NOVEMBER 2006
A Russian Odyssey
He made a fortune for himself and others in Russia, not to mention enemies. Now Bill Browder is locked out.
In his glory days Bill Browder lived and worked in Moscow before his visa was revoked in 2005. Now he works in London and lets others represent Hermitage Capital inside Russia.
In a town where the super-rich celebrate their birthdays by hiring international rock groups for private concerts or throwing wildly decadent parties at 19th-century mansions, Bill Browder's 40th was a modest, if slightly surreal, affair. He had hired out a bar in a quiet Moscow neighborhood. A bevy of attractive hostesses glided among the guests, most of them besuited men who seemed to be not actual friends of Browder's but the bankers, fund managers, businessmen, and journalists with whom he spent his working days. Around the walls hung screens playing a medley of clips from Browder's interviews on Bloomberg and CNBC with the sound turned off—a continuous loop of glorious Browdervision. An actor who specialized in Lenin impersonations took the microphone and, in a long and flowery speech, presented Browder with the Order of Lenin, in commemoration of his grandfather's leadership of the American Communist Party and Browder's own contribution to Russia's economic boom. As the fake Lenin declaimed, the real Browder simpered, and the virtual Browders pontificated silently around us, we watched with both amusement and embarrassment, exchanging snide jokes about his overblown ego while stuffing our faces with sushi and downing cocktails at his expense.
The media, which he is a self-acknowledged expert at playing, typically depicts Browder, now 42, as the plucky little guy exposing corruption and mismanagement by the heavyweights of the Russian business world. There is no doubting his achievements. He has publicized some of Russia's biggest corporate-governance scandals, and Hermitage Capital, which he started in 1996 with $25 million, currently has $4 billion under management. An investor who joined at the start would, by the end of July this year, have had 24 times what he put in. (Russia's stock market index, the RTS, grew by just under 15 times.)
Illustration by Mark Ulriksen
On top of that, nobody I know of has ever accused Browder of swindling, stealing, killing, or otherwise breaking the law. Among Russia's economic elite, freedom from even one of these taints is a mark of relatively good character. Being guiltless on all counts practically qualifies you for sainthood.
All the more remarkable, then, that quite a lot of people—including not a few of Browder's birthday guests—do not really like the man. Since his visa to Russia was revoked a year ago, there has been not a little schadenfreude that the upstart has finally gotten his just deserts—as well as feverish speculation about whom he finally pushed that one step too far.
Browder's demeanor is a strange mix of caution and directness, like someone who is permanently ready both to be attacked and to meet it head on. But he owes his success, in large part, to an ability to make enemies without overly caring. "People have always disliked me," he stated bullishly, as we sat this summer in the high-ceilinged conference room of the cramped office suite that he was renting in central London. "The more successful I've got, the more people have sniped at me. But I'm not bothered—it's like getting bothered if a dog barks at you. As the saying goes, if nobody's saying bad things about you, you must not be doing anything important."
He seems always to have been a bit apart from the mainstream. At Stanford Business School, he found many of his peers effortlessly following ancestral paths, in investment banking and real estate, and decided to do the same. Browder's grandfather, Earl, had been a union organizer in Kansas and had met his Russian wife when the Comintern invited him to Moscow. So Browder applied to the United Steelworkers Union.
It turned him down. "They said they had never hired an MBA and didn't intend to." He moved on to the next family connection: Eastern Europe. Graduating in 1989, as the Berlin Wall came down, he got a job with the Boston Consulting Group.
On his first assignment, in Poland, Browder discovered his true vocation. The first privatizations were under way, and a back-of-the-envelope calculation revealed that the government was so eager to start selling companies that it had given them a market price lower than their own net profits. If you bought the company, you made your money back in a year. Browder invested $4,000, his entire savings. "When you make a lot of money investing," he says, "it releases a certain chemical in your body and it's as addictive as crack cocaine."
Absurd prices were the defining characteristic of the post-Soviet era. And Browder combined lucky timing with a knack for thinking ahead of the curve. Joining Salomon Brothers, he cast himself as the Russia expert when nobody else was interested in the place, and found himself advising on the privatization of the Murmansk fishing trawler fleet—around $1 billion worth of ships, he estimated, which had been given a book value of $2.5 million. He soon discovered that the same thing was going on all across Russia. The urge to privatize fast, combined with the devaluation of the ruble, meant that the entire market capitalization of the country with some of the world's biggest oil, gas, and mineral deposits was around $10 billion.
Bidding for stakes in state firms was a murky and uncertain process, so those few who tried it were rewarded. "It wasn't hard," Browder recalls. "You basically invested in the biggest companies in the country. You couldn't lose because the numbers were so low." He quintupled Salomon's $25 million initial investment in seven months, and soon afterward left to start his own fund, Hermitage. He was 32.
At this point in the telling, Browder shows his disdain for a group from which he would later draw enemies: the investment banks with their "Wall Street–educated brokers." Since the banks made money out of commissions on trades, their research—and hence foreign investors' money—focused mostly on companies with large free floats of stock to trade. Browder invested in big but overlooked firms with little stock on the market, on the assumption that they were run no worse than the others and must therefore be undervalued. His strategy paid off again: Within a year and a half, his fund had grown from $25 million to $1 billion, earning him plaudits and magazine covers.
