Clare Nuttall in Almaty -

Troika Dialog completed its acquisition of Almaty-based Almex Asset Management just weeks before the collapse of Lehman Brothers plunged international financial markets into freefall. James Turnbull, CEO of investment banking and global markets Kazakhstan, outlines the firm's strategy and explains why it still makes sense to be expanding in the country.

According to Turnbull, the firm plans to build "a significant operation" in Kazakhstan. Ultimately, it will offer the full global market platform it already provides in Russia and Ukraine, comprising equity and fixed income, investment banking and advisory services, private equity, private banking and wealth management.

"Troika has a five-year goal: to be and continue to be a market leader in all the businesses it's operating in," says Turnbull. "It sees itself very much as a local champion, a domestic investment bank. Kazakhstan is a market that we have to dominate if we're going to fulfill our goal of becoming a true Russian and CIS powerhouse."

Troika first announced plans to buy Almex in March this year. It purchased 100% of the company from its previous owner Almex Holding Group, a company jointly owned by Dinara Kulibayeva - daughter of the Kazakh president - and her husband Timur Kulibayev. Today, the Almaty office numbers 22, a combination of former Almex staff and new hires. Troika also inherited from Almex the full range of licences it needs to launch its business in Kazakhstan, as well as its offices in central Almaty. A move to larger premises is planned in 2009, by which time the team is due to double in size.

Turnbull, who previously headed Russian origination and structuring for Merrill Lynch's fixed-income business, joined Troika in August. From previous visits to the city, he is already well connected with local business people, including Askar Yelemessov, who is now the firm's chairman.

Troika's initial move in Almaty was to put together a team of analysts. While it already covers a number of Kazakhstan's London-listed blue chips from Moscow, the Almaty office will add coverage of additional GDRs such as ENRC and some of the locally traded stocks. Next, it will get its equity trading platform up and running in Kazakhstan. "Our idea is to build a local equity trading platform for our clients," explains Turnbull. "Troika has a specific way of doing business in terms of how we manage risk. Our equity trading initiative is very centrally controlled, which means rolling out a sophisticated IT platform that will allow Troika to have a direct window onto the local exchange."

Compared to the $150-180m daily trading volume of Kazakh bonds and equities offshore, Turnbull acknowledges the volume traded on the KASE (Kazakhstan stock exchange) is relatively small. "Yes, it's an investment project," he says of Troika's local trading platform. "Given the size of the market, I suspect that the immediate rollout doesn't justify a two-month payback. However, it will demonstrate that we are a real local presence."

He is also confident that the market will expand, a process driven by the entrance of Troika and two other large Russian investment banks, Renaissance Capital and VTB, to the market, alongside homegrown Visor Capital. "I think we'll see a virtuous circle. Some funds have been nervous about the banking sector and custodian arrangements, but those problems are going to recede. I think the transparency of the exchange and the availability of top-class research will give people compelling reasons to come back to Kazakhstan," he says, adding that in the longer term, the KASE has a real opportunity "to become a powerhouse for offshore entities from the region."

Troika's other priority for 2008 is to showcase its investment banking activities, which will put it in a strong position when the IPO markets re-open. "It's very difficult to say right now when the capital markets will re-open for equity and debt issuers," Turnbull says. "In the meantime, I think there's going to be a lot of work that we can reasonably pitch for on the investment banking side. For example, there's clearly going to be clearly a lot of change around Samruk-Kazyna, and a lot of restructuring work."

Brighter outlook

Despite the recent turmoil that has sent stock prices in Kazakhstan, along with other emerging markets, plummeting, Turnbull says that the reasons why Troika chose to enter Kazakhstan still hold strong. "Part of the panic in emerging markets derived from the implied commodities prices. The implied forecast of where the oil and metals and mining companies are trading, takes them in some cases way below the marginal cost of production," he says. "Clients that we speak to think that will be a short-lived."

Turnbull points to Opec's oil production cuts, as well as expected cutbacks in nickel, zinc and copper output. "I think that should resuscitate the commodities market, perhaps in the second half of next year," he says. "Some of the reasons why people were forecasting $200 a barrel of oil a few months ago have been forgotten, but the intrinsic systemic arguments are still valid.

"I'm hoping that in 2009 markets will start to anticipate a recovery and perhaps that will coincide with a much brighter economic outlook in Kazakhstan." Even at this low ebb, Troika is forecasting a minimum of 4% GDP growth in Kazakhstan this year.

The firm expects the commodities story to remain at the fore, to a greater extent than in Russia or Ukraine. "Kazakhstan doesn't have the same consumer and retail angle that has driven the Russian market. Supermarkets and retail will play a role, but the population is a tenth of the size of Russia's," he says. "Most people are investing here for the extremely exciting opportunities in agriculture and commodities - oil and gas, base metals and gold."

In the last week, more details of the Kazakh government's plans to support the banking sector and the rest of the local economy have emerged. Further analysis of the implications of the Samruk-Kazyna merger to form the $40bn "National Wellbeing Fund" and other government measures will have to be carried out, notes Turnbull.

"Opportunities to manage these funds could be quite exciting in time. I think it's potentially a mutually beneficial arrangement. The corporate sector is bringing in funds which it needs to grow. The government is providing the liquidity, but by making an investment at the bottom of the cycle, it also benefits."

Global shift

Turnbull is enthusiastic about Almaty, which he first visited in 1997, not just from a business point of view but also as an ex-pat now living in the city. "Almaty is a fascinating place, full of opportunity and very inviting," he says. It's not difficult to appreciate this on a crisp autumn afternoon. Looking out from Troika's seventh-floor boardroom, the ochre and russet trees on some of Almaty's abandoned development sites stretch towards the mountains and the towering Hotel Kazakhstan.

But Almaty is more than a pleasant location. Its situation not only in the heart of Central Asia, but on an increasingly important axis between Russia, the Far East and the Gulf states, makes the move here a highly significant one for Troika. "Certainly, Almaty will be a very important centre," concludes Turnbull. "The world hasn't changed forever, but it may have tilted on its axis. People used to tell me that Kazakhstan is a long way away. Measuring from London or New York, it is. But if you look at where the influence is, where the dynamic economies are, you're looking at China, Singapore and the Gulf. Troika needs to build a bridge to these markets, which will be a very important part of the future of investment in Kazakhstan and Russia."

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