Browder, Branded a Danger to Russia, Posts 2,549 Percent Return

By Stephanie Baker-Said

    It was a routine flight for Browder, who runs Hermitage Capital Management Inc., a $4.1 billion hedge fund firm specializing in Russian stocks. Browder, 42, has spent the past decade living in Moscow and building Hermitage into the largest foreign investor in the country's $899 billion stock market.
      Browder has made a fortune in the brave new world of capitalist Russia. As he hustled through Sheremetyevo's Terminal 2 on Nov. 13, a visa stuck in his British passport, he was about to find out his success had come at a price.
      Browder says he walked into the VIP lounge and handed his passport to a guard. He expected to speed through immigration, as he'd done dozens of times before. Fifteen minutes passed, then 30, then 45. Finally, the official told Browder that he wasn't allowed to enter Russia. He ordered Browder to turn around and return to London.
      In mid-May, Browder was working from an office near London's Covent Garden, trying to persuade Russian officials to let him back into the country after months in exile. The government of President Vladimir Putin has barred him from entering Russia under Article 27, Item 1 of Federal Law No. 114FZ.
      The statute lets Russia exclude people who might threaten ``the security of the state, public order or public health.''

                       Enemy of the State

      Browder, a balding man who wears frameless glasses and has an MBA from Stanford Business School, says he's not an enemy of the state. He calls himself a friend of Russia, his adoptive home, and an ally of Putin. Browder says he still doesn't know who blacklisted him or why he was banished. He refuses to speculate about it.
      ``I'm not going to point any fingers because, honestly, I don't know,'' Browder says, sitting in a chilly yellow conference room in his London office.
      The most likely explanation is that Browder has broken a cardinal rule of post-Soviet Russia, says Eric Kraus, chief strategist at Sovlink LLC, a Moscow-based brokerage: Don't come between powerful people and their money. Browder's plight highlights the potential dangers -- political ones, not just economic -- that investors still face in Russia 15 years after the collapse of the Soviet Union.
      ``Business questions remain more politicized than in most countries of the world,'' says Ian Hague, who helps manage $2.5 billion, mostly in Russian stocks, at New York-based Firebird Management LLC, a Hermitage competitor.

                       Corporate Gadfly

      Since arriving in Moscow in April 1996 with a briefcase, a cell phone and $25 million from late banker Edmond Safra, Browder has made trouble for some of Russia's biggest corporations. He bets on stocks and then agitates for companies to adopt U.S.-style corporate governance. His goal is to drive share prices in his favor.
      Over the years, Browder has accused the management of energy giant OAO Gazprom -- now the centerpiece of Putin's plan to use his country's vast reserves of oil and natural gas to restore Russian might -- of looting the company's assets.
      He has criticized OAO Sberbank, Russia's largest lender, of trying to bulldoze minority shareholders. He has picked a fight with Vladimir Potanin, a former deputy prime minister, over a convertible bond sale by Sidanco Oil Co.
      In April, Browder called Putin ally Vladimir Bogdanov, the billionaire businessman who runs another oil company, OAO Surgutneftegaz, ``the Saddam Hussein of Russian business.''

                       `Obnoxious Personality'

      His loud mouth has earned Browder a reputation as a rabble-rouser, says Boris Fyodorov, a Gazprom board member who has clashed with the money manager. Fyodorov, 48, says he doesn't know why Browder has been expelled. ``My personal view is that he's such an obnoxious personality that you can find a thousand reasons,'' he says.
      Browder's brash style has helped him make money -- lots of it. Since 1996, the Hermitage Fund has posted a cumulative return of 2,549 percent. Lately, Browder has profited from a surge in oil prices that has made Russia the hottest equity market outside of the Middle East. He has invested the bulk of his fund's assets in 10 companies, including Gazprom, whose stocks were swept into a rally that lifted the benchmark Russian Trading System Index 83 percent in 2005.
      Browder, whose grandfather led the Communist Party of America during the 1930s and 1940s, has supported Putin's efforts to rein in the billionaire tycoons, or oligarchs, who came to dominate Russia's economy following the collapse of the Soviet Union.

                       Sided With Putin

      Putin, 53, has been moving to centralize political and economic control. Since 2005, his government has bought a majority stake in Gazprom, which in turn has taken over oil company OAO Sibneft and Izvestia, Russia's flagship newspaper.
      Browder sided with Putin in the 2003 prosecutorial assault on Yukos Oil Co., once the country's largest private oil company. In 2004, state-owned OAO Rosneft Oil Co. bought the bulk of Yukos. Mikhail Khodorkovsky, the former CEO of Yukos, is now serving eight years in a Siberian labor camp for fraud and tax evasion.
      Putin has used Russia's stature as a burgeoning petroeconomy to reassert authority over former Soviet republics such as Ukraine. His tactics have alarmed the administration of U.S. President George W. Bush. On May 3, Vice President Dick Cheney delivered the administration's strongest rebuke yet.
      ``In many areas of civil society -- from religion and the news media, to advocacy groups and political parties -- the government has unfairly restricted the rights of her people,''Cheney said in a speech to European leaders in Vilnius, Lithuania's capital.

