The full extent of Western economic sanctions on Russia after its Feb. 24 military invasion of Ukraine is still uncertain. But private equity and venture capital investments in Russia have already been impacted by restrictions imposed on Russia's banking system.
Starta Ventures, a New York-based global venture capital firm with offices in Berlin and Moscow, has completed 17 deals in Russia since 2018, according to S&P Global Market Intelligence data. It works with technology company founders in both Ukraine and Russia that have incorporated their companies in the U.S., but many still have development teams in their home markets that may be cut off from cross-border payments, said Renat Khairullin, a program manager at Starta.
"They need to pay [development teams], they need to transfer that money and the banking system now in Russia is under sanctions," Khairullin said.
Announced sanctions on Russia also include restricting access to cutting-edge technology, which will likely slow innovation and development in that sector. Khairullin said more technology startups will relocate their companies outside of Russia.
Another impact will come from the plunging ruble, which has fallen about 30% to the U.S. dollar in the last few days. Should the ruble stay at that level or worsen, local companies allowed to buy foreign equipment, supplies and services will face far higher costs on purchasing, and companies with revenue derived from domestic consumers will likely take a hit if inflation flares and GDP weakens.
On the limited partner side, the invasion and sanctions have prompted a growing number of U.S. institutional investors to announce the intention to divest from Russian holdings. Virginia, Georgia, Rhode Island and Colorado are among the states with investment entities that are reviewing or pulling out of Russian investments.
Small deals
Private equity and venture capital investment in Russia is relatively small, totaling $2.41 billion since 2018, according to Market Intelligence data. Venture capital firms have made the most deals, though the vast majority of investments have been in the single-digit millions.
Foreign investment since January 2018 totaled $551.1 million, or about 23% of the total investment in Russian companies by private equity and venture capital firms.
The largest deal during the measured period was a round of venture capital funding in 2020 that raised $42 million for Ecwid Inc., a Russian IT company behind a small-business e-commerce platform. The round was led by new investors Morgan Stanley Private Equity and PeakSpan Capital LLC.
Next was a 2018 private-placement deal that raised $15 million for LLC MKK SimpleFinance, a Russian financial technology company specializing in loans to small and medium-sized businesses. The investor was a fund managed by SBI Investment Co. Ltd., which had a 25% stake in the company following the deal.
Investment in Russian companies by domestic private equity and venture capital firms has tended to overshadow investments by foreign firms since 2018.
