Economic Analysis: Blackstone Leaves Russia

The Blackstone Group (BX: NYSE), one of the United States leading private equity groups is hoisting the white flag and leaving Russia. Even investment firms who have seemingly strong connections are giving up doing business in Russia as Western sanctions take hold.

The New York based firm is done. They have, for three years, and without success been trying to find deals in Russia ever since its co-founder Stephen Schwarzman joined the Russian Direct Investment Fund (RDIF), as a member of its advisory board. This is a Russian government backed $10 billion fund. Since then, the RDIF has hired form head of investment banking for ING, Dmitri Kushaev to be a senior adviser on deals within the Russian Federation.

However, Blackstone, which has no office in the Russia, has refused to renew contracts supplying consultants it employs in Russia. This ends any attempts by Blackstone to break into Russia.

Russia is currently being battered by both European and U.S. sanctions against its government officials, state backed industries and financial institutions as a penalty for Russia’s involvement in the Ukrainian war. These sanctions have led to a freeze in all Western investments into their economy.

Blackstone has not found a suitable investment opportunity in Russia in three years. This has forced them to surrender and give up. They could find nothing in good times, and have reasoned, correctly, that they will find nothing during these bad times.

Earlier in September, DMC Partners, a private equity group consisting of three former Goldman Sachs (GS: NYSE) executives shut down. They failed to raise a planned $2 billion fund.

Also, the European Bank for Reconstruction and Development has suspended operations in Russia. They backed many of Russia’s successful private equity firms for nearly 30 years. This included Baring Vostok. They have suspended any new investments into Russia’s banking system. These international buyout groups had their worries about Russia long before the Ukrainian crisis. There has always been concern about corruption, interference from political echelons and one very complex and confusing judicial system.

These worries were bolstered after AFK Sistema Chair Vladimir Yevtushenkov was arrested on charges of money laundering. The charges supposedly stem from the acquisition of the oil producer Bashneft, which is a Russian based oil producer.

Private equity groups are fleeing Russia. Only TPG Capital,  based out of the United States, is the only global buyout group to have made any successful headway into Russia which continues to be dominated by state owned VTB.