Former hedge-fund manager Bill Browder has spent more than a decade warning Western policymakers and financiers about Russian President Vladimir Putin.
For years, Browder lobbied for legislation — known as the Magnitsky Act — that became the template for levying sanctions on Putin and his cronies even before the Russian president’s savage invasion of Ukraine.
As one of the first Western investors to venture into post-communist Russia, Browder was also blunt in his views on the risks of doing business with Russian oligarchs, the billionaires whom he argues are simply trustees for Putin’s wealth and agents of his regime. These people, he says, have helped make Putin the richest man in the world. Before recent sanctions began to dent the oligarchs’ fortunes, Browder estimated that Putin was worth $200 billion or more.
“You don’t want to take [the oligarchs’] money because if you lose it, they’ll kill you,” is the message Browder relayed to his fellow financiers.
Browder’s comments probably seemed like hyperbole to many in the West. But he had witnessed such brutality firsthand when his lawyer, Sergei Magnitsky, was beaten to death in 2009 in a Russian prison after uncovering a plot by law-enforcement officers to steal the tax money Browder’s hedge-fund firm, Hermitage Capital Management, had paid Putin’s government.
While their lives may not be in jeopardy, investment managers now find themselves in a tough spot between Western governments’ clamping down on Russian money on the one hand, and their Russian oligarch investors on the other. Firms have been forced to freeze the assets of sanctioned oligarchs but say they have been given no guidance on how to manage the money — and they now have to worry about future litigation from the oligarchs if and when sanctions are lifted.
“It’s just going to be a total nightmare, an expensive nightmare for every hedge fund that has Russian money, because it’s like 2 percent of their investor base and they’re going to probably be spending 25 percent of their time with lawyers, regulatory specialists, and staying up at night wondering how they’re going to get out of this mess,” says Browder.
Until the start of Putin’s war this year, such an outcome no doubt seemed far-fetched to hedge-fund managers, especially those who’ve been scrambling to raise assets in an era when more money has been leaving the industry than coming in. The Russian money was a godsend. By 2021, 118 Russian oligarchs were on the Forbes list of billionaires, with a total net worth of almost $600 billion. That’s close to half of Russia’s GDP — representing what many say is theft from the Russian people.
Hedge funds, along with private-equity and venture-capital firms, all gladly took the money — with apparently few concerns about the oligarchs’ connections to Putin or their past business dealings.
“The view is a lot of these people were the robber barons of their day” — like U.S. tycoons John D. Rockefeller and Andrew Carnegie — says a senior executive at a hedge fund that manages money for sanctioned oligarch Roman Abramovich. After all, Russian oligarchs seemed to have shed their gangster capitalist image of the 1990s, when murdered bankers were a regular sight on Moscow streets.
Browder scoffs at this attitude. “That whole robber baron thing was just oligarch spin,” he says. “And what was interesting is it created a lot of groupthink, like Madoff. Everybody was taking [the money], and so everybody was repeating to each other, looking at each other saying, ‘Well, he’s doing it. I can do it, and it must be okay.’ And so after it became an acceptable thing, nobody thought to dig below the surface and figure out who the guy is.”
Hundreds of hedge funds have taken Russian oligarch money, according to one executive at a global regulatory-compliance consulting firm that advises investment managers. Of those oligarchs investing in private funds, Abramovich is perhaps the most famous, sanctioned by the U.K. and the European Union for his connections to Putin and his 29 percent ownership in Russian steel and coal company Evraz. The U.K., which suspended trading in Evraz shares in London, says the company may have provided material to build Russian tanks for the war, which Evraz has denied. Meanwhile, Abramovich’s net worth has fallen from about $12 billion before the war to $8 billion, according to the Organized Crime and Corruption Reporting Project’s Russian Asset Tracker.
