2. Tracy Cao
Outlook on Chinese FDI flows to Russia
1
“Derail” vs. “Fix” Perception on Chinese FDI Transactions in
Russia
Derailed perception Fixed perception
VS.
Chinese investors are
excluded in Russia
Chinese investors are not
welcomed in Russia
Chinese deals are scrutinized
for primarily political-driven
purposes
Investors only look at natural
resources sector in Russia
Investments are mostly in
Moscow region and St.
Petersburg region
The Foreign Investment
Advisory Council (рус. КСИИ)
is to improve investment climate
Chinese FDI transactions in
Russia increase significantly
Developing friendly relations
with China is one of the
priorities of Russian foreign
policy1
Manufacturing (31.9%) is the
center of Russia’s appeal,
followed by financial
intermediation (28.1%)2
Moscow and St. Petersburg
regions account for 42% of the
projects2
Source:1.Concept of the Foreign Policy of the Russian Federation, 2013
2. Russian Federation Federal State Statistics Service
3. Tracy Cao
Outlook on Chinese FDI flows to Russia
II
Chinese FDI Transactions in Russia Increase Significantly (2009-
2013)
Chinese outward FDI value increased $31.74bn in 2013, and transactions value in
Russia 4800 times in 2013 on a year-on-year basis
Compared to United Kingdom, Germany, or U.S.A., Chinese FDI in Russia
demonstrated potential for future growth
67.6
67.1
47.2
32.4
24.1
22.0
19.6
14.8
12.0
10.5
0.0 20.0 40.0 60.0 80.0
Cyprus
Netherlands
Luxembourg
China
United Kingdom
Germany
Ireland
France
USA
Japan
Transaction Value
$bn
Accumulated FDI in Russia by Countries2
Source:1. Statistical Bulletin of China's Outward Foreign Direct Investment 2009-2013, Ministry of
Commerce of China
2. 9 moths as of Sep 30, 2013, Russian Federation Federal State Statistics Service
Chinese Outward FDI Flows – by Year1
43.0
58.4 59.5
76.6
57.8
0.3
0.6 0.6
0.7
32.4
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
100.0
2009 2010 2011 2012 2013
Russia Others
Transaction Value
$bn
CAGR:
4800%
4. Tracy Cao
Chinese Horizontal Investments in Russia Cover Multiple Sectors
(Jan – May, 2013)
Outlook on Chinese FDI flows to Russia
Source: Quarterly Report No.201311, Institute of World Economics and Politics Chinese Academy of Social
Sciences
Note: ★★★ stands for the most heavily invested sector in Chinese outward FDI flows; ★★ stands for the less heavily invested sector; in
Chinese outward FDI flows; ★stands for a normal investment level
R&D
Business
Services
Wholesale &
Retail
Energy &
Resources
Real
Agriculture,
Fishery,
Husbandry
Manufacturi
Russia ★ ★ ★ ★ ★★★ ★★
United States ★★★ ★ ★★ ★★ ★
Germany ★★★ ★★ ★★
Japan ★★★ ★
Hong Kong ★ ★★★ ★★ ★
Singapore ★★ ★★ ★
South Korea ★★ ★ ★★
Canada ★★★
Australia ★★ ★★ ★★★
III
5. Tracy Cao
Outlook on Chinese FDI flows to Russia
M&A Continues to be a Critical Component in Chinese Outward
FDI
World FDI stats pie sliced relatively unchanged in terms of greenfield FDI and
M&A in 2013, yet the role of M&A in Chinese Outward FDI is increasingly
significant1
Russia recorded 530 FDI projects in the last 24 months, the top highest of any
CIS country, and also doubled project numbers (265) in 20121, yet with a further
23.8% decrease of M&A deal flow by value from 2012’s $110.3bn on a year-on-year
basis2
Source:1. UNCTAD, based on information from the Financial Times Ltd, fDi Markets
2. Russia M&A Trend Report: 2013, Merger Market
0
200
400
600
800
1,000
1,200
1,400
1,600
0
10
20
30
40
50
60
70
80
90
2009 2010 2011 2012 2013
China Outward M&A
China Greenfield FDI (outward)
World M&A
World Greenfield FDI
Transaction Value
$bn
Dynamics of Chinese Outward FDI Flows – by Year1
IV
6. Tracy Cao
Outlook on Chinese FDI flows to Russia
Drivers of Chinese FDI flows to Russia
Russia’s recession to WTO has multiple
impacts including government reform for
investor-friendly environment and export-
tariff reduction benefiting export-oriented
manufacturing sectors such as auto parts3
Russia formulates foreign policy
to integrate itself into Asia
Pacific (2013-2020)
China
Domestic
Russia
Domestic
World
Econom
y
International
Relations
State program “The social and
economic development of the Russian
Far East and the Baikal region until
2025”
Russia and China share similar positions in
many international affairs, and economic
disputes have mutual mechanism to address
Driver
s
China is deepening restructuring and
sectors such as auto parts, capital goods
and home electric appliances particularly
are seeking overseas expansion due to
excess capacity1
Source:1. China 2030, Building a Modern, Harmonious, and Creative Society, The State Council & The World
Bank
2. Quarterly Report No.201304, Institute of World Economics and Politics Chinese Academy of Social
Sciences
SAFE co-Financing was initiated
in the early 2012 to facilitate nter-
governmental“go-global“ pipeline
including Sino-Russia Oil
extraction/trade projects2
Both have pressures for more active
regional cooperation to diversify
dollar portfolio in Forex reserves and
to restructure industry structure (i.e.,
for Russia: Dutch Disease; for China:
middle-income trap)
China holds the world largest
Forex reserves, followed by
Russia taking the thrid place.
