Monday, 26 May 2008

Troika Dialog - the chosen one

Business New Europe

Jason Corcoran in Moscow
May 22, 2008

Andrei Sharonov is flattered that Troika Dialog has been dubbed the Kremlin's preferred investment bank, but gently demurs at such a lofty description.

Troika's managing director and chairman of board of directors knows more than most about the links between Russia's public and private sector, having served in the government for a decade, including nine years as deputy minister of economic development and trade.

"I think Troika is in a good position, but there are some sectors in the government where we have no mandate and it proves the market is competitive," he tells bne in an interview. "I think there is no preference in general for the participation of investment banks in deals with the government."

Troika's status as the Kremlin's banker of choice has been raised because of its key role in the recent sale of a 25% stake in state-controlled carmaker AvtoVaz to France's Renault, its mandates from the break-up of the electricity monopoly UES and its involvement in the privatisation programme of the state-owned rail giant RZD.

Troika's owner and chief executive, Ruben Vardanian, has long-held links with several state-held industries as well as members of the siloviki, the so-called securities services faction in the Kremlin. He is also a member of the board of state-owned arms agency Rosoboronexport and has close ties to its chairman, Sergei Chemezov. A key Kremlin player tasked with reshaping the economy, Chemezov sits on the board of several Rosoboronexport-controlled enterprises such as Sukhoi Civil Aviation, which is spearheading the Kremlin-backed project to create a new passenger plane, and Russpetsstal, a specialist steel producer with military applications.

Sharonov, who was appointed to the bank in July, retains seats on the boards of the utility UES and the airline Aeroflot, but is clearly relishing his first job in the private sector. His role is to act as a bridge between the bank and the state, and to attract investments into Russian companies in utilities, automotive, telecommunications and high technologies sectors. "We are glad to be involved in such projects providing a valuable link to the private sector," explains Sharonov. "It's a pro-market activity and we try to involve first-class investors and producers and to increase competitiveness and financial stability for the target."

Having presided over the sale in February of a 25% blocking stake in AvtoVAZ worth $1.16bn to Renault, Sharonov says Troika hopes to clinch a similar deal for trucker manufacturer KamAZ. "KamAZ could be developed as a truck manufacturer with one of the big boys from the West. We are looking for a strategic investor and there are talks with a number of interested parties," he says. Reports in the Russian press suggested talks were taking place with Volvo, Iveco, MAN and a number of other manufacturers, though Sharonov declined to comment on the names.

Troika is one of the two co-ordinators of the upcoming IPO of TransContainer, the cargo subsidiary of national railways operator RZD. Sharonov also says Troika is putting together a debt syndicate for RZD so it could address its colossal half a trillion rouble investment programme.

He says Troika had taken part in half of the restructurings involving subsidiaries of the electricity grid UES. "The example of UES has been a good template for future privatisations insofar as unbundling a monopoly and attracting private investors. The final hurdle will be price liberalisation, which will be painful for citizens and companies involved," he says.


A keen observer of the current transition of power from Vladimir Putin to Dmitry Medvedev, Sharonov has been in touch with former ministerial colleagues in recent days to gauge the mood. "I spoke [recently] with a guy from government. He and his colleagues are very nervous about the imminent changes and what course the government will now take," he says.

Sharonov, who worked under German Gref, the former economy minister of and current head of savings giant Sberbank, believes the remaining economic liberals like Finance Minister Alexei Kudrin could be squeezed further. "I think it's going to get more difficult for him [Kudrin] to maintain his anti-inflationary policy when more and more factions from the parliament and the regions are pushing for spending. It's going to be difficult for him to maintain his course and for him to stay in government."

Kudrin is also fighting a battle to resist calls to invest Russia's new sovereign wealth fund in domestic stocks and bonds, a move Sharonov regards as disastrous for macro-economic stability at home.