Then disaster struck. Browder, like everybody else, failed to foresee the August 1998 financial meltdown until it was upon him. His fund crashed back to $120 million. His investors, though, had little choice but to stay in and hope for better times. And the crash brought him face to face with a new and powerful set of enemies.
Russia's new ultra-wealthy elite, the "oligarchs," had acquired their companies at bargain prices through the infamous "loans-for-shares" deal of the mid-1990s: They lent money to state firms, which put up large chunks of their shares as collateral and then conveniently failed to pay the loans back. The government, fearing a Communist return to power in the 1996 election, abetted the scam in return for the oligarchs' promise to support President Boris Yeltsin's campaign.
With the stock market booming, Western investors cared little. But after the crash the oligarchs became pariahs again. "The only thing that had kept them behaving nicely to minority shareholders was that they might get free money on Wall Street," Browder remarks. Now the easiest way to get money was to milk it from their companies.
Browder got his first taste of this from Vladimir Potanin, a former deputy prime minister and at the time Russia's most powerful oligarch. Potanin's Uneximbank and Renaissance Capital, an investment bank it part-owned, tried to issue new shares in Sidanco, an oil firm of which they held 96 percent, with the catch that only they could buy the shares. Small investors like Browder, who owned 2 percent of Sidanco, would have seen their holding diluted by nearly two-thirds.
Previously, investors faced by such swindles had usually kept quiet. Browder and his main backer, the Lebanese-born billionaire Edmond Safra, decided to fight. After hiring 15 bodyguards, Browder starting recounting Potanin's misdemeanors to his Western business associates, and then, despite getting threats, took a dossier to the press. Uneximbank and Renaissance, instead of denying or backing down, tried to justify themselves. The media uproar prodded the Russian securities commission to investigate and finally to suspend the share issue.
For Browder, however, the main victory was that investors, knowing such abuses had been curbed, were more willing to buy Sidanco stock. That raised its price—and thus Browder's returns.
It became his modus operandi: Buy shares in a firm, dig up embezzlement, mismanagement, or corporate governance abuses, raise a ruckus, force reforms, and watch the share price climb. Soon, the ruckus alone became enough to convince investors that reforms were around the corner. Their confidence grew also because each scandal shone more light on the inner workings of Russia's notoriously opaque top firms.
It helped that the opacity was, in fact, something of a mirage. Information, Browder discovered, was relatively easy to come by, first because the gross inequity of the early Russian privatizations made for a lot of unhappy people willing to dish dirt on their competitors, and second because the vast and corrupt government bureaucracy generated a lot of confidential data that ended up on sale for a few dollars on pirated CD-ROMs in Moscow street markets. (During my own time in Moscow one such disk appeared listing the previous year's tax returns for each and every taxpayer in the capital; everyone had great fun looking up the paltry sums paid by some of Moscow's biggest fishes.) Vadim Kleiner, Browder's whiz-kid head of research, would compile a damning presentation, full of charts, graphs, and maps. Browder, with his knack for searing turns of phrase, would call up journalists and walk them through the material, which invariably made a mouth-watering story. Lawsuits, which Hermitage launched frequently but won rarely, were secondary; the main point was to name and shame.
There followed a string of public scandals at top Russian firms. At UES, the electricity monopoly, Hermitage made waves about a plan to sell off assets (such as power stations) cheaply without giving minority shareholders a stake. After that, the government imposed a fairer restructuring plan. At Sberbank, the state savings bank, Hermitage fought against a dilutive share issue similar to the one at Sidanco; though Browder lost every court case, a law passed the following year that banned such share issues and made Sberbank's price rise fivefold. His biggest coup was Gazprom, Russia's gas behemoth, where the misbehavior Kleiner and Browder exposed in 2000 eventually prompted the new Russian president, Vladimir Putin, to fire the company's boss. Thereafter, their muck-raking reports on Gazprom—and the subsequent share price rises—became an annual ritual, carefully timed just before the company's shareholder meetings for maximum embarrassment.
Browder was lucky again, for his interests and Putin's had coincided. The president was embarking on his own war with the oligarchs, who had turned his predecessor, Boris Yeltsin, more or less into their puppet. But Browder's way of working, besides alienating oligarchs and Wall Street bankers, was beginning to earn him a bad name with two other sets of people.
The first was those who had been trying to achieve the same thing as Browder—better corporate governance—but by quieter, backroom means. "A lot of us have contributed to the building of institutions and capital markets and we've done it in a deliberate, collaborative way," says Bernie Sucher at Alfa Capital, a private-equity fund belonging to the Alfa Group, a big Russian conglomerate. "You sit on committees and worry about what are the right trading rules, how should companies be regulated, what sanctions will apply to market-makers that don't behave. To demand all that before it existed with very public campaigns like Bill was doing early on was to demand too much of Russia." Moreover, says Sucher, Browder had a tendency to see those who didn't follow his approach as part of the problem, "and that was a powerful alienating factor for some people." (Browder's retort: "Nothing in Russia ever changes by pleading with people or asking nicely.")
