Red Notice

by Bill Browder

  “How much?” I asked.

  “Around fifteen thousand dollars.”

  “Fifteen thousand bucks? You’ve got to be kidding. What else have they got?”

  “Not much. Just some ugly picnic tables and folding chairs.”

  “How much for those?”

  “About six hundred dollars.”

  “We’ll take them.”

  By the end of that day we had four picnic tables and eight folding chairs—plus a houseplant Svetlana bought on her own initiative. We then purchased some computers and set them up, and by the end of the week my fledgling operation was ready to go.

  As I got set up, Yeltsin’s poll numbers continued to move in the right direction, but the election was still more than ten weeks away and Sandy was still not releasing any more of the funds. In the interim, I started researching companies for the fund on the assumption that eventually Safra was going to honor his $25 million commitment.

  The first company I targeted was the Moscow Oil Refinery, known as MNPZ. At Salomon we had made a lot of money on oil-related companies in Russia, so a big Moscow refinery seemed like a promising place to start looking.

  Svetlana made an appointment with MNPZ’s chief accountant and in early April we went to meet her at the company’s headquarters. Plump, blond, and in her fifties, she wore an unfashionable maroon pantsuit. She met us at the entrance of an ugly, old building and led us inside. The place had clearly seen better days. Lights flickered on and off, tiles were missing from the floor, and the walls were filthy.

  In her office I asked a series of basic questions: “What were your revenues last year?” “What were your profits?” “Can you tell me how many shares are outstanding?” These questions may sound mundane, but in Russia there was no public information on companies and the only way of getting any was by going to the company and asking.

  Svetlana translated as the accountant answered the revenue and profits questions, but when we got to the question about shares outstanding, she asked, “Do you mean common shares or preferred shares?”

  I’d heard the term preferred shares before, but I didn’t know what she was talking about. “What are those?”

  “Preferred shares were given to the workers during the privatization process.”

  “How are they different from the ordinary shares?”

  “They pay out forty percent of profits in dividends.”

  “How much do the ordinary shares pay out?”

  “Let me see.” The accountant grabbed a large binder off her desk, inspected several stained sheets of paper, and said, “It says here that they paid nothing last year.”

  “So the preferred shares paid out dividends equal to forty percent of the profits and the ordinary shares paid out nothing,” I offered, not quite understanding this discrepancy.

  “Yes, exactly.”

  As soon as I was done with the meeting, Svetlana and I jumped into Alexei’s beat-up Zhiguli—a type of small, boxy Soviet car that was ubiquitous in Moscow—and puttered back to the office. As we inched through the midday traffic, I called Yuri Lopatinski, one of my favorite local brokers. Yuri was a Russian émigré from New York who’d recently moved back to Moscow to work for the brokerage firm Creditanstalt-Grant. He was not like the other brokers who trafficked in what I called tourist stocks, the banking equivalent of hawking $10 coconuts on a beach in Fiji when the locals bought them in town for twenty cents.

  Yuri was in his early twenties and had a hushed way of speaking, as if he were always telling secrets. It was often difficult to understand anything he said, but when I did understand him, his information was usually interesting.

  “Hey, Yuri, do you have a price on preferred shares of MNPZ?” I asked.

  “Dunno. Probably. Let me see.” He cupped the receiver and mumbled to his trader. I heard some garbled shouting in the background and Yuri came back on the line. “Yeah, I can get you a hundred thousand at fifty cents.” He said this so inaudibly that I had to ask him to repeat it.

  “How much for the ordinary shares?”

  He mumbled something again and got another response. “A hundred thousand at seven bucks.”

  “You sure about that?”

  “Yep. Those are the prices.”

  I didn’t want to tip my hand, but my heart started beating fast. “Let me get back to you on this.”

  I hung up and wondered: These preferred shares seem much more attractive than the ordinary shares. Is there something wrong with them? Why are they trading at a 95 percent discount to the ordinary shares?

