William Browder had cause to feel smug. His Hermitage Fund
had racked up a 228 percent return, making it the
best-performing fund of any type anywhere in the world in 1997.
His Moscow-based firm, Hermitage Capital Management, had
amassed $1 billion in assets from a standing start 20 months
before. And Browder was now regularly rubbing shoulders with
Russia's elite: the great and the good -- and the
Running money in Russia seemed both uncomplicated and
awesomely profitable. But fate -- sudba -- the
ineluctable force at the heart of the Russian novel, was about
to intervene. Browder had been invited to a party to celebrate
the Russian New Year by the brother of Boris Jordan, the former
star deal maker for Credit Suisse First Boston in Moscow and
the founder of Renaissance Capital, Russia's premier investment
Although no bon vivant, the workaholic Browder readily
accepted because he was anxious to have a little chat with
Boris Jordan. He had heard rumors that Renaissance was about to
issue a convertible bond on behalf of oil company Sidanco, but
only to management insiders, threatening serious dilution of
minority shareholders' stake. Hermitage happened to own 2
percent of Sidanco, which was controlled by Vladimir Potanin,
one of the Russian "oligarchs" who had acquired enormous
economic and political power in the early 1990s.
As white-jacketed waiters doled out caviar, Browder pressed
Jordan for an explanation, but the banker responded blandly
that talking business at a festive occasion just wasn't done in
Russia. He told the fund manager that there had been a simple
misunderstanding and to drop by his office the following week,
where he would explain everything.
At the allotted time, Browder was shown to a Renaissance
conference room, where he waited and waited. Jordan never
showed up. Instead, after an hour had elapsed, Browder was
greeted by the firm's head of investment banking, Leonid
Rozhetskin, who favors the slicked-back hair, crisply tailored
suits, brightly colored braces and aggressive attitude of a
1980s-style U.S. investment banker. Rozhetskin informed Browder
that Sidanco was indeed planning a convertible bond. It would
be priced at a 96 percent discount to the current share price
and would increase Sidanco's share capital by 173.3 percent.
And yes, minority shareholders would be excluded.
Aghast, Browder did a back-of-the-envelope calculation and
concluded that, in effect, $65 million was about to be stolen
from his fund because of the extreme dilution. He angrily told
Rozhetskin that there was no way Renaissance and Sidanco could
get away with such flagrant disregard for minority
shareholders. In reply, recalls Browder, Rozhetskin calmly but
firmly told the fund manager that the deal was going ahead
anyway and that "a little guy like Bill Browder" couldn't stop
Browder was no innocent abroad. The then 34-year-old Chicago
native had been involved in investing in Eastern European
businesses for eight years, following Stanford Business School
and a stint as a proprietary trader of Russian securities for
Salomon Brothers. He had done everything from establish Yellow
Pages directories in Poland to privatize the Murmansk trawler
fleet. Although Browder had already had plenty of exposure to
sharp business practices in Russia, even he was taken aback by
Sidanco's seeming audacity.
So Browder called his chief financial backer and confidant,
Edmond Safra, the legendary banker to the wealthy, who died in
1999. Safra's counsel: "If we want to fight this, we do it
properly. We go to war." First, Browder hired bodyguards. Next,
he talked to everyone he knew who had leverage with either
Renaissance or Sidanco, including Safra's friend, hedge fund
manager George Soros, a significant investor in Russia, and Sir
John Browne, CEO of BP, which owned 10 percent of Sidanco.
Days later Jordan was on the phone to Browder telling him
that he wasn't "playing by the rules," according to the fund
manager. Nevertheless, Browder persisted, instructing his
lawyers to draft a complaint to Russia's Federal Commission for
the Securities Market, which had to approve the convertible
issue. On February 19, 1998, the commission annulled it. "It
was a landmark," says Dmitry Vasiliev, then head of the
commission and now of the Institute for Corporate Law and
Governance in Russia. "It showed that minority shareholders had
rights if they were prepared to stand up for them."
The Sidanco skirmish was to be the first of many such
battles for Browder. In others he would go up against Russian
powerhouses like Gazprom, Sberbank and Unified Energy Systems.
He has become famous -- or notorious, depending on one's
perspective -- as a scourge of the oligarchs, a crusader for
corporate governance reform and, in the process, an important
catalyst for economic reform in Russia.
