Smart investments with a big lever

Aleksey Chekunkov, CEO of the Far East Development Fund (FEDF), told Review about the fund’s additional capitalisation prospects and transition to shareholdings in supported projects, as well as about the peculiarities of attracting investors to the Russian Far East.

— The Eastern Economic Forum (EEF) is held for the fourth time in a row. Are you expecting any changes in the agenda?

— EEF was originally conceived as a forum about Russia’s role and potential in the Asia-Pacific Region. It was this agenda that let the Forum succeed and it is this subject that every EEF promotes. Furthermore, in terms of economic and geopolitical power of the agents that have confirmed their participation this year, this is an unprecedented meeting on a global scale. It is not that often that the leaders of China and Japan end up in the same venue.

Furthermore, the Forum shapes our own agenda — our team with its current membership has operated for three full years of investment work sharp. This EEF will crown the previous cycle and inaugurate the new one. During the hard times when both the interest rates and the exchange rate of the Rouble were in flux, the fund invested around RUB 39 bn, and moreover, 45% of such investments are investments in the projects in Advanced Special Economic Zones and in the Free Port of Vladivostok. We supported the projects that have turned into landmark projects for the development of the Russian Far East: for instance, we invested RUB 5 bn in Rusagro’s pig-breeding complexes and another RUB 4 bn in coking coal production in Yakutia. In the Amur Region, we invested in soy processing that was non-existent before — soybeans were simply grown and exported to China as raw materials.

We have created a system to allocate areas for aquaculture via e-auctions. This project took a lot of time and effort. To date, we have already had 21 auctions, multiple areas had not been in the market before. We already have winners for 18 areas and the average price ended up six times as expensive as the opening price — this is real competition in action, the first auction lasted for over twenty-four hours. In the past, the areas used to be allocated in Moscow and the price never rose to the same extent, so to say, even though the opening price this time was not the catalogue price — it was raised 26 times to reflect the real value of the areas. Ultimately, the auctions collected over RUB 150 m for 18 areas (with the opening price of RUB 25 m) and we managed to transfer the bidders to an absolutely transparent electronic trading platform with an electronic digital signature.

By the opening date of EEF, the Ministry for the Development of the Russian Far East published the list of available waters where investors will be able to create areas on their own. You can draw four points and the request will be forwarded to the Federal Agency for Fishery automatically. The deadline for giving the response is tight — three days. At the lapse of this period, the new area will go under the hammer. Feedback from our colleagues, including from the Federal Agency for Fishery, indicates that apart from the Russian Far East, this system can be used for all other water basins in Russia, and not only for sea waters, but also for rivers, and to manage state property in general — essentially, it serves as the investor’s user account.

— Is access to the system granted only to Russian investors?

— You need a Russian legal entity to obtain an electronic digital signature and accreditation for the electronic trading platform, but there are no restrictions in terms of the shareholding structure, and therefore, a foreign company may also take part.

— What will be the peculiarities of the new approach to FEDF’s work?

— First, it is crucial to build on the progress of the projects that met our expectations, since we invested at the business plan stage, when you have agreements, but have not invested any money, driven any piles, or deployed any excavating machinery to the construction sites yet. By now, the leaders have been screened out —these are Rusagro, Kolmar, and Amuragrotsentr. One way or another, all these companies are doing business in the Russian Far East due to proximity to gigantic Asian economies as they want to sell their products there. However, this task is not equally straightforward and simple for everyone. Thus, Asian countries have been importing coking coal for 40 years from our country, but are still reluctant to purchase our meat products. However, there is certain progress: we can see that China has its own interest to buy — the country is simply short of domestic production capacities. This market may prove to be several billion dollars’ worth.

I hope that the next joint step we take with Rusagro will be a major deal involving investments in the creation of businesses both in Russia and in China by the private Asian fund that we were creating virtually for the two past years. We are talking of around RUB 40 bn worth of investments in projects in crop farming, fodder base creation, and meat production and processing. The investor is the Generations Fund to be created as a consortium with Russian investors represented by FEDF. We count on mobilising private investors to cooperate with this fund. Our Chinese colleagues want this to be a fully private fund, it has no government money so far, the first $2 bn have been invested by private investors, primarily, by a major real estate management company from Hebei province, and its Board of Directors is chaired by Irina Bokova, former Director-General of UNESCO. The fund positions itself as a private investment vehicle for “One Belt, One Road” projects — it is a form of private-public partnership light without direct commitments; however, the business realises that the risk-return ratio will be better if your steps are in line with government decisions.

China and Russia want more mutual investments by such companies, as for instance Rusagro, but they need financial partners capable of coordinating these investments on the part of both countries’ governments. This is why FEDF’s participation on Russia’s part is intended to concentrate the new fund’s efforts on the projects in the Russian Far East as much as possible. Alongside with animal husbandry and dairy project, what we are discussing with Rusagro is the possibility of attracting the fund to our natural gas chemical projects that stand out for the best economic efficiency in the world. For instance, the project of the Nakhodka Fertilizer Plant is even more competitive than the Middle East projects, despite the lower gas production costs there, as we prevail due to freight: obviously, the distance from Nakhodka to Shanghai is shorter than the distance from Qatar to Shanghai, and besides, investors factor in potential instability of supply.