  When we finally made it back to the office, I sent Svetlana back to MNPZ to get a copy of the corporate charter, which would contain the details of the rights of different classes of shares. She came back two hours later and we pored over it. The only substantive difference between preferred shares and ordinary shares was that preferred shares didn’t have voting rights. That didn’t seem to be a problem because foreign investors such as ourselves never voted our shares at annual general meetings in Russia, anyway.

  I was convinced that there must be some other explanation for the deep discount and spent the next several days searching for it. Did the preferred shares have different par values? No. Was the ownership restricted to workers? No. Could the higher dividends be arbitrarily changed or canceled by the company? No. Did they represent only some minuscule part of the share capital? No. There was no explanation. The only reason I could fathom for why they were so cheap was that no one had showed up to ask about them—until I had.

  Amazingly, I found that this anomaly wasn’t restricted to MNPZ. Nearly every company in Russia had preferred shares and most of them traded at a huge discount to the ordinary shares. These things were a potential gold mine.

  I intended to leave Sandy alone until after the election, but this situation was too compelling. These preferred shares were trading at a 95 percent discount to the ordinary shares, and the ordinary shares were trading between a 90 and 99 percent discount to the shares of comparable Western companies. Whatever Sandy’s concerns about Zyuganov, valuation anomalies like these were too rare to ignore. You’re lucky if you find something at a 30 percent discount, maybe even a 50 percent discount, but to find something this cheap was unheard of. I had to tell Sandy about them right away.

  When I told him the numbers, he immediately perked up and started grilling me for more information. We finished the conversation and I could practically hear the wheels turning in his head about how he was going to justify this investment to Safra.

  Two days later, the Levada polling agency1 published Yeltsin’s latest approval ratings. They had jumped from 14 to 22 percent. About three minutes after this announcement hit the wires, my phone rang. “Bill,” Sandy said excitedly, “have you seen the polls?”

  “Yes. Amazing, isn’t it?”

  “Listen, Bill, I think we should start buying some of those preferred shares. I’m wiring two million for tomorrow.”

  I told Clive and Svetlana the good news and we high-fived each other. I even walked over to Alexei, who hadn’t learned about high-fiving in his previous job in the Moscow Traffic Police. I awkwardly grabbed his arm, raised it in the air, and slapped his hand. He gave me a polite, toothy smile. Clearly he enjoyed being a part of this strange American ritual.

  We were now in business, and by the end of the next day the fund had invested all of this new money in Russian preferred shares.

  Over the next three weeks Yeltsin’s approval ratings jumped from 22 to 28 percent. For the first time since his campaign began, people started to factor in a real possibility that Yeltsin would win. New buyers entered the stock market, pushing my fund up 15 percent.

  Unlike other decisions in life, with investing you know if you’re right or wrong, based on the market price. There is no ambiguity. That Sandy could see a $300,000 profit on his first $2 million gave him more confidence than any words or analysis. He called me that Saturday afternoon on my mobile phone to let me know he was wiring an additional $3
million into the fund for Monday morning.

  With the probability of an apocalypse now fading, and the market starting to rise in reaction, other investors didn’t want to miss out, and more and more started to enter this small, illiquid stock market at once. Panic buying ensued. The week after Safra put in his additional $3 million, the fund was up a further 21 percent. Since we’d started investing a few weeks before, the fund was up a total of 40 percent, which in the world of hedge fund investing would have been an amazing year—only we had made it in three weeks!

  The following Monday, Sandy wired an additional $5 million without even telling me.

  In the midst of this excitement, I had a wedding to attend—my own. Sabrina and I were going to be married on May 26, 1996, only three weeks before the Russian presidential election. I rushed back to London on the Wednesday before the ceremony to prepare.

