Bids and offers in no-man’s-land
Have fund, will travel
THE ROUTE TO the Kant Cement-Slate Plant from Bishkek, the capital of Kyrgyzstan, is a bumpy 20 kilometres. And our car, which carries foreign number plates, is likely to attract unwelcome attention from the notorious traffic police, known by their Russian acronym GAI, stationed along the route.
After some discussion about what’s best to do our host has agreed to send his SUV, bearing official government plates, to accompany us on our journey. We weave our way through the traffic at will, paying little attention to oncoming vehicles. Those police who do contemplate stopping us have second thoughts when they see the car heading our mini-convoy. They melt away into the background. Sometimes, it seems, the system has its advantages.
We pull up at the plant, its spluttering chimneys sharply highlighted against the blue of the sky and the white of the snow-capped mountain range behind it. The snow on the mountain peaks never melts, not even in the burning 40ºC heat of summer. The thought crosses my mind: what exactly are we doing here?
It’s the final day of a week-long trip around central Asia, accompanying two hedge fund managers as they tour the region on the lookout for new investment opportunities. And cement might prove to be a good investment, as demand for building materials across the region looks set to rocket.
Kant Cement is one of five cement companies spread across Russia, Kyrgyzstan, Kazakhstan and Uzbekistan that is ultimately to be packaged into a holding company and listed, in all likelihood on a London exchange.
Demand for cement is huge, particularly in Kazakhstan, where the government is engaged in the construction of its new capital, Astana, from scratch. Afghanistan is also expected to become a big importer, along, of course, with China. Kyrgyzstan is a poor, mountainous and largely commodity-free state nestled between China, Kazakhstan, Uzbekistan and Tajikistan, and this factory could well prove to be one of its most profitable enterprises.
The plant’s general director, Adal Issabekov, was transferred here from one of the Russian cement companies in the group earlier this year, with a mission to get the factory working to its full capacity before a listing plan is taken any further.
Kant was one of the largest cement producers in the USSR and, despite ageing equipment installed in 1962, it is in reasonably good condition, Issabekov says.
To falling jaws all around the room, he then proceeds to tell us about the factory’s other product – artificial slate. “It is not used widely in Europe, I know,” he says, “as ecologically speaking, it is not very politically correct. One of its main ingredients is asbestos. However, there is a huge demand for it in this region.”
Our western attitudes make us baulk at this use of something so injurious to health. Yet it is clear that for the local population, who face temperatures of minus 25ºC and below every winter, such concerns are secondary to having a warm roof over their heads.
We express the hope, at least, that this will prove to be a market with a finite lifespan. “As the population gets richer, demand will certainly drop,” Issabekov agrees.
At the moment, Kant is Kyrgyzstan’s only cement producer, and the country’s anti-monopoly commission that regulates it ensures that most of its production is destined for domestic consumers at below-market prices.
However, the government is building a new cement plant, and once Kant is no longer a monopoly it can take full advantage of higher market prices abroad in such places as Kazakhstan.
We are invited to take a tour of the plant and jump in a minibus, accompanied by the chief engineer. On our way round, we cannot escape a visit to the slate production line, including a warehouse where thousands of bags of a white-looking substance – asbestos – are piled high up to the roof. The chief engineer pooh-poohs our questions about its safety, saying that he has worked in the plant since the 1960s with no ill effects. But as he finishes saying this he breaks into a spasm of coughing; it does nothing for his argument.
The new adventurers
The Diamond Age Russia Fund is one of the few hedge funds operating on this new frontier. Just 14 months old, and still growing, it recently became the first international institutional investor to buy into the corporate bond market in Uzbekistan. Today, it also holds nine Uzbek equities, with a total Uzbek allocation of 6% of the fund spread between different bonds and equities, meaning that no position is worth more than 0.5% of the total fund.
It also boasts investments in Azerbaijan, Kazakhstan, Turkmenistan, Ukraine, Georgia and the Baltic States as well as its core market of Russia. Its strategy is to invest in the stocks and bonds of any company that has most of its assets, revenue growth or net income growth in one of the countries of the former Soviet Union, regardless of where they are listed. It also invests in derivatives in currencies, interest rates and commodities. The fund’s key investment professionals, Slava Rabinovich, a former head of leading private Russian bank MDM’s asset management arm, and previously an assistant portfolio manager and head trader at Hermitage Capital, the largest public equity investor in Russia; and John Winsell Davies, previously a director of Alfa Capital and a managing director of Franklin Templeton Investments, are constantly on the lookout for new opportunities.
They believe that central Asia might offer these. It is a region where first-mover advantage is everything. By the time the hedge fund community at large has cottoned on to the yields that a market can offer, the type of returns that allowed a pioneer to produce a more than 82% return net of fees for investors during its first 14 months of operation have already begun to be eroded.