FUNDS: Russia stock market veteran discovers Iran’s Sberbank and Rosneft

By bne IntelliNews September 4, 2015

Jason Corcoran in London -


A veteran of Moscow’s capital markets has identified the Iranian equivalents of Sberbank and Rosneft as part of a quest to provide frontier investors with returns not seen since Russia’s heyday in the 2000s.

Alexei Yazikov, former head of research at Aton Capital in Moscow and executive at Robert Fleming, ING and Renaissance Capital, started First Frontier along with fellow alumni from both Aton and ING in 2013. Operating out of London as “the first truly pan-frontier investment bank”, they believe investor appetite for frontier markets mirrors the enthusiasm for emerging markets over two decades ago, when the latter first opened up to foreign investment.

The firm’s business model is to provide frontier-hungry investors with direct access to investment opportunities in Iran, Vietnam, Pakistan, Mongolia, Argentina and other disparate markets, through alliances with local brokerages on the ground. First Frontier opted not to take equity stakes in these brokers, but has exclusivity for distribution in the UK and Europe. “The terrible performance of emerging market funds has put more exposure on frontier markets,’’ Yazikov tells bne IntelliNews in an interview in London. “But the problem for investors is that information is hard to come by in places like Iran where companies don’t publish earnings in English. That’s where we come in, as we have the relationships with the brokers and translators.’’

Analysts at Renaissance Capital forecast that $1bn will pour into Iran in the first year after sanctions are lifted; a landmark nuclear agreement agreed in August between Iran, the US and other world powers means sanctions could start being eased as early as next spring. First Frontier is planning to set up an Iran-sanctions compliant fund with as much as £50mn.

Trip to Tehran 

In light of the progress in talks over a nuclear agreement between Iran and world’s major powers, Yazikov and his colleagues flew to Tehran earlier this year on a field trip organised by their local partners at Agah Brokerage Company.

They travelled to Iran via Istanbul and found that business visas can be obtained easily enough within two weeks, although in some cases invitations may be required from an Iranian organisation. “Passing through security was relatively quick, even though an Austrian guy in the line to passport control at the Khomeini airport complained that just a few years ago there were hardly any people at the window for foreigners and now the line is twice as long as that for the Iranians,’’ Yazikov recounts.

Tehran has a population similar to Moscow with about 14mn people in its metropolitan area. Like the Russian capital, it suffers from chronic traffic during peak hours and pollution is so bad the surrounding mountains can’t be seen through the fog, according to Yazikov.

What surprised the First Frontier guys the most was how normal and boring Tehran appeared to be. “Having travelled extensively across Russia, CIS and the former Eastern Bloc in the 90s, we were half-expecting to see the familiar signs of the beyond-frontier market on the verge of becoming a destination to foreign businessmen and investors – armed patrols in the airports and around the city, visible presence of numerous policemen on the roads, an extreme contrast between wealth and poverty, crumbling infrastructure, frenetic activity, street currency dealers, chaos and petty corruption on every step.’’

“There was nothing of the sort. I mean, no gun-toting Mafiosi and salesmen with shifty eyes from around the world, con-artists of all races or even furry green aliens flogging second-hand infinite improbability drives in the hotel lobby. And the smell of greed – oops, sorry, opportunity – and half-delirious excitement after long lunches was suspiciously absent.’’

In the hotels, Yazikov encountered business people from Germany, Austria, Scandinavia, a sprinkling of Russian and many of Chinese appearance.

First Frontier visited the market regulator, the Tehran Stock Exchange as well as huge conglomerates like Ghadir Investment Co, banks, oil and gas companies, and technology firms. One of Yazikov’s most distinct memories of the trip were cans of Russian Baltika non-alcoholic beer served on the tables of the steel company they met with. It turned out the company had received the beer as part of a barter payment.

Most of the large-cap companies are controlled by the Revolutionary Guard, while most of the oil companies have been off limits to foreign invesors due to the sanctions. Investments into companies where the Revolutionary Guard has a majority is not prohibited unless the company itself is on the sanctions list, but these companies do come under more spotlight of the regulators. “What matters is potential corporate governance risk,’’ Yazikov says. “From an investor point of view it is like investing in the company in Russia where Summa or Gazprombank also has interest. You may achieve a decent return, but only if you know when to quit because otherwise insiders will eat your lunch.’’

Yazikov identifies Khalij Fars with a market cap of about $10bn as Iran’s Rosneft. Bank Mellat, which has a large retail deposit base, is the country’s Sberbank. He pegged Novin Bank as the early RenCap or Troika, and their partners Agah as Aton. However, companies like Mellat and Ghadir remain uninvestable until they are removed from the US and EU sanctions lists, Yazikov says.

By applying his experience in Russia, Yazikov says investors can expect to double their money in the first year after sanctions are removed. “First gains will come from re-rating, then from utilisation of unused capacity, ramp-up of production and boost to revenues plus cost reduction from opening of the market and lower cost of capital. Then you have broadening of the market, IPOs, further expansion, first Magnits and Wimm-Bill-Danns and all that song and dance of the new economy.’’

Provided there are no major setbacks, he predicts Iran will become at least a $300bn-400bn market in five years time, with daily liquidity of half a billion on average. “Our overall impression was that the country is on the verge of a qualitative and quantitative breakthrough with sanctions relief as a trigger,’’ he says. “Some sort of Perestroika seems to be on the cards.’’

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