  We’d invited 250 guests from all over the world, and when Sabrina and I stood on the bimah of the Marble Arch Synagogue and she vowed to love and cherish me as long as we might live, I was moved. The words felt as real as any I’d ever heard. As I made my vows, I stared through tears at my beautiful, vulnerable wife. After the ceremony we had a raucous party with an Israeli band, which started off by playing “Hava Nagila.” We were lifted into the air on chairs and then danced all night. It was an amazing wedding with friends and family, and it felt as if all the planets had lined up for both of us.

  I’d promised Sabrina a honeymoon, but I could do it only after the election, and I flew back to Moscow the following Monday exhausted but happy. When I got to the office, Clive told me that we had another $5 million in the account from Safra. Over the next two weeks, two more tranches of $5 million arrived. By the second week of June, only a week before the presidential election, Safra had invested the entire $25 million he had committed, and the Hermitage Fund was up 65 percent from inception.

  The first round of the Russian presidential elections took place on June 16. Clive, Svetlana, Alexei, and I got to the office at 6:00 a.m. to track the results from Russia’s Far East, which was seven hours ahead of Moscow. The results were good for Yeltsin. In Sakhalin, he had 29.9 percent versus 26.9 percent for Zyuganov. The results moved west, and in Krasnoyarsk, Yeltsin got 34 percent. Finally, results came in from Moscow, where he won 61.7 percent of the votes. In all, Yeltsin had beaten Zyuganov 35.3 percent to 32 percent, the rest of the votes going to other marginal candidates. He had won, but since the Russian constitution requires a candidate to get 51 percent of the vote, there would be a second round on July 3.

  Over the next two weeks, anyone with a vested interest in getting Yeltsin reelected went all in. I was a bit worried that the race would be too close to call, but I needn’t have been. By midday on July 3 it was clear that Yeltsin would retain the presidency. When the final votes were tallied, he had beaten Zyuganov by nearly 14 percentage points.

  The markets went wild, and the fund was up 125 percent since we launched. That was it. I was well and truly in business.

  * * *

  1 The Russian equivalent to Gallup in the United States.

  11

  Sidanco

  Late on a Friday afternoon in August 1996, I learned of another intriguing investment idea. It was a sizzling-hot day. The only sounds in our office were the gentle whir of the computers, the hum of our air conditioner, and the intermittent buzzing of a large horsefly. The city outside lay unnaturally still. On summer Fridays, all of Moscow’s citizens poured into their countryside cabins, called dachas. That afternoon, it felt as if we were the only people left in the city.

  As my small team was about to leave for the weekend, the phone rang. “Hermitage, zdravstvuite,” Svetlana said, sounding bored. She swiveled in her chair and cupped her hand over the receiver. “Bill, it’s Yuri.”

  “Yuri? Put him through.”

  I picked up the phone and he whispered, “Hey, Bill. I’ve got a four percent block of Sidanco. You interested?”

  “What’s that?”

  “It’s a big oil company in western Siberia that no one’s heard of.”

  “Who controls it?”

  “A group headed by Potanin.” Everyone knew who Vladimir Potanin was: a tough-looking Russian billionaire oligarch with a pockmarked face, who was also a deputy prime minister of Russia.

  “How much do they want for the four percent?”

  “Thirty-six point six million.” Although my fund was growing, it couldn’t buy a block that big no matter how attractive it was. However, if the stock was interesting, the fund could buy part of the block. I remained silent as I thought about it.

  “If it’s not interesting, don’t worry,” Yuri said.

  “No, no, Yuri, it may very well be. I’d like to do some homework.”

  “No problem.”

  “How long do I have?”

  “I don’t know. I can probably keep it quiet for a week before the seller starts pressing, but it’s not as if there are many people out there looking for second-tier stocks.”

  I hung up with Yuri and my little team and I left the office for the weekend. But as I went home that day I had that tingling, greedy tension in my gut, similar to when I saw my $2,000 Polish investment multiply by nearly ten times, or when I’d first unearthed the Russian voucher scheme. I knew Yuri wouldn’t shop the deal to someone behind my back, but I also knew that a truly good opportunity wouldn’t last very long.