It is critical for this type of projects that FEDF is involved in the project as partner and shareholder rather than simply as creditor. This envisages direct investments, even if the share is low. This obviously boosts the multiplier: if hypothetically, we assume that the price of the project is RUB 100 and of its joint-stock part — RUB 30, then we will take 10% of this part and invest RUB 3. And yet this RUB 3 will propel the project, e.g. the completion of the feasibility study and survey works — thus, we will launch the project using 3% out of 100% of its capital and the effective lever for our investment will be 1 to 30 and more.

Over these past years, we have gained both an expertise to be capable of such direct participation in projects and a pool of partners in China, Japan, and South Korea willing to take part as joint-stock co-investors and support projects with loan resources. We do know the markets and project drivers on Russia’s part. This is why the future reincarnation of FEDF will comprise direct investments in projects in minority status for the sake of launching the most complex and large-scale projects of the Russian Far East and bringing them to full capacity.

— Will the fund stop its operations as creditor now?

— The creditor is a bulk investor, the administrator of bulk capital. If we compare the fund to Russia’s major banks — VTB, Sberbank, Gazprombank — whose total assets amount to several hundred billion dollars, I deem it simply inefficient to waste the expertise of our team, probably, the best team in Russia in the field of investments in the Russian Far East, on a few credit deals in the market where our share will not exceed 0.1%. However, if considering our real potential, we switch over to investments worth of RUB 10-15 bn per year, then we will be able to implement projects worth of RUB 200-300 bn per year. Participation in the lending pool will secure a smaller lever — one to three, one to five at the most. Smart investments with a big lever is what we need to do at this stage.

— Has the fund acquired any interest in joint-stock capital before?

— 10% of our portfolio is participatory interest in the Nizhneleninskoye — Tongjiang bridge project. However, the structure of the project did not provide for any external financing. Apart from this, we have not acted as a direct investor in the joint-stock capital of the projects that would ultimately attract other investors and bank financing so far, but we do possess all necessary competences to do so.

— The issue of the fund’s additional capitalisation has been on the table for several years now. How much money do you hope to get?

— We have fully invested the seed money and we will even have to finance some of our investment liabilities by investment returns. A minor part of our financing has been provided for shorter terms, this is predominantly the case of SMEs, we issued short loans there — for two or three years. We hope that FEDF will receive an additional capital of at least RUB 10-11 bn per year as Prime Minister Dmitry Medvedev said. The decision has been made, the sources will vary, but in any case, this will be done at the expense of the budget.

A smart investor invests in two, three, or four deals per year. These do not necessarily have to be any major deals. If a deal has a potential to drive up GRP growth, this will be a significant deal irrespective of its size. Thus, for instance, we have recently invested RUB 300 m in greenhouses in Yakutia. The total amount of the project is RUB 1.5 bn. This doesn’t look like a major investment in terms of size, but the project makes use of a global-scale technological innovation. This is the coldest greenhouse in the world. It is pretty chilly in Yakutia, and the Japanese have invented a technology involving a 100°C temperature differential: from -50°C to +50°C. Should the project work out, it will provide an innovative solution for the northern regions in terms of vegetables that are currently being imported from China. It is bad that they are expensive, but it is even worse that we have no idea about the quality of water in these vegetables, as 90% of vegetables is water. Yakutia has good water: it is much cleaner than in China. Hence, first, the products will be less expensive, and second, we will ensure self-sufficiency. We will have a participatory interest in this project already.

— Are you planning to implement any new projects with Japan Bank for International Cooperation? When are you expecting the first deals under the umbrella of the Russia — Japan investment platform for the Russian Far East?

— This platform should finally show its worth at EEF. We currently have a shortlist of eight projects, they all involve advanced technologies originating from Japan. This is Asian logic — they are slow to mount but ride fast: if you rush at the start, you can make a mistake. Speaking of both Japanese and Chinese colleagues, I watched our Asian partners making multiple starts of the same project in a very relaxed mode: they elaborate a project for a half-year or a year — should anything be imperfect, they will not press the “start” button. This is driving us insane; we get nervous, start pushing each other: “How come? The forum is coming, we need to report, the year is over...” By contrast, when our partners see the project working, then it goes fast.

This is why we hope that this year will be the starting year of the platform. It was launched a year later than we would prefer, but I think it will get to the right track and attain its objectives. The business plan drawn up by the Japanese themselves provides for the implementation of projects worth of RUB 85 bn. Moreover, our partners are starting to look at the projects of a larger scale: if a project has an agent comfortable for the Japanese, then it can be used as an umbrella for most diverse deals, not only the ones reflected in the charter.

— What is the status of the project on Russky Island implemented with Chinese investors?