The 55-year-old oligarch made his fortune during the early days of Russia’s privatization, which allowed insiders to amass huge stakes in state companies — mostly extractive industries like oil, gas, timber, and minerals — in a controversial “loans for shares” program that involved lending the state money that it could not pay back, then taking ownership of the property in sales that were widely deemed to be rigged. The massive crime and poverty that followed the dodgy privatizations eventually led to the election of Putin, a former KGB operative who promised to bring the oligarchs to heel. After Putin imprisoned Mikhail Khodorkovsky, then Russia’s richest oligarch (and one who had begun to criticize Putin and his regime’s corruption), others were warned to stay away from politics if they wanted to remain out of prison — and keep their money. According to Browder, the word in Moscow business circles is that Putin also struck a deal that gave him 50 percent of the oligarchs’ wealth. Browder believes that’s the real reason the oligarchs are finding themselves under sanctions: It’s a way of freezing Putin’s assets too.
During the Putin era, oligarchs sold some of their interests back to the Russian state — at huge gains — and began to move some of their wealth abroad, using Western lawyers and bankers to create offshore trusts and shell companies to hide their ownership via nominee accounts that did not show the ultimate owner’s name.
Some jurisdictions, including the U.K., have recently made hiding the ownership of these assets more difficult by requiring that beneficial owners be named. But so far in the U.S., neither hedge funds nor private-equity firms are required to find the true owners nor the source of their money. That has become a topic of debate in Washington, where efforts are afoot to close this loophole in anti-money-laundering rules. “It’s such a big pile of money and it’s a black hole of information,” says Lakshmi Kumar, policy director for Global Financial Integrity, an anti-corruption think tank in Washington.
While there is likely much more oligarch money hidden in private funds than governments have been able to ferret out, the oligarchs aren’t always shy about claiming ownership. “A bunch of these oligarchs, because they weren’t sanctioned, they came to the U.S. and not only did they openly invest in certain things, they actually actively promoted their reputations. They donated to charitable causes,” says Gary Kalman, director of the U.S. office of Transparency International. “It’s a way of forgetting the fact that the way in which they made money was through corrupt practices.”
Some funds that took money from Abramovich appear to have been fully aware that it came from him. “I don’t think the view was that Abramovich was tainted money,” says the executive, whose fund knew it was managing the oligarch’s money through a little-known Tarrytown, New York, adviser called Concord Management. Concord is believed to have placed billions of dollars of Abramovich’s wealth into more than 100 U.S. funds. But this hedge-fund executive’s view of Abramovich appears to be changing: “He did plenty of things in his past that may not survive scrutiny.”
Abramovich became something of a celebrity following his 2003 purchase of the U.K.’s Chelsea Football Club — a deal that former Putin banker Sergei Pugachev said was done at the behest of the Russian president, according to Catherine Belton’s book Putin’s People: How the KGB Took Back Russia and Then Took on the West. Abramovich, who sued Belton and publisher HarperCollins over the book’s claims about his ties to Putin, denied the charge. (The case has been settled, with more Abramovich denials included in a new edition. Due to the sanctions, Abramovich is in the process of selling the Chelsea soccer team.)
Belton wrote that, according to her Russian sources, the Russians’ foray into Western investments, which began during the Soviet era, was a strategy to infiltrate the West and corrupt its politicians. While the Russians’ influence is most notable in London, giving rise to the “Londongrad” moniker, it has spread across the pond, as was made clear by Russian oligarch involvement in the 2016 U.S. election.
Whatever the geopolitical goals, the oligarchs’ investments were definitely a way for them to diversify their wealth outside of Russia and burnish their reputations, and they took the effort seriously. Says one private investigator and due-diligence expert who has worked both for Russians looking to invest in U.S. firms and for firms wanting to vet the prospective investors: “The oligarchs aren’t messing around.”
The Russians do a thorough job of vetting their prospective managers, the investigator says, arguing that is natural because the oligarchs “grew up and operated in a certain level of deceit, paranoia, and corruption.”
