Ben Aris in London -

As the traditional high-risk markets of Eastern Europe have gone mainstream, investors addicted to the heady triple-digit gains earned in the past are moving onto the frontier markets to feed their habit. In January, Alisher Djumanov, managing partner of Eurasia Capital Management, launched a $100m fund focusing on out-of-the-way places like Kyrgyzstan, Uzbekistan and Mongolia.

Russia has been the traditional high-risk/high-return market in Eastern Europe, but as foreign direct investment (FDI) floods in and reams of research is pumped out, what was once the "Wild East" has become almost pedestrian. The international investment Klieg lights then swung to illuminate Ukraine and Kazakhstan at the start of 2006, but even these markets are rapidly becoming well understood. When a Swedish-based fund manager launched a Kazakhstan and Caspian region fund at the time, the allocations were filled in a matter of days.

The Kazakh stock market has since been through a rapid boom-bust as money poured into Central Asia, only to drain out again within a year as the US sub-prime debacle rapidly scotched enthusiasm. But Djumanov's Eurasia Capital has been running well ahead of the pack; even as international investors latched on to Kazakhstan, Eurasia had almost no exposure to trendy Kazakh banks and has preferred to invest into frontline economies like Uzbekistan and Mongolia.

A rare breed

There aren't many Western-trained investors working in the countries of Central Asia other than Kazakhstan, and you can count the number of Uzbeks who have a Fontenbleau MBA and experience of working in a Western bank on one hand. Alisher Djumanov is one.

Last year, Djumanov sold his 50% share in Ansher group to strike out on his own and has set up a family of funds to capitalise on the burgeoning Central Asian market. Many of Eurasia Capital's funds were set up in 2007 and include a Central Asian open-end fund, a Central Asian Real Estate Fund and Eurasian Financial Institutions Fund.

While Kazakhstan has attracted most of the attention because it's so advanced with its reforms, has massive oil deposits and "President for life" Nursultan Nazarbayev is an enlightened despot, giving talented pro-market reformers in Kazakhstan their head, Uzbekistan should be the more natural investment destination in the region. Uzbekistan, with a 25m-strong population and the only so-called 'Stan' with a border of all five of the other Central Asian republics, is the natural production and distribution base in the region - the centre of a market with 80m people. "We are contrarians," says Djumanov. "We have less than 20% of our investments in Kazakhstan and as of August 2007 [when the US sub-prime market crisis hit], we had zero exposure to Kazakh banks. Why? We are from the region and we see things differently."

The problem with Uzbekistan is that Islam Karimov, an old-school hardliner who keeps a tight grip on power, runs it. For more than a decade, the government in Tashkent lived hand to mouth on its $3bn-a-year cotton export business. But finally the glacial pace of investment and reform has started to pay dividends.

Real estate is an obvious investment in nearly every market of the Commonwealth of Independent States (CIS). It started in Russia where prices in Moscow have soared from $900 per square metre to over $20,000 in the most exclusive parts of Moscow. From there, the property boom has spread out into every corner of the former Soviet Union. Apartments that could have been picked up for a few tens of thousands of dollars on Kreschatik in Kyiv just a few years ago are now going for millions of dollars, and the prices in the nice parts of Almaty are not much less expensive. Even the cost of housing in the Kyrgyz capital of Bishkek has doubled in the last year.

For most investors, the only way of getting exposure to these exotic markets is to fly to Bishkek and buy a flat (which is exactly what some Western bankers living in Moscow have done). That was until the launch of Eurasia's Central Asian Real Estate Fund last year. "The fund is the only way for international investors to get exposure to the real estate markets from Bishkek to Baku," says Alisher. "The fund is investing into projects and property rights across the Caucasus, Central Asia and on to Mongolia, all of which are largely being driven by domestic investors."

Registered in the Cayman Islands, Eurasia Capital's funds have a minimum investment of $100,000 and carry the classic 2% management fee, 20% of the profits fee structure. "We have seed capital of $25m and hope to raise a total of $1bn across all the funds eventually. The existing funds already have $100m under management," says Djumanov.

Uzbekistan attracted a lot of attention in the first half of the 1990s. But when Karimov lost his nerve as the country's limited hard currency reserves began to dwindle thanks to a flood of imported foreign goods, he clamped down on foreign exchange and killed investment dead in its tracks. However, now the car plant in Andijan and metal exports from the Kazylkum desert have begun to gather momentum, the government is finally started to ease up on the onerous exchange rate mechanisms and the economy has responded.