Russia concluded 30 bilateral
agreements on market access for
services, which permit 100% foreign-
owned business service companies to
be established3
V
7. Tracy Cao
Outlook on Chinese FDI flows to Russia
Moscow &
St. Petersburg
Regions
Siberia &
Russian Far
East
Republic of
Tartarstan &
Republic of
Bashkortostan
Federal program “The social and economic
development of the Russian Far East and
the Baikal region until 2025” sets tune
Ministy of Development of the Far East
means to attract another 3bn Rubbles FDI
in 7~8 yrs; the figure in 2011 is $9.9 bn2
I
II
III
Major China Relevant Investment Themes in Russia by
Geography
“Silk Road”
Economic Belt
FDI to landlocked developing countries (LLDCs)
reached $35 billion, a new high. The “Silk Road”
economies of Central Asia attracted about 54% of
LLDC FDI inflows in 2012. 3
Developing economies became the largest investors
in LLDCs, with particular interest by TNCs from
the Republic of Korea and West Asia 3
The US, Germany and France
are the top three investors in
Moscow
Between 2011 and 2012, the
number of FDI projects in
St.Petersburg fell by 31.3% due to
the city‘s administrative
restructuring1
Revitalization of
Old Industrial Bases
in Northeast China
Mature
investment
destination
Source: 1. “New St. Petersburg Agency Targets Investment”, Embassy of the Russian Federation in the
Republic of India
2. Alexander Galushko talks, Ministry of Development of the Far East
Investment
Theme
VI
8. Tracy Cao
Outlook on Chinese FDI flows to Russia
VII
Major Issues in Chinese FDI flows to Russia
Chinese investors bear disadvantages in investing in
Russia1
Russian concerns on
Chinese investors
Seriousness on business?
Certainty on financing?
Execution on transactions?
Pass economic spillover test?
Integration with communities?
Compliance to regulation?
Violate market orders?
Speculate resources?
Due Diligence
Sales/Trade Representative Offices of
Chinese companies involve little in DD
Due diligence specialists are less
employed
Language barriers exist
On-site visits/due diligence is less
coordinated
Decision Making Russia strategy is often unclear at board
room level; wait-and-see approach is
common
Empirical evidences show Chinese
investors in general take longer time than
average 2
Financing/
Financial
Advisory
Chinese banks usually engage at late
stage
Middle-market investors are not
adequately served by VTB-CITIC or
RDIF-CIC
Russian government have explicit
restriction on state-owned investors3
Regulatory
Source:1. Based on our experience & interviews on C-level executives
2. Ernest & Young
9. Tracy Cao
Outlook on Chinese FDI flows to Russia
Is There a Role for DACH in the Sino-Russian Bilateral Investments? If so,
What?
Source :1. 1 Vasili Mikheev, “Russia-China: ‘Reloading’ the Relationship”, Russian Politics and
Law, Vol. 49, No. 6 (November-December 2011), p. 79.
2. Evgenii Verlin and Vladislav Inozemtsev, “Russia-China: Time for a Course Correction”,
Russian Politics and Law, Vol. 49, No. 6 (November-December 2011), pp. 63, 66.
A number of claimed blemishes and challenges within Russian-Chinese relations :
• Imbalanced trade structure: thought the 1990s saw a different situation, since the beginning of the
2000s Russian exports have mostly consisted of energy, raw materials, fishery and timber, while
Chinese exports have been to a large degree composed of machinery and manufactured goods.