"Bill has shone a light into the darkest corners of Russia,
and in my view that has done great service to both investors
and the country as a whole," says Dominic Gualtieri, head of
equities at Alfa Bank, part of Russia's powerful oil, industry
and financial services conglomerate, the Alfa Group. Adds
emerging-markets doyen Mark Mobius of Franklin Templeton
Investments, who sits on the board of two Russian companies: "I
applaud anyone who is prepared to stand up and be
Browder too decries the "timidity and amorality of many fund
managers." He says that "many are more concerned about keeping
their names out of the paper or what their investment banking
group will think than with standing up for the investors in
But to his many enemies -- and not just those among the
Russian oligarchs he challenges -- Browder is a vainglorious
publicity junkie eager to take credit that he doesn't deserve
for corporate reforms. "You can't knock the guy's record," says
one London fund manager. "But some of his recent antics do
strike me as publicity stunts."
Ironically, Browder's highly visible activism has in some
respects overshadowed his exemplary track record as a fund
manager. For the five years ended December 2001, Hermitage Fund
ranks as the world's best-performing emerging-markets fund,
with an annualized return of 30.9 percent. This is in spite of
-- there's that sudba again -- a peak-to-trough
decline of 88 percent in 1998, the year that Russia defaulted
on its domestic debt. This year through July 31 the fund is up
25.5 percent, compared with 7.2 percent for the CSFB Russian
ordinary share index, and from its April 1996 launch through
this year's first half, Hermitage has risen 465 percent,
compared with the index's 184 percent.
Browder approaches investing like a detective -- an
especially appropriate technique for Russia. He refuses to rely
on published accounts or brokerage reports because other
investors read them and he likes to have an information edge.
Led by research chief Vadim Kleiner, Hermitage analysts
interview company officials, suppliers and bankers. The
resulting scraps of information are assembled into minutely
researched analyses. Hermitage Capital, which currently manages
$600 million in the Hermitage Fund and a further $200 million
in separate accounts, typically has no more than a dozen,
invariably low price-earnings investments.
BROWDER DIDN'T GO TO RUSSIA EXPECTING TO
become an agitator for good corporate governance. After
graduating from business school in 1990, he was drawn to
Eastern Europe by the fall of the Berlin Wall and by a curious
family connection: His grandfather, Earl Browder, had been the
leader of the U.S. Communist Party between 1932 and 1945 and
had met his Russian wife while taking part in the fractious
Communist International debates in Moscow in the 1920s. He died
His son, Felix, Bill's father, became a mathematics
professor at the University of Chicago. After graduate school,
Bill worked briefly for the Boston Consulting Group, then for
Robert Maxwell's Central and Eastern European Partnership
before joining Salomon in 1994. There he once parlayed a $25
million investment in Russian privatization vouchers into $100
million in six months.
But he left to start Hermitage in 1996 -- and became
embroiled in no fewer than 11 public rows with Russian
oligarchs in less than five years.
It was a turbulent time. Russia's default on its domestic
debt in 1998 had created a climate of political and economic
chaos that gave rise to a stunning display of outright
corporate theft. The government had devalued the ruble, the
stock market had crashed, and Russia had become a virtual
pariah on international markets. The oligarchs saw that they
had virtual carte blanche to do whatever they pleased.
"The default and devaluation sent the message from the state
that it was okay to cheat," says James Fenker, chief strategist
at Troika Dialog, a Moscow-based brokerage. "The message was
enthusiastically seized upon by the corporate sector. It was a
crude and rude time -- the nadir of corporate governance in
Browder, meanwhile, had a mess of his own to deal with.
Hermitage was devastated by the crash of '98. Its funds under
management plummeted during a ten-month free fall from $1.38
billion to $165 million. Of the 42 funds then investing in
Russia that had managed more than $10 million, only ten
survived. "The party was over," recalls Browder.
But he reasoned that Hermitage mostly owned companies that
exported oil and were paid in dollars, while the bulk of their
staff and capital expenditures were in devalued rubles,
boosting their competitiveness. One catch: "I knew my
investments were fundamentally sound, but I had to make sure
they were not about to be stolen from me," says Browder.
He had determined early on that the best assets in Russia
were the large holding companies, not their so-called
"daughter" assets: partially owned, separately listed
subsidiaries that were often more widely traded than the
illiquid holding companies themselves.
Browder's emphasis on holding companies would pay off
splendidly. Oligarchs like Mikhail Khodorkovsky, CEO of Yukos
Oil, began a concerted campaign to gain full control of their
company subsidiaries, with many riding roughshod over investors
in these daughter assets. Today just 15 companies control more
than 50 percent of Russian output.