Equally, Sharonov is also critical of western concern over the potential to use the $32bn National Welfare Fund as an instrument of foreign policy or to build up stakes in strategically vital assets. "Western markets have been overly paranoid about our new sovereign fund," he explains. "The idea that special laws were adopted in the West faster than in Russia to curb these funds indicates a level of paranoia and how the pendulum is swinging globally from an open market to a closed one."

Troika is itself trying to cash in on new markets overseas by reaching out to the Middle East and Asia. The bank set up a Kuwait-Russian business forum in March and is understood to be setting up an office soon in Dubai. It is also setting up a $1bn infrastructure fund and is seeking investment from Singapore's state-owned Temasek fund. Stephen Cohen, head of Troika's hedge fund business, told bne, the bank would soon launch a retail fund for the Japanese market in conjunction with local bank Shinsei.

Elsewhere, Troika recently acquired a brokerage and fund management operation in Kazakhstan and is understood to be bolstering its operations in Ukraine's capital Kyiv.

Deutsche begins Russian fightback with Moscow hires

Financial News

Harry Wilson and Jason Corcoran in Moscow

20 May 2008 updated 20 May 2008 at 08:32 GMT

Deutsche Bank has made 15 hires, promotions and internal transfers to its Russian business as it moves to repair the damage to its Moscow office wrought by a wave of senior departures in recent months.

The German bank has hired 11 staff to fill gaps left in its investment banking business by the departure of several bankers to state-owned rival VTB, including five for its Moscow-based equity research business.

The hires come just months before a change of senior management in Deutsche Bank’s Moscow office, with Igor Lojevsky, formerly head of Dresdner Kleinwort’s Russian business, joining the bank to replace Charlie Ryan as chief country officer.

Deutsche today confirmed Ryan is set to give up his day-to-day duties at the bank and become chairman of the operation when Lojevsky joins the business in late August. Financial News first reported the news yesterday.

Mikhail Seleznev has been hired from Citigroup as co-head of equity research along with Jaroslov Lissovolik. Seleznev was previously a metals and mining analyst at Citigroup, while Lissovolik was already a senior analyst in Deutsche Bank’s Moscow office.

The bank has made four other hires for the research business, with Tatiana Kopoustina joining from Aton Capital, the Russian business of Italy’s UniCredit, to cover the oil and gas industry; Bob Kommers from UBS to cover industrials and banking; Igor Semenov from ING to cover telecoms; and Brady Martin from Moscow-based broker Alfa Bank to cover retailers.

Dalinc Ariburnu, global head of emerging markets in Deutsche Bank’s global market business, said: “The Deutsche Bank business in Moscow is one of our most important emerging markets franchises, and having lost quite a few staff recently we wanted to move quickly to fill the gaps left.”

Pavel Dimitriev head of debt capital markets at Dresdner Kleinwort in Russia has been hired to head Deutsche Bank’s corporate coverage business in Russia and will be responsible for the bank’s global markets marketing operation in the country.

Deutsche Bank has also promoted its head of corporate equity derivatives trading for Russia and the CIS, Batubay Ozkan, to head of debt trading for the region, as well as hiring Alex Ponomorenko, from a Los Angeles-based private equity firm to run its illiquid credit, private equity and real estate trading business.

Tim Wiswell and Jack Busta have been appointed to run equity sales and trading in Moscow. Busta was a senior derivatives trader in Deutsche Bank’s London office and will oversee equity derivatives trading in Russia, while Wiswell was a senior salesman in Moscow for the bank.

Additionally, David Johnson has joined the equity sales trading desk from Alfa Bank, while Sergei Suverov has joined the domestic equity sales team from Citigroup.

Alexey Bolshakov and Patrick Vebel join the general Russian equity sales team from DWS and Deutsche Asset Management respectively. Yassine Rhalib, a derivatives structuring banker in London, transfers to Moscow to cover derivatives sales to corporates.

The hires will not be the last Deutsche Bank makes for its Russian business and the bank said it will add more staff in its Moscow office soon as it continues the process of filling jobs left by departed staff.