The Chinese economic orientation generates a threat of Russia becoming a resource appendix,
leaving it on the “other side of the barricades” from the leading world, including China itself. 1
• Experts argue that China cannot serve as a “beacon of innovation-based model of development”
or supply Russia with high-tech equipment, as it is interested only in Russia’s resources (except
military know-how to a certain extent) and itself uses second-hand Western technologies
purchased or copied outright from the West. 2
Acquirer Target Sector Year
Ningbo Huaxiang HIB Trim Parts Auto parts 2013
Heibei Lingyun Industrial Kiekert Auto parts 2012
Citic KSM Castings Auto parts 2011
Bayraktarlar Odelo Auto parts 2011
Ningbo Huaxiang Sellner Auto parts 2011
Joyson Holding Preh Auto parts 2011
…… …… …… ……
CQLT Saargummi Auto parts 2011
VIII
11. Tracy Cao
Deal Overview
Source :1. London Stock Exchange
China Construction Bank acquired a minority stake in VTB Bank via secondary public
offering agreement. Relevant information as follows1:
Deal Structure:
• JSC VTB Bank raised Rub 102.5bn capital through the issuance of 2.5 trillion new
ordinary shares by way of an open subscription;
• A group of investors comprising existing and new shareholders, including, Norges
Bank Investment Management, Qatar Holding LLC, the State Oil Fund of
Azerbaijan and China Construction Bank, have been allocated an aggregate of
approximately 64% of the New Shares not taken up under the pre-emptive offering,
or approximately 55% of the total number of New Shares
Consideration:
• Rub 0.042 per Share; deal value $100m
Transaction Process:
• 22 May 2013, completion of share placement announced
Financial Advisor:
• China Construction Bank (Acquirer) financial advisor: non-disclosed; Clifford Chance
(legal advisor)
• VTB Bank (Target) financial advisor: Citigroup Global Markets, VTB Capital, Merrill
Lynch, J.P. Morgan
12. Tracy Cao
Shareholding Structure
Post-
deal
VTB
Bank
Russian
Federati
on,
represen
ted by
FASM
Bank of
New York
Internati
onal
Nominees
Norges
Bank
Investme
nt
Managem
ent
State Oil
Fund of
the
Republic
of
Azerbaija
n
Cred
it
Suis
se
AG
Onexi
m
Holdin
gs
Limite
d
Olybri
us
Limite
d
Others
(incl.
China
Constructi
on Bank)
60.93% 14.51% 4.28% 2.95% 2.95% 2.43% 2.36% 9.62%
Pre-
deal
VTB
Bank
Russian
Federation,
represented
by FASM
Bank of New
York
Internationa
l Nominees
Other
institutio
nal
investors
Individu
al
investors
75.5% 16.09% 5.89% 2.28%
Source: Corporate websites
13. Tracy Cao
RMB ¥m 2009FY 2010FY 2011FY 2012FY
Revenue 243.38 298.68 365.39 422.91
Net Income 106.76 134.84 169.26 193.18
Total Assets 9623.36 10810.32 12281.83 13972.83
Net Assets 555.48 700.91 816.66 949.61
Net Margin 43.86% 45.15% 46.32% 45.68%
ROE 19.22% 19.24% 20.73% 20.34%
ROA 1.11% 1.25% 1.38% 1.38%
Leverage Ratio 17.32 x 15.42 x 15.04 x 14.74 x
Asset
Turnover
0.0253 0.0276 0.0298 0.0303
China’s second-biggest bank by total asset
(14,859 bn RMB) and total loans (8,095 bn
RMB) as of the second quarter of 2013
CCB is listed on the HKSE; Its current market
capitalization of over $180 bn ranks it 5th
among listed banks in the world
CCB spans a network of 14,295 domestic
branches in Mainland China, and has
344,913 employees as of June 2013
CCB opened its Moscow branch in March
2013
Source: 1. Corporate websites; Annual reports
2. Yahoo Finance; London Stock Exchange
Target (VTB Bank) Profile1
Founded in 1990 and is headquartered in
Moscow, Russian Federation
The company was formerly known as
Vneshtorgbank and changed its name to
JSC VTB Bank in March 2007
Acquirer (China Construction Bank) Profile1
Acquirer (China Construction Bank)
Financials2
Target (VTB Bank) Financials3
US dollar $m 2009FY 2010FY 2011FY 2012FY
Revenue
Net Income -2253.53 2333.78 3609.38 3780.17
Total Assets 119136.86 140844.1 212175.00 242917.01
Net Assets 16658.97 18978.78 19534.38 25095.23
Outlook on Chinese FDI flows to Russia
Acquirer/Target Brief
14. Tracy Cao
Company Name BicBanco VTB
Bank of
America
(Asia)
Year 2013 2013 2006
Shareholding ratio 72% 100%
Consideration
1.6bn
Brazilian
Reais
$100m HK$9.71 bn
Status Planned Completed Completed
22May 2013,
deal
announced
Transaction Motivation
China Construction Bank seeks Russian partners
against the backdrop of increasing bilateral trade
between two countries2,, following a previous
investment of China Investment Corp in VTB
Bank’s asset in Feb 2011
Future pipeline: “buying midsize banks is the
most efficient, because they offer CCB a big
enough platform for expansion while still being
digestible”, said Wang Hongzhang, Chairman of
China Construction Bank3
Source: 1. Bloomberg stock chart
2. CCB online press
3. “China Construction Bank looks to Europe for acquisitions”, Financial Times
China Construction Bank Cross-boarder Deals
23May 2013,
deal
announced
-1.23%
China Construction Bank Stock Price VTB Bank Stock Price