                         Still Bullish

      The remarks set the stage for what is shaping up to be a strained meeting between Bush and Putin at a Group of Eight meeting scheduled for July in St. Petersburg.
      Browder defends Putin. ``Putin has brought enormous stability to the country, which has allowed us to make money in the markets,'' Browder says. ``He's been good for the Russian people and good for the Russian markets.'' Browder says he remains bullish on Russia and says the country's oil and gas companies are bargains.
    Such kind words haven't swayed the Kremlin. Igor Shuvalov, Putin's deputy chief of staff, declines to comment on Browder's case. ``It's not my responsibility,'' he says. Oleg Vyugin, Russia's securities market regulator, says he has no idea why the money manager has been banned.

                      `Friends of Russia'

      Some Russian companies, meantime, have moved to distance themselves from Browder. Browder says he has been a featured speaker at the annual Russian Economic Forum in London since 1997. In April, Pepeliaev, Goltsblat & Partners, a Russian law firm, bumped Browder from the panel it had sponsored at this year's event. Sergey Pepeliaev, managing partner at the law firm, says Pepeliaev Goltsblat took its clients' interests into consideration in setting the agenda.
      As the London conference got under way in April, Browder called a news briefing. ``We'd like President Putin to know we're friends of Russia,'' Browder told reporters. ``Whoever convinced him otherwise is wrong.''
      Browder, who relinquished his U.S. passport in 1998 when he became a British citizen, says he's enlisted U.S. and U.K. diplomats to help get him back into Russia.
      ``This is a man who's brought billions of dollars to Russia and who speaks out defending Russian economic policy,''says Anthony Brenton, the U.K.'s ambassador to Russia. ``This seems to me to be very damaging to Russia. We've never had a detailed or proper explanation of why he's been excluded.''

                        Communist Roots

      It isn't the first time a member of Browder's family has had a falling out with the Kremlin. Sixty years ago, Stalinists expelled Earl Browder, William's grandfather, from the Communist Party of America. Earl had become a socialist in his teens and went on to lead the U.S. Communist Party. He was imprisoned in the U.S. during the Red Scare of 1919 for opposing the draft and again in 1940 for alleged passport violations.
      Josef Stalin had Browder cast out of the party in 1946, at the dawn of the Cold War, after Browder had declared that communism and capitalism could peacefully co-exist.
      During the McCarthy era of the 1950s, William Browder's father, Felix, who was born in Russia, had trouble finding work as a mathematics professor.
      William Browder says his grandfather's communist past is what first prompted him to set his sights on Russia. When the Berlin Wall fell, in November 1989, Browder, who had just gotten his MBA, decided to make his career in the former Soviet bloc. He joined the London office of Boston Consulting Group, becoming the first employee to focus on Eastern Europe.

                           Bargains

      On a business trip to Poland in 1990, Browder asked his translator what various advertisements in the Polish newspapers were about. His translator told him one was for the sale of a textile plant and another was for the sale of a bank.
      Browder saw bargains. He took his life savings -- about $4,000 -- and bought shares in the first Polish privatizations. ``It released that chemical in your stomach that one gets from making 10 times your money,'' Browder says.
      From Boston Consulting, Browder went to work for London-based media mogul Robert Maxwell as an analyst for Maxwell's private-equity investments in Eastern Europe. After Maxwell -- aka the Bouncing Czech -- drowned off the Canary Islands in 1991 at the age of 68, British financial regulators discovered the publisher had looted 400 million pounds ($752 million) from the pension funds of his Mirror Group Plc, according to the U.K. Department of Trade and Industry.

                       Salomon Brothers

      Before Browder went to work for Maxwell, several people had told him that the Maxwell was a volatile character, Browder says. No one said be dishonest, he says.
    Browder bolted to Salomon Brothers Inc., becoming an investment banker covering Central and Eastern Europe. Michael Fortier, his boss at Salomon, says Browder once spent a weekend compiling a 30-page dossier on Russia's aluminum industry, years before other bankers became interested in it.
    No one had asked Browder to do that, says Fortier, 47, now a consultant working for Slavia Capital, an investment bank based in Bratislava, Slovakia, and Prague.
    ``He has an amazing capacity for facts, figures, details and work,'' Fortier says of Browder.
    Browder moved on to Salomon's proprietary trading floor in 1993. There, he bought $25 million of Russian privatization vouchers. Seven months later, the investment was worth $125 million, he says. Browder says prospective investors began calling. ``They all said, `Can I give you some money to manage in Russia?''' he says.

