MAURICE TAYLOR JR., chairman and CEO of Illinois-based
industrial wheel and tire manufacturer Titan International, had
been eyeing the Russian market without making a move for about
four years. An entrepreneur so hard-charging that he calls
himself "the Grizz," as in grizzly bear, Taylor has expanded
Titan around the world over the past two decades, opening
subsidiaries everywhere from Brazil to India.
But the Grizz always thought better of attacking Russia,
despite the allure of its vast farmlands and bountiful mines,
full of big machines needing tires. Like other investors,
Taylor feared the country’s reputation for
lawlessness and behind-the-scenes intrigue. "When you put in
money over there, you never know whether you really own
something or some guy in a BMW is going to drive up one day and
announce that he is your new partner," he says.
Taylor’s reluctance began to fade one day in
New York last year when he met Konstantin Ryzhkov, a director
at the Russian Direct Investment Fund (RDIF), a
$10 billion, state-owned vehicle founded in 2011. On
closer acquaintance, Taylor found Ryzhkov and his colleagues to
be "a pretty sharp bunch of boys and ladies."
His admiration culminated in a June announcement that Titan,
RDIF and New York–based One Equity Partners, the
private equity arm of JPMorgan Chase & Co., would team up
to buy a controlling stake in Voltyre-Prom,
Russia’s top agricultural tire maker,
headquartered near Volgograd, in the country’s
Although the purchase price will remain secret until the
deal closes later this year, Taylor is eager to crow about the
structure of the purchase, which allows Titan to run and revamp
Voltyre-Prom while sharing financial risk with partners and
having the strong arm of the Kremlin at the ready to swat aside
any pests in BMWs. "We are the general partners right out of
the box, with the option to buy out the other partners in three
to five years," he explains.
Chalk up another small milestone for Kirill Dmitriev, CEO of
RDIF, which is a sort of sovereign wealth fund in reverse. The
fund’s rules allow it to invest as much as 20
percent of its cash outside Russia, but its raison
d’être is to lure money in as a partner with
other sovereign wealth funds and private direct investors. RDIF
is limited to a 49 percent stake in any single investment. So
its $10 billion war chest should, in theory, leverage to
at least $20 billion that can be poured into
Russia’s dilapidated infrastructure and health
care system or spurring growth sectors like information
technology and entertainment.
Most of RDIF’s powder remains dry. But Dmitriev
and his colleagues have generated an interesting array of
ice-breaking deals with marquee private partners like U.S.
technology giant General Electric Co. and asset management
The challenge ahead is to engage sovereign wealth funds in
China, Abu Dhabi and elsewhere on much bigger transactions.
"These relationships could produce billion-dollar investments
rather than ten $100 million deals," Dmitriev observes.
But he will have to find Russian capital projects that look
safe and solid enough to satisfy the stringent investment
criteria of funds like China Investment Corp. (CIC) and Abu
Dhabi’s Mubadala Development Co. That will not be
Dmitriev says RDIF has so far committed $620 million,
while co-investors have supplied $2 billion. Most of its
projects were announced this year.
In June RDIF unveiled a joint venture with GE to build power
co-generation facilities at industrial plants throughout
Russia; Dmitriev expects his fund’s side of the
deal to reach $100 million. It invested $200 million
in Russia’s premier stock exchange, the Moscow
Interbank Currency Exchange (Micex), joining New
York–based BlackRock and the European Bank for
Reconstruction and Development. Micex went public in late 2012.
The RDIF sank $50 million into the October 2012 London IPO
of Moscow-based MD Medical Group, a budding chain of private
maternity hospitals (again bringing BlackRock along with it),
and $100 million into Moscow IT outsourcing firm
Cooperation with fellow state-owned investors is developing
more cautiously. CIC, Mubadala and State Bank of India have all
signed memoranda of understanding with RDIF establishing
multibillion-dollar joint investment vehicles.
Some cash has already been committed. In May the
Russia-China Investment Fund, the RDIF-CIC collaborative
structure, put nearly $200 million into Russian Forest
Products Group, the country’s largest
wood-processing company, based in the far eastern city of
Khabarovsk. The Kuwait Investment Authority, the sovereign
vehicle for the Arabian Gulf oil producer, has a standing
agreement to take a minority stake in any RDIF investment, up
to a total of $500 million.
