Ukraine ceasefire will unlock billions in Gulf-Russia deals

Novatek

• UAE and Saudi Arabia weigh opportunities in oil and gas and logistics
• Gulf is major investor in state-owned Russian Direct Investment Fund
• But Moscow’s appeal to funds has ‘plummeted’, says Invesco

GCC investors shelved a potential $15 billion of investments in Russia when Moscow invaded Ukraine, but companies are said to be quietly resuming due diligence in the hope of tying up deals when a peace accord is reached.  

These possible Gulf-Russia deals are mainly in the oil and gas, transport, logistics and agricultural sectors, according to Chris Weafer, chief executive of Eurasian investment consultancy Macro-Advisory. 

“What we have seen recently – not just in the Gulf – is a lot more companies looking at opportunities in Russia once a ceasefire is established,” he told AGBI.

“Nobody has any idea when that will be, but there’s a sense it’s going to happen. Russia is a very big economy and, for the Gulf, it appears that the level of engagement and due diligence [seen before the conflict] has resumed.”

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Before the invasion of Ukraine in February 2022, Saudi Arabia had been mulling investments of around $10 billion in Russian liquefied natural gas projects in the Yamal Peninsula of Siberia or Ust-Luger near St Petersburg, AGBI understands.

Novatek, Russia’s largest privately owned natural gas company and a partner alongside France’s TotalEnergies in the Yamal LNG joint venture, was reported to be in talks in 2019 over a sale of up to 30 percent in its Arctic LNG 2 project to Saudi Aramco. 

Kremlin.ru via Reuters

Ukrainian Presidential Press Service via Reuters

The deal broke off when Aramco instead signed a 20-year LNG export agreement with US-based Sempra Energy. However, before the Ukraine invasion, there were signs that Gulf interest in a deal for Russia’s LNG was re-emerging. 

In the UAE, sovereign wealth fund Mubadala and Dubai logistics operator DP World were considering investments in the Northern Sea shipping route, which runs along the Russian Arctic coast and links Asia with Europe.

In 2021 DP World signed an agreement with Russia’s state-owned Rosatom to help develop the route. It is said to cut journey times between Southeast Asia and Northwest Europe by 19 days, with the potential to be even faster. But work with DP World has not materialised. 

The UAE is also understood to have been eyeing around $5 billion of investment in the North South Transport Corridor, which connects India with St Petersburg and northern Europe, then down to the Iranian port of Chabahar.

Saudi Arabia, meanwhile, was reported to be looking at agricultural investments in Russia to boost food security. 

Over the past decade, Gulf countries have gradually increased their interests in Russia, according to Global SWF, a data platform that tracks deals made by sovereign wealth and public pension funds. It estimates that, in March 2022, Gulf funds accounted for 69 percent of the $41 billion invested in Russia by foreign state-owned investors.

Gulf states' ties with Russian Direct Investment Fund

Mubadala has held $3.5 billion of investments in various Russian assets since 2013, including a $2 billion joint venture with the state-owned Russian Direct Investment Fund (RDIF).

The fund was set up in 2011 to invest in high-growth sectors of the Russian economy. In 2016 it said it had secured more than $25 billion through long-term partnerships with global investors, 90 percent of which was from Asia and the Middle East. 

Saudi Arabia’s Public Investment Fund pledged to invest $10 billion in the RDIF in 2015, while DP World has a $2 billion joint venture with the Russian fund. Bahrain’s Mumtalakat and the Kuwait Investment Authority had smaller investments in the RDIF. Qatar holds an 18.5 percent stake in Rosneft among other interests. 

Spanish fashion retailer Inditex, which owns Zara, is one of the many European businesses to have quit Russia after the West imposed sanctions on Moscow. Its operation in the country has been sold to the UAE’s Daher Group, which aims to open new stores in Russia in April and May. 

Those sanctions have given food for thought to state-owned investors. A report by investment manager Invesco found that Russia’s attractiveness to portfolio investors had “plummeted” over the past year to 2.1 out of 10.

The figure had held steady at 5 out of 10 for the past few years, after a dip in 2015 caused by Moscow's annexation of Crimea the previous year.

Invesco's report quoted an unnamed Middle East-based sovereign saying: “The invasion led us to focus more on political risk and the rule of law in our valuations.”

Instead, over the past year, Gulf investors have sharpened their focus on central Asia – a region with strong cultural and commercial synergies with the Middle East.  

Exodus of Western businesses leaves Russia seeking new partners

“Had the Ukraine conflict not started, we definitely would have expected to see several more big deals in the last 12 months,” Weafer said. 

The Gulf is now “waking up to the opportunity to get back into Russia”, he added. “There are a number of emerging opportunities and rumours that Gulf investors are looking at them.”

Reuters/Sergei Karpukhin

Moscow has been looking to replace Western multinational energy companies with new partners. Exxon Mobil pulled out of the Sakhalin-1 oil and gas project in March 2022, BP is selling its almost 20 percent stake in oil giant Rosneft and Shell has halted operations in Russia, leaving vacancies. 

Greater cooperation is also expected with the Gulf on developing products, services and equipment for which Russia was previously reliant on the West, such as oilfield services. 

Weafer said: “People are looking beyond the war and won’t wait for a peace deal that will take years. That being said, so long as shooting continues and people are dying, there will be few deals – and the Russian government knows that."