia sanctions hit wealth fund RDIF

The US has named Russia’s sovereign wealth fund and its chief executive in strikingly harsh language as part of its sanctions package. Is RDIF ‘a slush fund for president Vladimir Putin’ or a legitimate vehicle ‘building international relations and supporting constructive ties’?

St. Petersburg International Economic Forum (SPIEF)
Kirill Dmitriev, head of the Russian Direct Investment Fund, has been individually named in US sanctions.
Photo: Reuters

The fallout from Russia’s invasion of Ukraine has swept up the country’s national sovereign wealth fund in an extraordinary exchange of public statements with the US government. The US Department of the Treasury calls it a slush fund for Putin; the Russian fund considers itself a fully compliant global citizen whose chief preoccupation recently has been Covid vaccine development rather than backing wars.

The party in question, the Russian Direct Investment Fund (RDIF), was founded in 2011. While the bulk of its work has been domestic, seeking to bring international funds into Russian enterprise, it has also had a mandate to build joint ventures and partnerships worldwide. Those exist all over the world, from Japan to Armenia, but have been most common and most active in China and the Gulf.

RDIF has been seen for many years as part of the mainstream of international sovereign wealth and is a member of the International Forum of Sovereign Wealth Funds (IFSWF). But the language used in a US Department of the Treasury statement on Monday left no doubt as to what the US thinks of its governance.

The department’s Office of Foreign Assets Control (OFAC) named RDIF as one of the Russian enterprises it was placing under sanctions, effectively blocking RDIF’s access to the US financial system. It named and sanctioned chief executive Kirill Dmitriev too.

While officially a sovereign wealth fund, RDIF is widely considered a slush fund for president Vladimir Putin and is emblematic of Russia’s broader kleptocracy
US Department of the Treasury statement

“Russian president Vladimir Putin and his inner circle of cronies have long relied on RDIF and Dmitriev to raise funds abroad, including in the United States,” the statement said.

It went on to say: “While officially a sovereign wealth fund, RDIF is widely considered a slush fund for president Vladimir Putin and is emblematic of Russia’s broader kleptocracy.”

In turn, the RDIF has reacted with outrage, putting out a statement of its own the same day. The fund said it “was never involved in any political activities, does not interact in any way with Ukraine and follows the world’s best investment practices, which has been acknowledged by all its international partners as well as by national regulators.”

Its statement continued: “RDIF always fully complies with laws of the countries where it conducts its investments. Imposition of sanctions against RDIF, which from the moment it was established has stood for building international relations and supporting constructive ties, demonstrates that the US has picked the course to destroy constructive dialogue between countries.”

At loggerheads

It is no surprise to find these two institutions at loggerheads, but equally, neither one’s account can go wholly unchallenged.

It is true that the RDIF was set up under Putin’s administration – everything in Russia in the last 22 years has been set up under Putin’s administration – but is it appropriate to call it a slush fund?

RDIF was, for sure, set up in order to bring capital into Russia. But that’s hardly unusual. Roughly half of the world’s sovereign wealth funds exist with this idea: to boost domestic industry by taking a catalytic role in seeking to bring international funds into the country. This is equally true of funds from Turkey to Indonesia to Senegal.

On the other hand, is it appropriate to think of RDIF as being some actor quite divorced from the behaviour of its parent state? That doesn’t really wash either. The whole point of a sovereign wealth fund is that it works for the sovereign, and it is no real surprise when there is a knock-on effect of association when that sovereign does something bad.

As for Dmitriev, he does indeed appear to be “a known Putin ally”, as the US statement said (going into some detail about his US education and closeness to one of Putin’s daughters). This is hardly a surprise. Anyone in a position of seniority in Russian political or commercial life is a Putin ally. But it is relevant; and the US is not the only one to have sanctioned him individually, Canada did so last week.

It is hard to see how a sovereign fund can operate when removed from the international system. RDIF isn’t like Adia or GIC, with a global portfolio of investable assets representing the diversified wealth of the state; most of its assets will be held in Russia, along with quite a bit of other people’s money by now.

But given that much of the mandate is international cooperation, that’s obviously impossible when it is considered illegal to transact with the entire operation and its chief executive.

Assessing relationships

Several nations and institutions now have some decisions to make about their relationship with the fund. The Japan Bank for International Cooperation, for example, launched a Russia-Japan Investment Fund with RDIF in 2017, announcing over R10 billion (now $100 million) of co-investment in its initial transactions.

South Korea’s Korea Investment Corporation launched a Russian-Korean investment platform with RDIF back in 2013.

Mubadala, in the United Arab Emirates, also established a fund with the RDIF in 2013, with each side initially committing $1 billion to the co-investment vehicle. As recently as 2019, the two institutions signed six investment agreements, and in 2021 both tied up with the Kazakhstan Investment Development Fund.

All told, the UAE fund is believed to have at least $3 billion of exposure to Russia. Euromoney understands that Mubadala is evaluating its position.

An increasing closeness between China and Russia is one of the most closely watched geopolitical strands of the conflict

Singapore’s GIC has also had partnerships with RDIF, including investments in real estate, the stock exchange and the Transneft oil pipeline company. GIC did not respond to requests for comment by the time this article went to press.

Also in Singapore, Temasek has largely pulled out of Russia already.

A spokesperson told Euromoney today: “We have a nominal legacy exposure to a couple of third-party funds in Russia, and have no active investment activity in Russia or Ukraine.”

Temasek has never partnered with RDIF.

The IFSWF itself must decide whether or not it is appropriate for RDIF to remain a member.

One fund that is unlikely to be particularly concerned is the China Investment Corporation. After international capital fled Russia in the aftermath of Russia’s annexation of the Crimea in 2014, China stepped up its cooperation with Russia and is thought to have filled much of the gap in capital flows. An increasing closeness between China and Russia is one of the most closely watched geopolitical strands of the conflict.

Covid role

Caught up in the wake of all of this is Covid vaccination. Euromoney has written before about RDIF’s close involvement in vaccine development with Moscow’s Gamaleya Institute, and about how it led Covid-19 testing regimes at Russia’s international airports – which does rather support the view of the fund as an active state actor rather than some passive investment vehicle.

Among other things, it has an alliance with India’s Dr Reddy’s Laboratories to market the Sputnik V vaccine in India.

This all appeared in RDIF’s statement on Monday.

“In the past two years, the fund has been focusing on ensuring global epidemiological safety through its pivotal involvement in the struggle against the new coronavirus infection in over 70 countries,” it said.

“The restrictions imposed by the US authorities complicating RDIF efforts on the international promotion of the Russian vaccine products, have been lobbied by a number of large western pharmaceutical companies. As a result of such unfair competition, billions of people around the world may be deprived of access to effective and safe Russian-made vaccines.”

The statement went on to describe comments by the administration of US president Joe Biden on RDIF as “defamatory and denigrating” and said it would use “all available means to protect its rights, reputation and lawful interests, including seeking judicial recourse in relevant jurisdictions”.

If so, it is unlikely to make much headway in the US. It sees its sanctions as “restricting Russia’s ability to financially sustain its war”. That’s not a small mission, and not one America is taking lightly.