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Qatar and VTB: Kindred spirits in Russia and the Gulf

Qatar’s investment in VTB helps future deals between Russia and the Gulf, but relations will remain difficult.

Qatar’s backing for the $3 billion capital-raising and part-privatization of Russian bank VTB is a special but important case in global investment flows. Russia’s second-biggest bank will now have a core shareholder from the Gulf.

That is a big step for investment ties, particularly given Qatar’s hyperactivity as an investor. VTB Capital is also one of Russia’s biggest investment banks, particularly for business outside the home region.

Because of geographic proximity, Dubai is a popular destination for Russian holidaymakers and is becoming more relevant for Russian business following the demise of Cyprus as an offshore hub.

Up to now, the Russia-Gulf relationship has been perhaps the least active corridor in the burgeoning trend of inter-emerging market deals that bypass the west and Japan.

Since 2011, the Russian state has been trying to get sovereign funds from Abu Dhabi and Kuwait, as well as global private equity funds, to put money into Russian projects alongside the Russian Direct Investment Fund.

AGC Equity Partners, a fund based in London and Dubai, and backed by Gulf sovereign wealth, committed $175 million to Russian power projects last year, alongside contributions from RDIF and others.

VTB itself has launched a Gulf investment-banking presence, hiring an equity markets banker from Credit Suisse, and this year issuing participatory notes giving foreigners exposure to Saudi stocks, for example.

Qatar’s investment in VTB might be a one-off. VTB was particularly in need of new capital following various acquisitions. Portfolio investors are more wary of VTB than rival Sberbank (which raised $5 billion in a share offering last year).

The deal helps cement investment relationships between Qatar and VTB and, by extension, Russia. New VTB-Qatari co-investments are now more likely in areas such as mining, energy, power or real estate in Russia and potentially elsewhere.

If the relationship works, other Gulf state investors, for example from Abu Dhabi, might give it a try. Abu Dhabi state vehicle Mubadala had already invested $100 million into Moscow-based and Russia-focused portfolio investor Verno in 2010.

Government-to-government deals might eventually give way to deals in the private sector too. Nevertheless, it is likely this particular emerging market investment corridor will still be relatively subdued.

In economic terms, there are obvious synergies between Chinese corporations and counterparts in the Middle East, Africa and Latin America – that is, between China and the states that export the commodities that China imports.

That cannot be said for the Russia-Gulf channel. True, Brazil is also a commodity exporter and has established strong investment relationships with fellow commodity-exporting markets in the Middle East, Africa and indeed Russia.

But the cultural gaps between Russia and the Gulf are large. There are few common historical reference points. Their opposing strategies towards Syria are perhaps telling and certainly do not help.

Perhaps even more important, Russian wealth, like that of the Gulf, is largely derived from oil exports – more than Brazil’s. As a result, Russian and Gulf investors, particularly state ones, tend to be very laborious as business partners.

Deals can happen despite such arrogance (as evidenced by Qatar’s widening corporate influence around the world). But one side has to be needy enough to put up with the other.