Ariburnu said: “We have been carefully choosing who we want to hire and expect to announce more appointments over the next couple of weeks.”

Deutsche Bank names head for Russia

Financial News

Harry Wilson and Jason Corcoran in Moscow

19 May 2008

Deutsche Bank has ended months of speculation over the leadership of its Russian business by rehiring the former head of its sales and origination team in the country to run its Moscow office, as Charlie Ryan, the current head of the group, prepares to step back from running the operation.

Igor Lojevsky resigned on Friday as chairman of Dresdner Kleinwort’s Russian business to return to Deutsche Bank, only 13 months after he quit the firm to join its arch rival, which has been hit in recent months by a wave of senior defections.

He will join Deutsche Bank in August as chief country officer for Russia, replacing Ryan, who is the last remaining founder of United Financial Group, the Moscow-based broker the bank bought in 2005, to be working in the business.

Ryan will retain what one source described as an “honorary” title within the business.

It is hoped the hire of Lojevsky will draw a line under a series of departures from Deutsche Bank’s Moscow office, mainly to the nascent investment banking business of state-owned Russian bank VTB.

Yuri Soloviev, the deputy head of Deutsche Bank’s Russian business who was viewed as a potential successor to Ryan, quit to head VTB’s Moscow-based investment banking team in March.

He was followed by co-head of investment banking Dmitri Snesar, head of real estate and infrastructure, Victor Makshantsev, head of research Alexei Yakovitsky and chief strategist Alexei Zabotkin, as well as several other senior bankers.

Deutsche Bank has the largest Russian investment banking operation of any international bank, employing around 900 people in the country, making it an obvious hiring target for rivals looking to build their own businesses.

Deutsche Bank and Dresdner Kleinwort declined to comment

Russia's Alfa Capital expands team to 28

Financial News

Jason Corcoran in Moscow
16 May 2008

Russian private equity adviser Alfa Capital Partners has expanded its private equity team with the recruitment of four from Goldman Sachs, Rothschild Investment Trust, Citibank and law firm Simmons & Simmons.

The appointments were made over the past two months and take the headcount at Alfa to 28.

Alexander Bezugly joined as a managing director from Rothschild Investment Trust, where he had been head of private equity for a closed-end listed investment trust chaired by Lord Jacob Rothschild. He previously worked in mergers and acquistions and private equity in London and Moscow with Lehman Brothers and Creditanstaldt.

Pavel Alimov has been hired as an investment officer from Goldman Sachs in Moscow, where he worked for two years as analyst. Vadym Pavlus has been appointed vice-president and arrived from Citibank in London, where he worked in the financial sponsors group.

Elena Mironova joined as general counsel from Simmons & Simmons and previously worked as head of legal at metal group Mechel Steel and legal practice Baker & McKenzie, both in Moscow.

Alfa Capital Partners advises funds with more than $700m (€452m) in capital from institutional and private investors alongside capital from Alfa Group, the affiliate headed by oligarch Mikhail Fridman.

The operation acts as the joint manager of the Marbleton Property Fund, serves as the regional manager for a $180m infrastructure fund and advises Alfa’s $200m private equity fund. Recent investments include $80m invested in Yolki-Palki, a restaurant chain, and $25m in automobile dealer Nezavisimost.

The firm is part of an increasingly competitive private equity landscape in Russia.

US firm TPG Capital has earmarked $1bn to spend per year on Russian equities and completed its first deal in April, paying $800m for a 50% stake in one of Russia’s largest drug distributors, SIA Pharmaceutical.

Renaissance Group announced in March it had raised $660m for its first private equity fund. Baring Vostok, one of the longest established players on the Russian market, last year announced a $1.5bn fund, while Troika Dialog is raising money for a $1bn fund.