He says his Russian clients always wanted to know intimate details about the fund manager they would be entrusting with their money — “like how many ex-wives he has, why he got divorced, how many children he has, has he been sued, does he have a criminal record, and how many entities does he own.” The oligarchs — who seem to have an obsession with yachts — also wanted to know how many boats a manager owned.
Concord, which was in charge of conducting due diligence for Abramovich, was known for its professional approach to picking investment managers. “These were serious investors who did detailed diligence in the space for a long, long time,” says the executive at the fund that took the oligarch’s money.
In vetting their investors, however, the hedge funds weren’t as picky as the Russians were when looking at them, according to the private investigator. “The level of due diligence the average hedge fund does is zero to very light.”
Even though U.S. funds aren’t required to follow the anti-money-laundering laws that banks are subject to, including “know your customer” rules, a prominent lawyer for hedge funds insists that his clients do it anyway. Moreover, offshore funds domiciled in the Cayman Islands are under the jurisdiction of the U.K., which since 2016 has required that beneficial owners of assets be disclosed. (To avoid U.S. taxes, most foreign money is invested in offshore funds.)
Hedge-fund administrators are typically tasked with doing those checks, which involve finding out if the individual is on the U.S. Treasury Department’s Office of Foreign Assets Control watchlist of sanctioned individuals, as well as getting proof of identity via a passport. Hedge funds “don’t want to look too closely,” says the due-diligence expert. “At the end of the day, they are just trying to make money.”
Abramovich’s money managers are a veritable who’s who of alternative investment managers. According to media reports, they include Israel Englander’s Millennium Management, one of the world’s biggest and most well-established; Sculptor Capital Management, which is in the midst of recovering from its own scandal after predecessor Och-Ziff Capital Management pleaded guilty to violating the Foreign Corrupt Practices Act in an African bribery scheme in 2016; Sarissa Capital Management, a relative newcomer launched by former Carl Icahn protégé Alex Denner in 2013; and Larry Fink’s BlackRock, known for its ESG stance. Others include major private-equity funds Apollo Global Management (previously bruised by its founder’s association with Jeffrey Epstein) and the Carlyle Group, which has significant ties to the U.S. defense establishment and investments in that area. Other prominent hedge funds known to have run Abramovich money include D.E. Shaw and the U.K.’s Brevan Howard.
The firms either did not respond to requests for comment or declined to do so.
It was not illegal to take Abramovich’s money, of course. But if the managers had looked closely, they might have discovered worrisome ties to Putin.
For example, Abramovich contributed around $200 million to an offshore company largely owned by Putin and whose money was funneled into the president’s $1.4 billion dacha on the Black Sea coast, according to a former Russian businessman turned whistleblower who was quoted in a documentary produced by Russian opposition leader Alexei Navalny called Putin’s Palace: The Story of the World’s Biggest Bribe.
Abramovich was also involved in a contentious lawsuit with former business partner Boris Berezovsky, another early Russian oligarch and Putin critic who received political asylum in the U.K. as a result. Berezovsky sued Abramovich in London over what he claimed was their mutual ownership in oil company Sibneft, and details of the shady way their business was done in Russia spilled out in court. (Berezovsky lost the case in 2012 and the next year was found dead in his home, the victim of an apparent suicide.)
Not until 2018 — after several suspected Russian poisonings of U.K. citizens — did Abramovich withdraw his application for a new U.K. investor visa, apparently realizing he would not receive one. Even that did not affect his relationship with Western investment funds. But once Abramovich’s name surfaced on the U.K. and the EU sanctions lists, fund administrators warned their clients they would have to freeze the oligarch’s assets.
The funds, however, have been given little direction about what to do next.
At least some of Abramovich’s known hedge-fund assets are in offshore accounts domiciled in the Cayman Islands, which is how they became subject to the U.K. sanctions. Cayman lawyers are advising that the oligarch’s hedge-fund managers “don’t do anything; penalties for violating sanctions are criminal,” says the aforementioned hedge-fund executive, adding that “those who would like to get him out of the fund because he’s associated with a war criminal have no freedom to do it.”
