What starts as an entertaining, almost comical account of the early incursions of Bill Browder into the world of Eastern European finance rapidly develops into a story of unparalleled success as an investor in Russia and, finally, into a drama that ends in the death of a courageous man, with the conversion of Browder into a formidable human rights activist. This testimony by Browder includes parallel financial, political and human narratives linked together by his perseverance and creativity, his “never quit” attitude.
Bill Browder grew up in a highly talented family. His grandfather, Earl Browder, was the head of the Communist Party USA during the 1930s who ran twice for president. Ironically, Bill became a “black sheep” in the leftist, academically oriented family, applying for an MBA at Stanford in his desire to become a capitalist.
In his search for a job he looked for a company that could send him to Eastern Europe. Joining Boston Consulting Group he was sent to the London office where he became the only member of the Eastern European “Division.” His arrival coincided with the fall of the Berlin Wall and with the end of much of the Soviet influence within Eastern Europe. In 1990, he got his first opportunity when he won a contract to advise AUTOSAN, a Polish bus company being re-structured with the help of a World Bank loan. His brief stay in the town of Sanok makes for one of the most entertaining chapters of the book, an often hilarious narrative reflective of the times about the scarce facilities of the town, the poor food and his comic interaction with his interpreter, Lescheck Sikoski. While doing his job, Browder found that Polish companies were starting to be privatized, their shares being sold at incredibly low prices as compared to earnings. His back of the envelope calculations revealed that by buying into them an investor could get his money back in six months. Using his life savings, $2,000, he bought his first shares of Eastern European companies. After one year he doubled his investment and after the second year he again doubled it. Ultimately, he says, they went up ten times.
He had found his calling.
After this success he felt he needed more intensive exposure to Eastern Europe and joined the corporation of Robert Maxwell, who, at the time, was the most important foreign investor in the Soviet bloc. When Maxwell was found dead in the sea, the company collapsed and Browder went to work for Salomon Brothers.
Seeing the light in Murmansk
As his first assignment with the company, Browder advised the employees of a Russian trawler company in Murmansk on whether to exercise their right to buy part of the company under the Russian privatization program. He soon noticed the company had between one and two billion dollars worth of ships and was willing to sell 51% of its shares for about $2.5 million. He felt he had found a potential treasure. Instead of returning to London he went to Moscow where he arranged some 30 meetings on the topic of Russian company privatizations. The Russian government had decided to turn over part of its property to the people, issuing vouchers to every one of its 150 million citizens. Together, these vouchers could be exchanged for about 30% ownership of all Russian companies. Since the market value of each voucher was about $20, this meant that the Russian state was valuing 30% of its total assets at only $10 billion, only one sixth of the value of Walmart. Russia had about 24% of the world’s reserves of natural gas, 9% of the world’s oil and produced about 6.6 % of the world’s steel and, yet, was willing to let go a third of the ownership in these resources for only $3 billion. Even more astonishing was the fact that anyone could buy these vouchers. There was a Moscow Exchange Center where packets of vouchers could be traded.
Browder returned to London “a man possessed,” only to find that no one at Salomon Brothers seemed to be interested in this unbelievable opportunity. He was finally contacted by another “weird guy” in the company called Bobby Ludwig, who listened to what he had to say and managed to obtain $25 million from the firm to invest in Russia. Browder went back to Russia and, based on his recommendations, Salomon Brothers participated in the acquisition of shares from Lukoil (oil & gas), United Energy Systems (electricity) and Rostelecom (telecommunications). Within a short time, their $25 million investment turned into $125 million. This made a hero of Browder at Salomon Brothers. However, he says, the firm was not geared to react quickly to this new business opportunity in Russia. Therefore, he quit the company and founded his own investment company, Hermitage Capital.
Hermitage Capital: From financial success to enemy of the Russian state
After a few unsuccessful efforts to raise the required seed capital, Browder found a partner, Edmond Safra, who committed $25 million to the new company. His initiative and enthusiasm led him, uninvited, to the World Economic Forum in Davos. Sleeping on the floor, sharing a room with an equally entrepreneurial friend, they somehow managed to arrange a dinner for Russian presidential candidate Gennady Zyugnov, so that he could meet with a group of powerful international investors as well as members of the Russian financial oligarchy. During this dinner, Zyugnov made the startling statement that Communism was “just a label” in Russia and that, if he won the presidency, privatization of Russian state-owned companies would continue. Simultaneously, the Russian oligarchs present at the dinner told Browder that Boris Yeltsin would easily be re-elected. Reassured from both sides, Browder went on to Moscow and opened his office. The first company he targeted for acquisition was the Moscow Oil refinery, MNPZ. In researching this company he found out about “preferred shares,” those given to the workers during the privatization process. Not only were these shares cheaper than ordinary shares but they had recently earned dividends while the others had not. Their only limitation was that they did not allow voting rights. But, who cared? Foreign investors never voted their shares anyway.