Monday, 12 May 2008

Investors in Russia miss out as oil price gush passes them by

Financial News

Jason Corcoran in Moscow

12 May 2008

Falling production of crude and domestic issues have dampened the effect of global price rises

Crude oil rose to a record $123.9 a barrel last week following threats to supply in Nigeria and Iraq and growing Asian consumption. Yet fund managers investing in Russia’s oil majors have seen little upside over the past year as a result of declining oil production, high taxation and disputes involving shareholders and the state.

Only Lukoil (7.%), Tatneft (6%) and Gazprom Neft (5.2%), the oil arm of gas producer Gazprom, have outperformed the Russian market over the past year. TNK-BP, the Anglo-Russian joint venture, has fallen 12% and Surgutneftegaz is down 18% while Novatek and Rosneft are flat.

Alexander Kotchoubey, managing director of Renaissance Investment Management, which has more than $6bn (€3.9bn) in assets under management, believes the speculative bubble in oil prices is not applicable to Russia. He said: “The direction of oil price has not impacted our strategy. Domestic oil production is falling, Russia is facing a huge headwind in capital spending and the taxation policy looks confusing.”

Kotchoubey said the price of crude could rise to $130-$140 over the next six months before the bubble is pricked. Many Russia fund managers prefer gas to oil because of the liberalisation of domestic gas prices and the perceived undervaluation of state-controlled Gazprom.

The Energy Ministry last week reported operating data for Russian oil and gas companies, which showed crude oil output down 0.9% year-on-year in the first four months of 2008. Production data for Surgutneftegaz, Lukoil, Gazprom Neft and TNK-BP showed their production had fallen by more than 2%.

However, gas output was up 2.3% over the same period and Gazprom’s production rose 1.4%.

It was the fourth month in a row that Russian oil production had fallen. Commentators said it was this that provoked a change of heart in Vladimir Putin, who stepped down as president last week in favour of Dmitry Medvedev. Putin, now Prime Minister, had ruled out a reduction in taxes on oil companies, but last week told the Duma, Russia’s Parliament, that 75% to 80% of oil company profits were going to the Government through taxes and this had made some oil wells unprofitable. He called for taxes to be lowered to stimulate investment.

James Fenkner, managing partner of Moscow-based Red Star Asset Management, saw his hedge fund punished in March for its short positions on oil. He said: “The concept of $120 oil is not there in the Russian equity market. You just have to compare share prices of Brazil’s Petrobras to Russia’s best performer Lukoil. Petrobras has been on the tear and Lukoil is up just a tick.”

Fenkner believes oil prices will remain just above $100 a barrel until the end of the year because of the thirst of emerging markets.
Stephen Cohen, chief executive of investment bank Troika Dialog’s hedge fund business, does not factor in a view on current oil prices into his firm’s investment strategy. He said: “We don’t have a view beyond what the futures market is telling us. I think there will be some compression from the current spike but prices won’t fall dramatically.”

Lukoil has been one of Troika’s biggest holdings but it now prefers Gazprom because of increasing global energy prices and growing domestic tariffs for natural gas.

The UFG Russia Select Fund was almost entirely invested in oil and gas assets at its launch five years ago because its managers found it impossible to have a diversified portfolio. Florian Fenner, managing partner of UFG Asset Management, said: “In the past, the rising tide lifted all boats. Since valuations were so low for almost all assets in Russia, stock selection was only of secondary importance as long as you had significant exposure.”

Over the past five years, the fund has gradually shed almost all its oil assets and today treats oil stocks as a proxy for the market.
Fenner said: “We also find that the much-discussed political risks seem to be concentrated in oil. Derivatives, which did not exist for all practical purposes a couple of years ago, have become an asset class in their own right and are now a staple of our investment decision process. Risk-reversals and bull spreads on Gazprom are quite common parts of our portfolio. Thus, we might not make more money, but there is a lessened degree of risk.”

The significant underperformance of Russia’s oil sector has spurred the hedge fund Diamond Age Capital Partners to reduce its exposure in Russian integrated oils close to a zero weighting.

Slava Rabinovich, managing partner, said: “A key missing ingredient for the Russia investment case has been a catalyst to ignite the market’s largest sector.

