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Flirting with foreign finance

Outdoor Electronic Sign with Russian Exchange NumbersForeign investors and their money are top of the Kremlin's to-charm list, as the government announces another challenging scheme to bring them and their money into Russia.

Capital is flying away, as investors saddle up and ride out of town in the face of high oil prices and the threat of inflation, besides the perennial thorns of opaque bureaucracy and notorious corruption.

So government gurus are setting up a new investment fund this summer, which splits the profits and perils of investing in Russia.

"Investors need to see some action and the model where the government is your partner and co-investor is a general model which should work in theory and where you share both the cost and the upside," Ildar Davletshin, Renaissance Capital analyst, told The Moscow News.

Encouraging foreign investment

State involvement should clam the jittery nerves of suspicious foreigners, "The state flag bearer of Vneshekonombank (VEB) is very important, because foreign investors don't feel entirely comfortable with the bureaucratic way of doing things, the corruption and the simply unclear situation," Vladimir Dmitriyev, head of VEB, the state bank charged with setting up the fund, told Vedomosti.

"It is very hard to do business in Russia without a good partner," says Ivan Ivanchenko, VTB analyst. But he is optimistic about the new project overcoming both the practical problems and the prejudices, "I think the government is a great partner as a way to lure investors," he added.

How it works

The fund is to spring into action by July, the president has said, and the government will contribute $2bn this year to start things up, using excess tax revenues generated by high oil prices. The authorities have been promising to contribute $2bn annually for five years but have dropped plans to tap Russia's existing sovereign wealth funds for money.

The fund is to take stakes of 15 per cent to 25 per cent in projects, spending between $50m and $500m. The bulk of investment in the projects - including controlling stakes - will come from the foreign partners.

Typical for private equity, the fund and its partners will hold stakes for five to seven years, exiting through public offerings or other sales, the Wall Street Journal reported.

The intention is that it will invest across Russia's economy, except in the already well-funded natural resource sectors.

Something, anything

"Being sceptical you have to assume that there are quite high risks that this will fail," Davletshin warned.

But other options are thin on the ground, and this does show investors that things are moving apace.

"The scheme aligns the interests of the government and investors better than just setting up regulatory bodies or tax incentives, which can be taken away in the future. The government's interests are tied up with it," he said by telephone.

Means to the same end

From kicking ministers out of company boardrooms to this latest manouevre, the Kremlin is keen to make Russia a more inviting investment climate.

Davletshin is cautious about how successful the execution will go, but Ivanchenko thinks the signs are auspicious.

"We have seen a number of positive signals lately and the government is really trying to attack and address the problems head on...Given the very high oil prices investors will come to Russia," Ivanchenko said by telephone.

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