                      Bankrolled by Safra

      One of those people was Safra, founder of Republic National Bank of New York and a Salomon client. Browder says Salomon agreed to let him set up a Russian investment fund. When Browder turned up for the first meeting for the fund, he looked at the 40 people gathered in the room and realized none of them had been to Russia.
      ``I started to see my role getting completely whittled away,'' Browder says. ``I thought, `I don't need to do this with Salomon Brothers; I can do this by myself.'''
      In 1996, Safra entrusted Browder, then 31, with $25 million to help found Hermitage, which Browder named after the famed State Hermitage Museum in St. Petersburg. ``He saw the potential when other people had a hard time seeing it,'' Browder says of Safra. Safra was killed in December 1999 when his nurse, Ted Maher, set fire to his Monaco penthouse.
      Browder picked a turbulent time to break into the Russian markets. Boris Yeltsin was fighting for re-election as Russia's president in 1996 against a resurgent Communist Party.

                         Fighting Back

      After Yeltsin won the July election, thanks in part to support from Russia's oligarchs, the country's stock market began to boom. The Russian Trading System Index surged 155 percent from July 1996 to October 1997. Browder rode the wave: Hermitage's investments soared 330 percent during that period.
      It was about this time that Browder picked a fight with Potanin, the Russian tycoon running Sidanco. In 1997, Sidanco announced it would sell convertible bonds to its controlling shareholders, among them two Russian banks, Renaissance Capital and Uneximbank. The banks were led by Potanin and Boris Jordan, an American of Russian ancestry.
    Sidanco, based in Moscow, planned to exclude minority shareholders from the sale, a move that would have cost Hermitage $80 million, Browder says. He decided to fight back.
      Browder says Safra tried to talk him out of it. ``He didn't want me to put myself at risk,'' he says. Safra sent his personal bodyguards to Moscow to protect Browder.

                         First Victory

      Hermitage filed a complaint against Sidanco with the Federal Securities Commission, calling the convertible bond sale illegal. The commission's then Chairman Dmitry Vasilyev investigated and, in February 1998, blocked the sale. Browder had scored his first victory.
    Andrei Kirpichnikov, a spokesman for Potanin, declined to comment. Jordan, now CEO of Moscow-based Sputnik Advisors Ltd., didn't respond to Bloomberg's requests for comment.
      ``It was a very difficult time in my fight against the oligarchs,'' says Vasilyev, now first deputy CEO of AO Mosenergo, Moscow's main supplier of electricity. ``Support from some prominent guys in the financial market like Bill Browder really helped. He put a spotlight on important cases.''
    As Browder was challenging Sidanco, trouble was brewing in the Russian markets. The financial crisis that had started in Asia in 1997 began to spread. Browder says he thought Russian stocks would be unscathed by the turmoil. He was wrong.

                       Russian Meltdown

    Emerging-market investors who were losing money in Asia began selling their investments in Russia. In August 1998, the Russian government defaulted on $40 billion of debt, rocking world markets. The ruble plunged, falling 70 percent by the end of that year. Hermitage's assets dropped almost 90 percent, to $120 million from $1 billion. Browder says his phone stopped ringing.
      Browder had to ride out the storm, says Bernard Sucher, head of the asset management division of Moscow-based Alfa Capital. ``He had his back to the wall,'' Sucher, 46, says. ``He couldn't walk away and tell his investors, `Sorry.'''
      To shore up Hermitage, Browder positioned himself as Russia's corporate gadfly. He trained his sights on RAO Unified Energy System, a government-controlled monopoly that operates Russia's power grid, the world's largest.
      In 2000, Browder and other investors, including Moscow-based Prosperity Capital Management Ltd., set out to prevent Anatoly Chubais, CEO of UES, from creating hundreds of companies in a proposed breakup of UES.

                       Targeting Chubais

    Browder publicly criticized the plan, saying it amounted to a fire sale of assets. He tried to call a shareholders' meeting to fire Chubais, formerly Russia's finance minister and deputy prime minister.
      ``To fire the CEO would have required government support, and that was not going to happen,'' says David Herne, a former UES board member who now manages $200 million at Moscow-based Halcyon Advisors.
      Herne, who at the time was a fund manager at Brunswick Capital Management, says he didn't back Browder's plan. ``It was neither practical nor constructive, although it generated some publicity,'' Herne, 34, says.
      Hermitage and Prosperity withdrew their call for a shareholder meeting in exchange for a promise from Alexander Voloshin, then Putin's chief of staff and UES chairman, to change the company's charter to give the board more power over asset sales, Browder says.