Nonetheless, Sucher is one of Browder's defenders. In retrospect, he says, attacking Gazprom by force "was more effective than anything we did." Moreover, the fact that Putin seized on it, thus prompting a whole slew of other companies to tidy up their acts and coax back foreign investors, "was one of the decisive things that took us out of the 1998–99 crisis, and that was Bill's victory."
Second, Browder antagonized those he most relied on: journalists. He had realized that they, lacking the resources or time to dig deep into corporate affairs, needed him as much as he needed them. To his credit, he was always absolutely frank about it. "You're in the business of getting information," he would tell a new foreign correspondent on their first meeting, "and I'm in the business of disseminating it.
But he played journalists off against one another—typically dishing out parts of a story to competing papers, stipulating when it could be printed, and saying that he would give it to the competition if it did not run soon—and that often grated. The journalists I spoke to for this profile privately dripped vitriol about Browder, though it was evident that their frustration stemmed partly from the depth of their dependence on him. (I, working for a weekly, cared less about getting scoops, and so was less dependent.) He, however, pleads guilty to the charge of manipulation and is unrepentant. "If you don't create a competitive situation among journalists, they'll just sit on the story and not do anything about it."
Also off-putting to some is Browder's apparent interest only in those aspects of Russia that affect his business. It mattered little to him that Putin, while replacing the management at Gazprom and bringing the oligarchs to heel, was also presiding over the destruction and brutalization of Chechnya. He also dismissed the arguments that the privatizations of the 1990s, messy and corrupt as they were, averted a return to Communism. But his most controversial moment came when Mikhail Khodorkovsky, Russia's richest man and its poster-boy for corporate reform, was hounded and imprisoned, and his oil firm, Yukos, was broken up and acquired by state-friendly companies in highly dubious ways.
It was obvious to all that Khodorkovsky was being punished not for underpaying taxes, as officially charged, but for meddling in politics, and that Yukos' breakup was not a debt-recovery operation but a naked expropriation—the very opposite of the rule of law that Browder had lobbied for. Yet he cheered, criticizing foreign journalists who wrote apocalyptic dispatches about state power run amok. Suddenly, his oft-repeated dictum that he was working for his own financial interests but "it so happens that my financial interests coincide with making Russia a better place" rang hollow.
Browder still defends his stance on Khodorkovsky, who before becoming a model businessman had pulled worse corporate governance abuses than anybody on small investors, Browder among them. "What I said is that the way they did it was bad, but selective justice is better than no justice at all," he argues. "The real injustice is that they didn't go after him because of bad corporate governance, but for other reasons, because lots of other guys who ripped me off are floating nicely in their yachts in the south of France."
Browder does now admit that with high oil prices buoying up the economy, Putin feels less of a need to push reforms, and the state's arbitrary power, wielded by a close circle of Putin allies, is getting out of control. Still, he defends the president. "He's got an impossible task. How do you handle such a vast country where people behave in such an uncivilized manner to one another, and where laws and institutions don't work? I can't imagine how difficult that job would be."
What Putin, in turn, thinks of his biggest foreign cheerleader remains a mystery. Officially, Browder lost his visa under a catch-all paragraph in Russia's immigration law that bars foreigners if they threaten "the defense capability or security of the state, or public order, or public health." Putin, asked by a journalist about Browder's case at the G8 summit this summer, said he did not know the reason for the ban; "I can imagine that this person broke the laws of our country" was his only explanation.
There is no shortage of theories as to the real reason. Most observers, Browder included, suspect it had to do with his campaign to increase transparency at the oil firm Surgutneftegaz. Surgut's boss, Vladimir Bogdanov, is an ally of Putin's and a member of the ex-KGB cabal that surrounds the president—the so-called siloviki, who hold top jobs in the government and security services, as well as in several big firms.
Yet Surgut may simply have been the last straw. Hermitage's prying at Gazprom, Rosneft (a state-owned oil firm that acquired a large chunk of Yukos), and elsewhere has impinged on the interests of a good many of the siloviki, and any of them could easily have gotten Browder's visa revoked. The real puzzle, indeed, is why nobody did it before.
Today, as he plans the expansion of his London office, Browder says that in some ways, his expulsion from Russia is the best thing that could have happened. Had he stayed, at best, his name-and-shame approach would have started to yield diminishing returns as the overall level of corporate governance in Russia got better. At worst, he might have suffered something a lot nastier than losing his visa. He keeps his future plans close to his chest, but he wants to look at other markets. Not China, he says, in answer to the obvious question: It has to be a country with at least some free press, otherwise his method won't work.
Yet that method is what made him enemies, brought him death threats, and got him kicked out of the country he had made his home. And so, as we wrap up, I ask him the question I had originally planned to open with.
Bill Browder, you've annoyed almost everybody. Was it worth it?
He smiles his usual tight smile and answers with his usual rapid-fire certainty. "I have absolutely no regrets. Plain and simple."
Gideon Lichfield was the Moscow correspondent for The Economist for two years from 2002 to 2004. He is currently its correspondent in Jerusalem.
