June 4, 2012 / 6:30 PM / 7 years ago

Russia-China fund to form, eyes forestry deal

MOSCOW, June 4 (Reuters) - A multibillion-dollar investment fund set up by Russia and China is expected to make its first investment, into a Russian forestry company, as economic ties between the neighboring countries grow closer.

Plans for the fund - a venture between sovereign wealth fund China Investment Corp and the state-backed Russian Direct Investment Fund - were announced in October.

The fund will be unveiled on Tuesday during a visit by Vladimir Putin, who is making his first trip to Beijing since his return to the Russian presidency and will meet Chinese counterpart Hu Jintao.

“This visit is really key to establish a breakthrough in Russia-China relationships,” Kirill Dmitriev, CEO of the Russian Direct Investment Fund, told Reuters in an interview.

“In the past there were lots of discussions on the topic but very little progress - the amount of Chinese investment in direct equity (in Russia)... is very small. But (now) there are some concrete examples.”

“We really see a major improvement and a major change in the number of deals and the quality of deals,” Dmitriev added.

The first investment is expected in the next month and is likely to be into one of Russia’s largest forestry firms, which exports a substantial amount of wood to China, Dmitriev said.

It will aim to allow the forestry company to make higher-margin processed wood products in Russia, which it can export. Dmitriev declined to name the company.

A source close to the deal said that an initial investment could be around $200 million for a minority stake.

The RDIF was created to give major foreign investors greater comfort in Russia’s uncertain business environment and is investing with private equity, strategic investors and sovereign wealth funds. It is separately investing alongside China.

The RDIF and CIC will contribute $1 billion to the fund. Dmitriev has said he expects it will take about 18 months to expand the Russian-Chinese investment fund to $4 billion, with the balance of the capital raised from outside investors.

It is expected to invest 70 percent of its funds in Russia and up to 30 percent in China, Dmitriev has said, adding that “the pipeline of potential deals for this fund includes industries such as forestry, machinery (and) logistics.”

Dmitriev pointed to a recent Ernst & Young survey showing increased appetite by foreign private equity firms to invest in Russia. According to the survey of more than 150 investors, 48 percent of respondents said they expected to increase acquisition activity in Russia in the next year as opposed to 25 percent six months previously.

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