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Russian investment in Africa is increasing even as its own economy reels under the impact of the credit crunch. With commodity prices falling, some Russian investors are capitalising on the opportunity to buy access to resources that will be in great demand when the global economy rebounds, writes Elizabeth Stephens from JLT.

Russia may be trailing China in the extent of its investments in Africa but in the past three years it has quickly expanded its activities, rejuvenating ties with former Cold War partners and venturing into new territories. The objective has been to secure resources in this relatively unexplored and underutilised region and, in line with the universal trend, Russian mining companies have been taking controlling stakes in many of this sector’s investments.

Oil and banks
Gazprom, the state-owned energy giant, has shown interest in building pipelines to supply Europe and has held talks with Libya and Nigeria, including bidding for the Trans-Saharan pipeline as well as oil and gas exploration rights in Nigeria.

Renaissance Capital, a Russian investment bank, has ramped up its presence on the continent over the last two years, taking advantage of the growing financing needs of mining and non-mining companies, as demand for investment banking services has increased.

It has already acquired 25% of the shares in Ecobank, one of the most advanced banks based in West Africa, with branches in 11 African countries. These investments came in the wake of a recently dispelled wave of investor optimism about Africa and the growth of the Russian economy.

Despite the current financial crisis, we should not expect a retreat of Russian business from Africa. On the contrary, many Russian business tycoons see this as a time of opportunity to advance aggressively abroad, and new markets will be their primary target.

Expansion into South Africa is part of Mikhail Prokhorov’s drive to establish a leading world investment bank on the basis of Renaissance Capital which he bought for the purpose. Another Russian bank, Vneshtorgbank, recently began operating in Angola, opening the first Angolan bank to have predominantly foreign ownership.

Behind the Chinese
“Russian engagement with Africa appears ad hoc rather than part of a coordinated state policy,” believes Natalia Leshchenko, Russia analyst at Global Insight. The Russian diplomatic initiative is relatively under-developed. Whereas Beijing was able to hold the now famous Africa-China Summit in November 2006, discussing areas of mutual interest, with 50 Sub-Saharan African government representatives.

India hosted 14 African heads of state in 2008 but there has been no equivalent Russian initiative. This may reflect China’s head start in cooperating with Africa on a pan-African scale and the size and sectoral distribution of Russian investment on the continent that does not occupy the same space and popular sentiment in the minds of African policy-makers. There is ample space for deeper Russian engagement as a corollary and facilitator of Russian investment.

Government-owned companies tend to push for sales and concession contracts – as with Libya where Russian Railways has bid for a US$2bn railway construction project – while arms, and to a lesser extent manufacturing products, are the principal export items.

Private companies focus their attention on natural resources exploration typified by Rusal’s acquisition of the Alumina Company of Guinea (ACG), Guinea’s sole alumina refinery and the Compagnie de Bauxites de Kindia (CBK), where Guinea’s largest bauxite mine is situated.

Rusal also acquired the majority shareholding in the Aluminium Smelting Company of Nigeria, in a US$250mn transaction. Large deals by Russian companies in South Africa include Norilsk Nickel’s US$1.2bn acquisition of 20% of Gold Fields in 2004, and Renova’s acquisition of 49% in United Manganese of Kalahari.

Russian companies are experiencing many of the same risks as their western counterparts in investing on the African continent. “Rusal’s operations in Guinea are coming under pressure as President Lansana Conte is reviewing the privatisation of the alumina refinery despite his personal endorsement of the sale in 2006,” says Kissy Agyeman, Africa analyst at Global Insight.

Rusal is also facing a challenge from the local people around its operations in Kindia, who claim they have not benefited from the proceeds derived from the mineral resources. Allegations have been made that Rusal failed to honour its promise of providing basic services to the area, with civil unrest resulting in a temporary halt to operations at the CBK mine.