“The very significant underperformance of the Russian oil sector over the past year and a half or so has been a drag on performance. The RTS Oil and Gas index is up just 3% since the end of June 2006, while our fund is up 27% during the same period.”

Rabinovich said the fund had benefited from oil strength through long crude futures contracts, and exposure to Commonwealth of Independent States oil stocks.

The oil and gas sector remains one of most important components of the Russian economy. It makes up about 65% of the market capitalisation, according to federal statistics agency Goskomstat.

The state’s share of Russia’s oil production has risen to 44%, from 6% in 2000, after it took over most of Yukos and Sibneft, according to investment bank Uralsib. The gas industry is almost all in the hands of the state-controlled Gazprom. Faced with declining production, the Government threw the oil sector a lifeline in March when Finance Minister Alexei Kudrin announced a proposal to reduce the mineral extraction tax for oil companies by roughly $4bn next year as part of a first step to support investment in the industry.

Since 2004, when oil giant Yukos was bankrupted, the Kremlin has buried the industry under a mountain of taxes as a punishment for Mikhail Khodorkovsky’s perceived attempt to mount a political challenge to President Putin.

The resulting marginal oil tax rate of more than 90%, the highest in the world, has suppressed crude production growth. In the four years before the 2004 change, Russia’s oil production grew at 8% a year; in the four years afterwards, it slowed to 2% a year.

When prices climb above $27 a barrel, the oil tax rate kicks in and this has reduced incentives to increase output and explore developing oil fields in remote regions beyond the maturing fields of West Siberia.

Investors remain concerned about potential state expropriation of TNK-BP following the decision by the Shell-led consortium to cede a majority stake at Sakhalin-2, a vast oil and gas field.

Russian oil shares rallied briefly following the news on taxation but some fund managers believe the state will ultimately find other ways to maintain the tax burden on oil companies.

Kotchoubey said: “Taxation is one of the big obstacles preventing investors from jumping in with both feet. They might ease taxation on exploration but the industry is too far into a production slide and they will probably increase tax on the other side of the pipe anyway.”

Hotel prices are in a league of their own

Financial News

Jason Corcoran

12 May 2008

Letter from Moscow

Online networking sites Facebook and Linkedin are helping to reunite many of Moscow’s expatriates with long-lost football-loving friends.

Old comrades and former colleagues, not heard from in almost a decade, have climbed out of the woodwork to e-mail, text and ring to enquire about tickets for the Champions League final on May 21, along with beds or sofas where they might sleep.

The red devils of Manchester United and the true blues of Chelsea have quickly realised that the Moscow trip may smash their budget for all of next season’s away games and the year after too.

Moscow’s tag as Europe’s most expensive city is deserved, if only for the cost of its accommodation. Budget hotels and hostels are thin on the ground in a city that caters more for the well-heeled tourist and business traveller.

With an estimated 42,000 football fans expected in Moscow on match day, beds have been at a premium and all the city’s hotel rooms have been snapped up, in spite of the inflated prices.
Moscow currently has 35,000 hotel rooms in a city with a population of more than 10 million.

By comparison, London, with a population of 7.5 million, has 88,000 hotel rooms, according to figures released last month by corporate services company Hogg Robinson.

Operators are focused on the five-star end of the Russian market and have so far failed to cater for the demand for two- and three-star rooms.

The Hogg Robinson study found that the average cost of a stay in the Russian capital last year was $480 per night; more than $100 higher than the second most expensive city, New York, at $370 per night.

The latest addition to Moscow’s array of five-star hotels is the Hilton Leningradskaya, which has been upgraded from three-star status since its closure and renovation.

Russia’s first Hilton hotel, which is due to open next month, is located in one of Moscow’s famous “Seven Sisters” – imposing skyscrapers built in the early 1950s in the Stalinist gothic style.

Completed in 1954, the 24-storey, 275-room hotel retains its historic exterior but the inside has been completely renovated. Prices have yet to be announced but guests can expect little change from $500 per night for a basic room.