It’s not a bad start considering the miserable
national backdrop. Russian leader Vladimir Putin effectively
kicked off RDIF in April 2011, organizing a Kremlin summit that
brought grandees from the sovereign wealth world together with
kingpins of Western private equity like Blackstone
Group’s Stephen Schwarzman and David Bonderman of
But Russia’s dollar-denominated RTS Index has
lost one third of its value since then, and
Putin’s reassumption of the presidency in May 2012
for an additional six years stamped out any flickering hopes
for the "modernization" policy rhetorically championed by his
placeholder, Dmitry Medvedev. Clampdowns on protest leaders,
alliances with gruesome dictators like Libya’s
late Muammar Qaddafi and Bashar al-Assad of Syria, and a
general sense of rot as oil-driven growth decelerates have
convinced most investors that Russia is a place to avoid.
All these adverse circumstances make it "a great time to be
in private equity," RDIF’s Dmitriev insists. "The
average P/E of the Russian stock market should be 8 or 9
instead of 5 like it is," he says. "But we can take advantage
of the low valuations."
Dmitriev, a lanky 38-year-old whose style tends to the
rumpled and informal, epitomizes the class of globally skilled
smart guys whom post-Soviet Russia has bred in abundance
despite an often-glowering official stance. His favorite story
about himself describes his first meeting with an American
tourist as a teenager in Kiev during the heady days of
perestroika. The traveler proffered a T-shirt from Stanford
University, and young Kirill decided on the spot — so
he says now — that he would attend that far-off temple
A few years later he did, adding a Harvard University MBA
and a stint at Goldman Sachs Group before returning to Moscow
in the 1990s to work for a U.S.-founded fund, Delta Private
Equity Partners, where he rose to the rank of managing
Dmitriev has amassed a team of a dozen like-minded financial
pros. Sean Glodek, his No. 2 at RDIF, is an American of
Eastern European background and a veteran of M&A at
Deutsche Bank and Lehman Brothers Holdings. Ryzhkov, a U.S.
college graduate and the man responsible for bringing Titan
International to Russia, joined RDIF from VTB Capital, the
once-sleepy state organization that has become the
nation’s top investment bank, where he headed
merchant banking. Maxim Arefyev, another director, previously
worked as an investment banker at privately owned Renaissance
Capital in Moscow and before that with ING Barings and
Deutsche. Chief risk officer Kishan Pandey is a newcomer to
Russia; his last job was heading international private equity
for GE Capital out of Hong Kong.
"We felt very comfortable with the RDIF guys because we
already knew them from the industry," says Konstantin
Povstyanoy, a partner at Moscow’s Baring Vostok
Capital Partners, which is considered the foremost private
equity house focusing on Russia. Late last year Baring Vostok
recruited RDIF as a co-investor on its $100 million buyout
of Moscow-based cinema chain Karo Film. "We gave them two weeks
to review the documents, and they did absolutely great work,"
Povstyanoy says. "All their suggestions were constructive."
There’s a contradiction at the heart of
RDIF’s mission. The Russian state
wouldn’t need an investment vehicle if its own
oppressive dysfunction didn’t scare so much
private investment away. The country runs huge perennial
foreign trade surpluses thanks to its sales of oil, gas and
other commodities; the 2012 figure was about $186 billion.
That has made Moscow the world’s leading city for
resident billionaires, who numbered 131 at last count.
But money leaves Russia nearly as fast as it comes in, as
oligarchs hedge their bets against the risk of becoming the
next Mikhail Khodorkovsky — the celebrated Yukos Oil
Co. CEO who is approaching his 11th year in prison —
and entrepreneurs tire of negotiating the swamps of red tape
"Russia is a place with tons of money but no capital," says
Bernard Sucher, a seasoned expatriate financial player who sits
on the board of Moscow investment bank Aton Capital. Net
outflows from the country totaled a prodigious
$782.5 billion between 1994 and 2011, according to
Washington-based watchdog group Global Financial Integrity.
From this perspective, the RDIF strikes some people as a
Band-Aid placed hopefully, or cynically, over an artillery
shell wound. "The government can’t solve any of
the real problems that are keeping investment away, so they
create this new show project instead," grumbles one veteran
Moscow financier, who prefers to remain anonymous.