                       Sberbank Campaign

    Vadim Kleiner, Hermitage's head of research, and Alexander Branis, Prosperity's chief investment officer, say they subsequently met with Voloshin to draw up the new charter, which shareholders approved in April 2001. In 2002, Chubais declared a moratorium on asset sales after foreign investors, led by Herne, demanded he halt them.
      By this time, Browder had already embarked on another campaign, this time against Sberbank. In 2001, he objected to the bank's plan to sell 5 million new shares at a 73 percent discount to the bank's book value.
      Browder argued the sale would hurt minority investors by diluting their stake in Sberbank. ``He was so proud of fighting,'' Fyodorov, who served on Sberbank's board at the time, says of Browder. ``I'm not in politics. Browder is in politics.'' Fyodorov says minority shareholders could buy stock through him.
      Hermitage sued Sberbank and its majority owner, the Russian central bank, seeking to stop the sale. Browder lost, and Sberbank went ahead with the plan. Browder says he succeeded in the end because he raised awareness about the need to change Russian law to require companies to offer new stock to all existing shareholders, not just a select few.

                       Defamation Suits

      The Russian Parliament did just that in late 2001. Since then, Sberbank's stock has soared 2,772 percent. Sberbank, for its part, has sued Hermitage's Kleiner, who sat on its board from 2001 to 2004, for defamation nine times. The bank won its first case and then lost eight appeals.
      Browder's battles have generated plenty of publicity. In 2004, he celebrated his 40th birthday at Justo, a Japanese nightclub and restaurant in Moscow, where television screens flashed images from his media interviews.
      He has grabbed headlines by turning issues involving arcane corporate law and accounting practices into snappy reports and sound bites. His October 2000 report on Gazprom, for example, was titled ``The World's Largest Non-Profit Corporation.'' The 39-page report argued that Gazprom had lost control over units worth $5 billion.
      ``Bill is a brilliant salesman,'' says Al Breach, head of research in Moscow at UBS AG.

                     Conflicts of Interest

      In his Gazprom report, Browder said Gazprom had lost $844 million because of conflicts of interest in deals that the company had struck with OAO Stroitransgaz, a pipeline construction firm. Hermitage also said that Gazprom was siphoning off more than $1.8 billion worth of profits annually to a Moscow gas company.
      After Fyodorov, the Gazprom board member, led a campaign to improve transparency, Putin fired Gazprom CEO Rem Vyakhirev in May 2001.
      In his place, the president installed Alexei Miller, who had worked with Putin in the St. Petersburg city government in the early 1990s. Browder says Gazprom, his fund's biggest holding, has since recovered more than $5 billion worth of assets. Gazprom stock has risen 19-fold since mid-2001.
      ``Some of his criticisms were absolutely groundless, and some were taken into account,'' Gazprom Deputy CEO Alexander Medvedev says of Browder. ``I can't say it was black-and-white.''

                         Surgut Dispute

      Browder has also crossed swords with Surgutneftegaz, the oil company run by Bogdanov, 55. In 2004, Browder began suing Surgut, arguing that management illegally controlled 62 percent of the company's voting stock through so-called treasury shares held by its subsidiaries.
      Browder says those shares should be canceled under Russian law. Over the past two years, the case has been thrown out by at least four Russian courts. Russia's Constitutional Court rejected the case in December, a month after Browder was banned from the country. Browder says he may appeal. Surgut spokeswoman Raisa Khodchenko says the company has done nothing wrong. She declined to comment on Browder's case.
      Bogdanov, who ran Putin's 2000 election campaign in western Siberia, owns less than 1 percent of Surgut stock, Browder says. The company stopped producing international financial accounting reports in 2002, however, so investors can't tell for sure who owns the Surgut treasury shares.
      Surgut, meantime, has amassed a pile of cash. The company sat atop $9.3 billion as of December 2005, according to Adam Landes, an analyst at Renaissance Capital Ltd. in London.
      For now, Kleiner, 36, and 13 other Hermitage employees are still on the ground in Moscow, enabling Browder to work from London, where he owns a penthouse apartment, or South Africa, where he has a home near Cape Town.
      Browder says he's waiting for Putin to let him return to Russia. Until then, Browder might contemplate a Soviet saying from the days of his granddad Earl: ``It's not whether you love the party; it's whether the party loves you.''