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China and Russia investment in Siberian timber

China and Russia’s sovereign wealth funds are making their first joint investment – in a Siberian timber company – as part of a push to increase commercial ties between the Russian far-east and fast-growing countries in Asia. Source: The Financial Times

China Investment Corporation and its Russian counterpart, the Russian Direct Investment Fund, established a joint private-equity fund in June.

The fund will make its first investment, of around US$200m, for a minority stake in Russia Forest Products, the country’s second-biggest forestry company, which has operations in Siberia.

Vladimir Putin, Russia’s president, has championed a pivot towards resource-hungry Asia in a tacit acknowledgment that Moscow has been slow to exploit economic opportunities on its Asian doorstep.

Putin is hosting the Asia-Pacific Economic Cooperation forum in the Pacific port city of Vladivostok in an effort to “market the far-east as attractive for investment”, said Kirill Dmitriev, RDIF’s chief executive officer.

Putin also attended the opening of a new Mazda motor car assembly plant in Vladivostok.

Mazda has teamed up with Sollers, the Russian auto maker, to invest US$350m in the plant.

Chinese investments in Siberia have been hampered by Beijing’s concerns about the reliability of Russia’s investment environment – as well as by Russian suspicions about Chinese motives in the sparsely populated far east.

Chinese attempts to buy land and natural resources in places as far afield as Iceland, Australia and Mongolia have sometimes been rebuffed.

Dmitriev said the joint nature of the Russia-China fund’s investments gave assurances to both sides.

“There’s a general understanding that it’s important for Russia to develop good relations with countries of the east and to learn from them. Russia-Asian co-operation is going to be an increasing feature of the way the world works,” said Dmitriev.

The fund’s first deal would create 1000 jobs, he added, and improve margins by getting Russia Forest Products to sell processed wood instead of raw logs.

Russia has invested US$21bn in preparing for the Apec leaders’ summit on Russky island near Vladivostok, including construction of the world’s longest cable span bridge.

CIC and Russian Direct Investment Fund will contribute US$1bn each to the joint fund and are hoping to raise another US$2bn from outside investors within 18 months.

Stanley Li, an analyst with Mirae Asset Securities, said the deal made economic sense for both sides, but noted there were likely to be limits to their co-operation.

“Russia will probably keep China out of really huge energy investments, like it has had from ExxonMobil or Shell, because those are more politically sensitive,” Li said. “At this stage, timber is something that the countries can do without too much political resistance.”