Browder had found a gold mine. He promptly started buying preferred shares and, after Yeltsin was re-elected, he saw his investment grow by 125%. Almost immediately he found another huge opportunity with a little known oil company called SIDANCO, its shares being sold at an extremely low price. Browder invested $11 million in this company, paying $4 a share. Soon afterwards BP bought 10% of the company at a 600% premium. By 2000, Hermitage Capital had become the most successful investment company in the world.
Russian oligarchs did not like Browder’s success
The Russian oligarch who owned most of SIDANCO did not like to see a foreigner profit so much from his company, so he advanced a plan to dilute the company shares without allowing Hermitage to buy into the new stock issue. This would have generated a loss of some $87 million to Browder’s company. Against all advice from friends and partners Browder decided to fight this move and he won.
The 1999 Russian economic crisis was misread by Browder and nearly wiped out Hermitage. However, his perseverance found another gold mine: Gazprom. His research found that this company had been divesting of its assets at ridiculously low prices to benefit Russian oligarchs, while still retaining significant value due to its oil and gas reserves. He decided to buy into Gazprom and, at the same time, leaked information to the press about what he considered to be a stealing of its assets by the oligarchs. As a consequence of his actions, the Russian state acted to fire the management of the company and to recover Gazprom’s stolen assets. Gazprom shares went up a hundred times (not a hundred percent, a hundred times).
Departing, perhaps unwisely, from his role as a financial investor, Browder decided to go after corruption in other Russian companies such as the National Electricity Company, UES. These moves went against Russia’s corrupt oligarchs and happened to coincide with Vladimir Putin’s interests. In fact, for some time Browder was mistaken by many to be “Putin’s guy.” This situation changed dramatically, when Putin imprisoned YUKOS chairman Mikhail Khodorkovsky. Browder claims Putin had decided to become the main oligarch and, as such, was prepared to destroy all rivals in his path. Browder’s Hermitage became one target.
President Putin’s new posture was the reason why Browder was listed as a threat to Russian national security and expelled from Russia, a decision that would lead to tragedy and death. After being expelled, Browder was able to help most of his closest collaborators to leave the country, but his tax lawyer Sergei Magnitsky decided to stay since he candidly believed Russian justice would work in his favor. He claimed he had nothing to hide and had done nothing wrong.
Sergei Magnitsky was a superb lawyer and did a great job of destroying the official accusations against Browder and his company. In fact, he uncovered major tax fraud through which Russian bureaucrats had pocketed $230 million that belonged to the Russian state. In retaliation he was sent to prison, where he was denied his rights, tortured and eventually assassinated by the Russian police. He never surrendered.
Magnitsky’s heroic death in 2009 triggered Browder’s conversion, from financier to human rights activist. He became determined to make Sergei’s torturers and killers pay for their crimes. Finding little support from the government in London, he decided to ask for help in Washington. He found a champion in Kyle Parker, at the U.S. Helsinki Commission. Parker took up Magnitsky’s case with passion and persuaded Senator Ben Cardin to send a letter to then-Secretary of State Hillary Clinton asking for sanctions against those responsible for the Magnitsky’s death. This letter was an unprecedented step, a U.S. senator calling for sanctions against 60 Russian officials. The State Department dragged their feet and even convinced Senator Kerry to obstruct the move in Congress. However, a strong show of solidarity involving both sides of the congressional aisle pushed it through. Co-sponsored by Senators Cardin (MD-D), McCain (AZ-R), Wicker (MS-R) and Lieberman (CT-D), it received so much support that it was passed in 2012 and became known as the Sergei Magnitsky Rule of Law Accountability Act, the result of the titanic efforts by Browder and his group of activists.
The Magnitsky Act represented a major victory for justice against a rogue Russian state that had been transformed into a Putin-led crime syndicate. It was an example of the democratic process at its best and proved that perseverance, good strategy, media support and the goodwill of top level members of Congress could result in the passing of a law against corruption and international human rights violations. Putin’s machine tried hard to retaliate but failed.
Bill Browder was judged and sentenced to prison in absentia by the Russian authorities. He probably will never feel safe anywhere as long as he lives. But his fight and victory are proof that when an evil deed takes place there will be a consequence.
The words of Andrew Jackson come to mind: “One man with courage makes a majority.”
Gustavo Coronel, who served on the board of directors of Petróleos de Venezuela (PdVSA), has had a long and distinguished career in the international petroleum industry, including in the USA, Europe, Venezuela and Indonesia. Mr. Coronel was also the Venezuelan Representative of Transparency International, a Berlin-based organization fighting corruption. He is an author, public policy expert and contributor to SFPPR News & Analysis.