Dmitriev keeps smiling in the face of such criticism and
trotting the globe pushing the Russian growth story, which
persists despite all the negatives. It might not be obvious
from reading the papers, but Russia is by far the richest of
the BRIC countries, with per capita income of $18,000 at
purchasing power parity, and the most educated, with an average
of 14 years’ schooling. The middle class, defined
as families with annual disposable income above $10,000,
tripled between 2005 and 2010 and now includes 30 percent of
the population, according to the RDIF website. And so on. The
message is seeping through to skeptics like Titan boss Taylor
and other onetime naysayers across the world. "Kirill and his
team have done a pretty good marketing job," says Baring
Comrades in the private financial markets are not the only,
or the most important, audience for Dmitriev’s
marketing blitz, though. The RDIF crew is also engaged in
high-stakes financial diplomacy with sovereign wealth funds
from an array of nations that would like closer ties to Russia
for its mineral riches or as a geopolitical balance to the U.S.
and other powers. But they need investments whose bottom lines
and risk-reward scenarios add up.
The key relationship to watch is with CIC. The economic ties
between Russia and China are burgeoning. Bilateral trade jumped
11 percent last year, to $88 billion, the Chinese General
Administration of Customs reports, and the two governments are
aiming for $100 billion by 2015. On a May visit to Beijing
with Igor Shuvalov, the deputy prime minister who oversees
Russian economic policy, Dmitriev told China Daily
that he would like to double the Russia-China Investment Fund,
to $4 billion. The fund’s brief is to invest
70 percent in Russia and 30 percent in China.
But Beijing and Moscow can find it tough to agree.
Negotiations on a multidecade deal for state monopoly Gazprom
to provide Russian natural gas to China — a seeming
synergistic slam-dunk — have dragged on since 2004. In
June the two countries missed their latest deadline for
agreeing on a price. Dmitriev is vague about how RDIF and CIC
will spend $4 billion together, other than to say that
"the Far East is a very interesting place."
Dmitriev seems to be forging an easier friendship looking
West, to France’s two-century-old national
investment fund, Caisse des Dépôts et
Consignations. Laurent Vigier, Caisse des
Dépôts’ director of international
affairs, sits on RDIF’s supervisory board and
often appears by Dmitriev’s side at fund events.
An inveterate Russophile, Vigier has even involved himself in a
somewhat quixotic Franco-Russian alliance to transform the
violence-torn North Caucasus into an international skiing
RDIF isn’t backing that particular development.
Rather, Dmitriev is keen to leverage his friendship with Vigier
into his fund’s first investments outside Russia,
capitalizing on even-more-dismal investor sentiment in Western
Europe. "We are seeing some very interesting opportunities in
Europe among companies in France or Italy that can benefit
tremendously by selling into the Russian market," he says. He
predicts "one or two deals outside Russia this year," one of
them probably a French target in tandem with Caisse des
The Russian state is employing a growing army of financiers,
and Dmitriev is far from the only one with an impressive global
CV. VTB, which leaped to dominance in Russian investment
banking by buying most of the team at Deutsche
Bank’s Moscow office in early 2008, is now
challenged by fellow state banking behemoth Sberbank, which
last year swallowed respected private investment bank Troika
In the private equity–venture capital world, RDIF
is joined by Rusnano, a $5 billion fund launched in 2007
to spur high-tech investment, and Skolkovo, a would-be Russian
Silicon Valley outside Moscow that has generous grant money to
provide to anchor tenants. But the RDIF appears to be the most
promising entity so far.
Rusnano was raked over the coals earlier this year by the
Accounts Chamber of the Russian Federation, a relatively
reliable monitor of government spending, for various acts of
waste, fraud and abuse, including some $450 million poured
into a failing solar-battery producer in Siberia. Putin poured
on ridicule shortly afterward during a TV appearance to answer
questions from the public. "It’s dark when you get
up and dark when you go to bed" during the Russian winter, the
president observed. "When would these [solar] batteries
The Skolkovo Foundation is grappling with a scandal of its
own: Management was recently overhauled amid allegations of a
rogue $750 million payment to an opposition Duma deputy
for public relations and marketing services.
Wherever the truth lies — and in Russia
it’s usually impossible to know — these
blowups at similar institutions are one more indicator of how
tough Dmitriev’s job really is. But
he’s earned some benefit of the doubt. "People in
the market are willing to give these guys a chance," says a
longtime Moscow financial professional who’s been
negotiating a possible deal with RDIF. "They’re
not just a joke like Skolkovo."