The last hotel opening to cause a splash was the Ritz Carlton, where guests can part with $1,000 for a basic room or $16,000 for the top suite. The Tsar’s breakfast, which comprises Cristal champagne, Beluga caviar and a truffle omelette, can add $700to your daily tab.

The city government has floated a variety of ideas to address the lack of budget hotels in the city but little has materialised.

Part of the problem has been the disappearance of the Soviet-era hotels. The Rossiya, once Europe’s largest budget hotel, offered 3,000 rooms for as little as $60a night.

It was commissioned by former President Nikita Khrushchev, who wanted a hotel big enough to house all delegates to Communist Party congresses and unfriendly enough to subdue them.

However, it was pulled down three years ago to make way for a $1bn multi-functional entertainment complex with 2,000 hotel rooms.

The project looks to be bogged in a legal quagmire after a Moscow court recently nullified a $830m deal involving British architect Sir Norman Foster to redevelop part of the land.

For football fans without a bed, they can do worse than spend the night out on the town. Moscow, more so than New York, is a true 24-hour city where the traffic is non-stop and the bars, restaurants, casinos and malls remain open around the clock. Just don’t forget your wallet.

Wednesday, 7 May 2008

GLG allows investors to exit emerging markets

Financial News

Jason Corcoran and William Hutchings

05 May 2008

UK hedge fund manager GLG Partners has advised investors in its emerging markets fund they should not be penalised if they remove their money after Greg Coffey, the fund’s manager, has left.

The US-listed firm has received redemption requests in respect of the fund, which accounted for $5bn (€3.2bn) of the firm’s $24.5bn of assets under management at the end of last year.

GLG has received redemption requests of $2.5bn, according to a source close to the firm. A second source close to investors in the fund estimated GLG would receive redemption requests of more than $3.5bn relating to the emerging markets fund. GLG declined to comment on the figures.

Coffey, who resigned last month but agreed to stay on until the end of October, ran a total of $7.2bn in four GLG funds at the end of the year.

A spokesman for GLG said: “We will provide an update on GLG’s emerging markets funds at our first-quarter results on Wednesday May 7. We are in the process of communicating to fund investors the measures we are taking to protect them throughout this period and are confident in the process we have in place.”

The firm told the emerging market’s funds investors, in a letter dated April 25 and seen by Financial News, it was considering making a recommendation that the fund’s independent directors “waive redemption penalties and waive exercise of the redemption gate for the November 3 dealing day”.

The decision whether or not to waive penalties rests with the fund's independent directors, not GLG.

GLG’s share price was trading at $8.91 on Friday. The share price was $13.48 on November 2 when it floated through a reverse takeover.

Thursday, 1 May 2008

Rabinovich finds diamonds in the CIS rough

Business New Europe

Jason Corcoran in Moscow

April 24, 2008

Befitting for a frontier markets investor, Slava Rabinovich was one of the early adventurers to set up office in the Russian capital's emerging business district of Moscow City.

Rabinovich, founder and managing partner of Diamond Age Capital Advisors, moved into Tower 2000 in August 2004, just before the fund's inception in February 2005. From his 22-storey perch on the right bank of the Moscow river, Rabinvoich can keep an eye on the spectacular rise of Moscow City, located on the Presnenskaya embankment, three kilometres west of the Kremlin.

Rabinovich's pioneering spirit has taken him a circuitous route to setting up his own hedge fund, which invests in Russia, Ukraine, Kazakhstan, Kyrgyzstan, Azerbaijan, Georgia, the Baltics, Uzbekistan, and over 27 countries globally whose principal focus is the former Soviet Union.

"I have been described as a pioneer because I was here at the inception of Russia's capital markets with Bill Browder at Hermitage," he tells bne in an interview. "Some people have been investing with me since 1996 and, at that time, we were the only investment firm in town."