The milestone that marked the revival of interest in Uzbekistan was the purchase of the local operator mobile phone company Uzdonrobita by Russia's MobileTele Systems (MTS) in 2005, which showed it was possible to buy companies in Uzbekistan and make a profit. "After that deal there was a flood of other investment," says Djumanov. "Maybe the most interesting of the recent deals was STS Media, aka CTC Media, set up a joint venture with an Uzbek group of investors to launch an entertainment channel on local TV."

Djumanov tied up with John Davies, who was the first (and only) foreign investor to have bought Uzbek equity on the local exchange, while still working for Diamond Age investment fund. Davies quit last year and has gone into a joint venture with Djumanov to exploit the opportunities in Central Asia and run the Greater Russian fund and the Eurasian Global Compass fund. "Investment is coming in. It is not a wholesale change, but it is starting move," says Davies. "Strategic investors like Lukoil, Gazprom and MTS have all arrived and begun to invest. The market is out on its own and has no correlation with the markets in, say, Russia. It is a consumer play, as there are great stories in agriculture, fertilizers, tractor leasing and bakeries, to name a few."

Still, old habits die hard and the Uzbek market is still heavily regulated, with foreigners' participation restricted in certain sectors like finance. However, Davies says that if you have a good local partner and a special purpose vehicle, then it's possible to invest even in these sectors. Karimov remains in control and while local businessmen say that the changes aren't exactly "liberalism," the government in Tashkent has finally woken up to the need to ease state control and is starting to understand the need to support private business.

Even so, these aren't markets for the uninitiated. Investments remain hard to make and the two biggest problems are the lack of stock to buy and the lack of liquidity that allows gains to be realised.

Xanadu bound

In many ways, investing into Uzbekistan is a no-brainer. The issue was not whether it was a good idea, but only to judge when the government had eased its grip enough to make it worthwhile - a point that Djumanov argues has now been reached. However, Eurasia Capital's Mongolia fund is not an obvious destination at all, but arguably the most exciting investment in the neighbourhood of the former Soviet Union.

Mongolia is as far from anywhere else as it's possible to be on Earth, so it's understandable that it hasn't exactly been on international investors' radar. However, in January Eurasia Capital launched the Mongolia Discovery Fund - the first ever offshore fund dedicated to investment in the land that was home to Gengis Khan and Xanadu. "There are a number of banks, insurance companies, infrastructure projects in the country. It is changing very fast and the market is isolated from the shocks that the rest of the world has been feeling recently: while almost all the equity markets in the world tumbled in January, the Mongolia Discovery Fund was up 3%," says Djumanov.

For most of the last decade, the only things to come out of Mongolia were cashmere, copper and documentaries. But that is changing fast. Despite its out-of-the-way location, Mongolia lies at a strategic crossroads between the two global powers of Russian and China, and is rich in untapped mineral resources. Russia's leading raw material producers have focused on the high steppe simultaneously. Gazprombank, Lukoil, RusAl and Renova are all scouting out mining options in Mongolia, while China is pouring money into the country, hoping to secure access to the mineral resources that it badly needs for the development of its impoverished northwest provinces.

Eurasia Capital offers exposure to Mongolia's three leading companies that are already listed on international equity markets. Mongolian Energy is the state-owned coal miner and is listed in Hong Kong where it has a market capitalisation of $2.5bn. Ivanhoe Mines is exploiting gold and copper deposits and is listed on the New York Stock Exchange with a market capitalisation of $4bn. And Centerra Gold is producing gold in Mongolia and is listed in Toronto where it has a market capitalisation of $2.5bn. "Together, just these three companies have a market capitalisation of about $10bn and this is just scratching the surface of what is available in Mongolia," says Djumanov.

In addition to these three large, liquid stocks, the Mongolia Discovery Fund will go a step further and give investors exposure to local companies and real estate investments. For example, under the local laws all companies that win mining licenses in Mongolia have to list 10% of their shares on the local bourse - 40 international and domestic companies have already applied for licenses. "Many of the most sizable companies haven't listed yet," says Djumanov. "This country is right at the start of the process, but moving forward fast."

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