— The project is currently in progress. We have acquired a strong Russian partner interacting with the Far East Development Corporation in order to secure resident status in the Free Port of Vladivostok and consolidate resources for the project. First, this concerns land plots. Therefore, this will be a Russian project involving Asian investors — we already have competition there. Creation of a new congress and exhibition centre will constitute a significant part of the Russky Island development project. We all are perfectly aware that EEF is a very important and successful story, but this year, the forum is scheduled for mid-September and this interferes with the educational process. It is the creation of congress and exhibition space from scratch that we are discussing with Roscongress, similar to what we have in both St. Petersburg and Sochi. This may be a facility that will offer event management services to partners from the Asia-Pacific Region.

— You said that 70% of investments in infrastructure construction might be provided by foreign investors, while FEDF’s share in the joint venture management company would not exceed 5%. Are you planning to stick to this estimate?

— This figure has not changed, but the most important part of any construction project is the land plot. The concept of the project has largely been approved by all parties involved, investments have been agreed upon. What we need to do now is to make sure that the project management company secures legal rights to the implementation of this project.

— What do you think about the prospects of SAR on Russky Island? How attractive is the proposed regime to Russian and foreign investors? Is it comparable to the conditions in the Special Economic Zones that exist in the Asian countries?

— The environment determines the need for the regimes protecting companies from political upheavals when people are not allowed to use their capital or when corporate decisions are blocked. Nevertheless, business is always driven by practical considerations and any offshore to be created in our country, either on Russky Island, in Kaliningrad, in the Caucuses, or anywhere else, will not be the only possible option for any businessman. Companies will compare SAR to the jurisdictions that have competed for their customer for centuries. Even international funds with Asian investors may work through European jurisdictions, Luxembourg, Switzerland, and therefore, we should not deceive ourselves and think that we have no competition in this field. There are places with dozens of law firms, audit companies, and banks and they are highly professional.

In the meantime, we definitely realise: even if the lawyers assure us that everything will be fine, every dollar transfer will go through the corresponding bank in New York rather than through the lawyer. An offshore will address this problem, but we also need an ecosystem of service providers. If we are talking about businesses with assets and turnover reaching several billions dollars, we should keep it in mind that they will look at this specific component very thoroughly: will the financial, operating, and legal activities be troubleproof, how will the economic disputes be resolved, and who will resolve such economic disputes? We have an example of the Dubai International Financial Centre using the English law. Their colleagues from the Astana Financial Centre in Kazakhstan chose the same path. This is why I welcome it that we are joining in this race — it is worth taking part. Similar to the situation with FIFA World Cup, we are entering the field. Will we win the cup? It will probably take some time.

— It has been announced that negotiations on the project of Suifenhe — Vladivostok high-speed rail line are underway. Are you planning to take part in this project?

— Transport links of this sort rarely prove their worth at the business plan stage. If we now try to estimate the costs of a cross-border high-speed rail line and imagine the customer flow and the payback time realistically, the outcome is unlikely to boggle the imagination by the rates of return. Obviously, this is not fast or easy money. Fast trains but slow money. However, such links are important from the standpoint of geopolitics. The same concerns yet another infrastructural project — the Sakhalin bridge. I was a teenager when the project of the tunnel between Great Britain and Europe was launched: it was criticised by many and it was running at a loss for decades. Nonetheless, construction of the tunnel has really turned Great Britain into a part of the continent and made exchange of people, talent, and ideas between the mainland and the island way faster, which turned London into a global financial centre. Therefore, the project may help further integrate Vladivostok in Asia and link it to major megalopolises.

Does the project require our financial involvement? Should a state partner be necessary as a minor shareholder to promote the success of the project, we will be happy to take part. From the standpoint of the total implementation cost, this is probably a project that does not match our scale, but we will be happy to take part, should our Asian partners express their interest.

— A year ago, an agreement on the creation of the fund for promotion and implementation of high technologies worth of RUB 4.9 bn was made with the Russian Venture Company and Rosnano. When should we expect the first investments?

— The fund has been established, the management company has been registered, it will be headed by FEDF top manager who used to work for Rosnano at the very beginning of its history. A number of projects have already been prepared, the investment risk assessment procedure is currently underway. The first agreement, a memorandum of intent, was made with a company engaged in industrial safety systems automation on the sidelines of the economic forum in St. Petersburg. A number of agreements will be made with companies working on self-contained power supply during EEF and I expect the fund to close its first deal by the end of the year.

Obviously, venture capital investments are a priori more risky, but the Russian Far East provides abundant opportunities for such projects. It is home to defence sector enterprises that need potential conversion technologies, oil and gas companies that ensure high demand for equipment, including in connection with the sanction risks, mining companies that experiment with self-driving technologies, and agriculture that, unfortunately, is not as technologically sophisticated yet as it could be. There is demand for technologies related to the fishing industry in need of modernisation. This is why we lay high hopes on this fund. It is not as big in terms of size so far (RUB 5 bn), but we expect that private investors will also take interest in the fund. The first deals speak loud about all investment funds. This is why we will let our colleagues prove their worth.

Interview by Tatyana Edovina