A St Petersburg native, Rabinvoich emigrated to the US in 1988 and returned to Moscow eight years later after gaining an MBA from New York University.

Hired by Hermitage Capital in 1996, he helped its founder and principal Bill Browder build up the business from scratch to over $1bn in just four years. Rabinovich served as head trader and assistant portfolio manager to Browder, who established the fund's aggressive activist stance toward energy giant Gazprom and other Russian blue chips. "I was number two at Hermitage during the wild days of the mid-1990s capitalism," he recalls. "I was second in command, so I was in the spotlight and that carried a risk. I remember [US businessman] Paul Tatum was shot the weekend I arrived at Hermitage in November 1996."

Rabinovich opted to leave Hermitage because he realised Browder was never going to give up the reins. He helped kick-start Renaissance Capital's fund business in 2000 following the 1998 financial crisis, and in 2001 went on to set up an investment unit at MDM Bank.

All that glitters is not gold

His own fund Diamond Age has grown at a decent lick to $102m in assets under management today from $2m at inception. Diamond's clients already include four individuals from the "Russian Forbes 100 Rich list" and several foreign private banks. With a three-year track record just under his belt, Rabinovich is looking to hike assets under management by winning over more Swiss and UK fund of funds clients. The fund, which has a minimum investment of $100,000, posted a 30% annual return at the end of March and a cumulative return of 127% since its launch. "Larger financial institutions are considering us more investable now, that we have cleared $100m assets under management and posted strong three-year numbers," says Rabinovich.

The fund tracks over 500 stocks globally with the only proviso that they are tied to the economic expansion and integration of Russia and the former Soviet states into the global economy. "We don't buy Coca-Cola or Microsoft just because they sell their products in Russia," he says. "We only consider companies where Russia and the former Soviet region has a significant impact on their income levels."

Diamond had been bullish on metals and mining stocks, which has helped performance. The fund is also exposed heavily to financial stock: it has bought shares in state bank VTB as a consolidation play and invested in Austrian and Swedish banks, which have a strong presence in Russia and the CIS.

Rabinovich shorts funds on a case-by-case basis. "We do short on an enterprise specific basis, but I don't have a compelling investment case to be a net short or market neutral in a region which grows double digit and which has earnings per share growth of 18%," he says. "We would be net short if the markets were to boom in a bubble and appreciate by 150% in a short period of time without corresponding growth in fundamentals."

In the third quarter of 2006, Diamond dramatically reduced and sold all of the integrated Russian oil companies and even shorted some of them. "The Russian companies were not making money due to high taxation, but since we were bullish on oil we bought crude futures and shorted some of the Russian oil companies," says Rabinovich.

Diamond cut the fund's leverage from as high as 30% down to zero in mid-January. The decision was taken on the basis of pure risk management rather than the cost of leverage, according to Rabinovich.

Diamond was one of the first investors, along with the European Bank of Reconstruction and Development and New York-based fund Firebird, to cop onto the potential of the Bank of Georgia in 2005. Within two years of investing in the lari-denominated stock, its GDRs had flown by 1,000% in value. Rabinovich had only scaled the bank as 1% of the fund because of its risk profile, but still banked a tidy profit.

Diamond's fund managers use a network of counterparties and brokers throughout the region, and spend most of the long Russian public holidays on the road looking for new opportunities. New recruit Kim Iskyan, former co-head of research at UralSib, knows Armenia and Kyrgystan from his previous incarnation as a journalist. About 15% of the portfolio is invested in what Rabinovich terms "frontier-frontier," which includes punts in 16 Uzbek stocks.

The fund has about 25% allocated to the large caps listed on the Moscow index. In a recent note, Rabinovich wrote: "Since mid-2006, the RTS has corrected by 10% or more on seven occasions and each time bounced back stronger afterwards. This time, given the valuations combined with growth and the overall prospects of the region, we are of view that it will be no different, and Diamond Age is positioned to take advantage of the anticipated strong valuation expansion of multiples, adjusted for growth."