The funds managing Abramovich’s money can’t take fees from the oligarch, and they were initially worried that — during a volatile market environment — they might not be able to redeem other investors who wanted out. That was a concern because the sanctions were imposed on March 10 — shortly before quarterly redemptions would come due for many funds. But lawyers and compliance experts have told Institutional Investor that the sanctions would not keep other investors from redeeming unless more than half of a fund’s assets belonged to the sanctioned individual.
But what to do with the frozen funds? The hedge-fund executive II spoke with said his firm wants to ring-fence Abramovich’s assets, but it hasn’t been given direction on the matter.
Ron Geffner, a partner at Sadis & Goldberg, echoes the lack of guidance from authorities. “Do you put them in cash and get them out of the portfolio? Do you create another vehicle to hold it? Do you simply keep it in a managed account? Under what authority? Those are things that need to be decided,” he says.
The problem is that making any of those decisions could go against the sanction rules because the fund would be engaging in a transaction involving the oligarch’s shares — which is prohibited.
The way the assets are handled could have other serious implications down the road. “If it goes wrong, it could cause liability to the fund,” says Geffner.
He explains that if the hedge fund continues to invest those assets and then the portfolio has a loss, the oligarch may sue, claiming that he put in a redemption request and “‘should not have lost any money because you should have honored my redemption.’”
It may not come to that, however, as there are legislative efforts underway to allow Western authorities to simply seize sanctioned Russian money to help rebuild Ukraine after the war is over.
There is also a question about potential future sanctions, as only half of the top 20 Russian oligarchs have been sanctioned, according to Bloomberg. Browder says that all but a handful of those on the Forbes list should be under sanctions, but that it will take time to build a case against some of them. Should Western funds redeem, or possibly freeze, other oligarchs’ assets in anticipation of more sanctions to come?
At least one hedge-fund manager, Greg Coffey, decided not to wait to find out. Even before Russia invaded Ukraine, he redeemed all of the Russian investors in his Kirkoswald Asset Management’s hedge funds to avoid problems for the fund, Bloomberg reported. And Abramovich, who also controlled venture-capital firm Norma Investments, put that company’s ownership in the name of an associate in an attempt to avoid having its assets frozen.
The U.S. has not yet placed Abramovich under sanctions, which The Wall Street Journal reported was due to a request made by Ukrainian President Volodymyr Zelensky related to the oligarch’s offer to help in negotiations with Putin — an effort that many say belie his previous assertions that he was not close to the Russian president. (In a recent 90-minute Zoom interview with Russian journalists, Zelensky was asked about Abramovich’s role and said all Russians who have attempted to help in negotiations “fear sanctions. I am sure it is not great patriotism that drives them.”)
But it’s not clear how useful Abramovich can be, given Putin’s admonition that the oligarchs stay out of politics. News that Abramovich and two Ukrainian negotiators were temporarily debilitated by a suspected poisoning during a recent meeting of the negotiators in Belarus was a reminder of the danger oligarchs face when they confront Putin.
“The oligarchs are serving at the pleasure of Vladimir Putin,” explains Browder. “At any moment, they can no longer be rich. They can no longer be free or they can no longer be alive based on his will. And they’re all absolutely terrified of him.”
He tells the story of being at Davos when Putin showed up at a meeting attended by several oligarchs. “They go from being self-confident, arrogant, aggressive, unpleasant people to being like school children the moment Putin shows up. I mean the body language and the behavior — it’s almost animal. Like when the alpha dog comes into the room, all the other dogs do all these subordinate genuflection demonstrations.”
But when these oligarchs have wanted to get their money back from a hedge fund in the past, they haven’t been timid. Funds have rules that do not allow them to favor one investor over another when it comes to redemptions, so when one since- sanctioned oligarch demanded to get his money out of a hedge fund several years ago in violation of its terms, the managers didn’t want any trouble.
Says Browder: “They basically closed down their fund because they were so afraid of the Russian oligarch.”