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. Last Updated: 07/27/2016

Bank Given Mandate to Invest in Industry

The country's new Development Bank, slated to receive almost $10 billion this year, will be able to buy strategic stakes in companies and stocks, according to an investment mandate published by the government.

The mandate will make it possible for the Development Bank to join the ranks of acquisition-hungry sovereign wealth funds from major emerging economies and oil exporting nations, whose activity prompted calls for protective measures in the West.

The Development Bank, based on state-owned Vneshekonombank, is tasked with financing an industrial and technological comeback from the country's post-Soviet economic collapse and boosting growth in non-oil sectors of the Russian economy.

"That would seem to imply that it might be used to take strategic stakes in foreign companies for the purposes of industrial policy or to purchase them for their intellectual property," said Rory MacFarquhar, analyst at Goldman Sachs.

The bank could also prop up domestic stocks in case investors flee the market amid global jitters and indexes dive ahead of next year's presidential election, when a successor to President Vladimir Putin is elected.

Prime Minister Mikhail Fradkov, who signed the mandate, chairs the eight-strong supervisory council of the Development Bank. His son, Pyotr, sits on the bank's management board.

According to the mandate, published Thursday, the bank will work closely with the government's Investment Fund, a vehicle that will finance infrastructure projects ranging from a highway to a luxurious Moscow suburb to a Baltic Sea port terminal.

The Development Bank's broad role and generous funding has led some critics to warn that it could become a vehicle for populist pork-barrel politics and a feeding trough for corrupt politicians.

German Gref, the Economic Development and Trade Minister, has likened the Development Bank to state-controlled Gazprom, which has aggressively accumulated banking, media and energy assets outside its core gas business.

The mandate says the share of loans with maturities exceeding 3 years in the bank's portfolio should not be less than 80 percent. It also enables the bank, which has a higher credit rating than Russia, to borrow at home and abroad.

The Development Bank will receive the bulk of its money from the $127 billion oil stabilization fund under a plan to use some of Russia's oil wealth to jump-start industry and repair aging infrastructure.

The Finance Ministry said that the National Welfare Fund, a riskier part of the new Oil and Gas Fund, which will be created next year as part of the budget reform, will only be a portfolio investor and place its money exclusively outside Russia. With memories still fresh from the late 1990s fall in oil prices the government has been prudently stashing away all the cash in the stabilization fund in super-safe AAA-rated securities.

This year Putin announced plans to invest up to $27 billion in industry, infrastructure and technology.

The mandate said the Development Bank could invest in projects with total costs exceeding $78 million in shipbuilding, aviation, space industry, nuclear energy, transport, timber and defense industries.