  I came back to the office early on Saturday morning and started to leaf through analyst reports and articles to see if I could learn anything about Sidanco, but there wasn’t anything in our files. As soon as my team arrived on Monday morning, I called Clive over to my desk. “I’ve been looking for information on Sidanco, but couldn’t find anything. Can you call around and see if any of our brokers have something?”

  He said he’d get right on it.

  I left for a series of meetings and when I returned around noon I asked Clive if he’d learned anything—but he hadn’t. There were no research reports, articles, data, or even reliable gossip. There was nothing on Sidanco.

  This was frustrating, but it made sense. A company like Lukoil, which had 67 percent of its shares trading in the market, was a liquid stock and generated lots of commissions for brokers. These commissions paid for research analysts to write reports for investors looking at the shares. Conversely, in the case of Sidanco, which had only 4 percent of its shares trading in the market, there weren’t going to be enough commissions to compel any analyst to waste time writing research reports.

  “Well, I guess we’ll just have to go and get the information ourselves, then,” I said.

  Going after information in Russia was like hurtling down the rabbit hole. Ask a question, get a riddle. Track a lead, hit a wall. Nothing was self-evident or clear. After seventy years of KGB-instilled paranoia, Russians were careful to guard their information. Even inquiring after a person’s health could feel like asking someone to reveal a state secret, and I knew that asking about the condition of a company would prove exponentially more difficult.

  I was undaunted, though. As I got started, I remembered that one of my classmates at Stanford ran a monthly trade magazine about oil and gas. Maybe he would have some information on Sidanco. I called him up, but instead of talking about Sidanco, he tried to get me to sign up for a subscription. “It’s only ten thousand dollars!” he said cheerfully.

  I had no interest in subscribing. “That’s a little out of my price range.”

  He laughed. “Tell you what, Bill. Since we were at Stanford together, I’ll send you some back issues for free.”

  “Great. Thanks.”

  Next, I turned to the pile of business cards on my desk. If I’d been a London investment banker, my Rolodex would have been bursting with embossed cards on thick stock. In Russia, my collection was humbler. Some were printed on cardboard. Others were orange or green or light blue. Some looked as if they’d been printed on a home computer. Two cards were stuck together because of cheap i
nk. Still, I went through them.

  I peeled a couple of cards apart and discovered someone I’d forgotten: Dmitry Severov, a consultant at a Russian finance company. I’d met Dmitry while still at Salomon Brothers and remembered that he was in the business of advising Russian oil companies on how to get bank loans. I figured he would know something about Sidanco. I picked up the phone, called his office, and asked for a meeting. He didn’t seem to be a man in demand and readily agreed.

  Dmitry’s office was in a residential apartment building on a quiet side street north of the Kremlin, which was one of the most desirable neighborhoods in Moscow. A single guard was sitting in a security booth at the entrance, smoking a cigarette, dressed in an all-black uniform. He could have passed for a Special Forces soldier were it not for his rubber sandals. Without even looking up, he waved me through to the elevator.

  I pulled out the address Svetlana had written down and frowned. Dmitry’s office was located on the fifth-and-a-half floor. I had no idea what that meant. Did I take the elevator to the fifth floor and walk up, or the sixth and walk down?

  A man brushed past me and hit the call button. The elevator was slow to arrive and was as narrow as a telephone booth. I had to squeeze in next to the man or risk waiting another ten minutes. He hit 5 and eyed me suspiciously. I looked at the floor and said nothing.

  We exited the elevator and went our separate ways. I followed a trail of cigarette butts up a half flight of stairs. There, a round, elderly woman let me into the apartment and I wondered if she was Dmitry’s mother or his secretary. She told me he was having lunch and directed me to the kitchen.

  “Sit! Sit!” he said when I entered, pushing aside a basket of gray bread and a glass jar full of sugar. I sat in a vinyl chair opposite him and tried not to watch as he sopped up his cabbage soup with the bread. “What can I do for you?” he asked between mouthfuls.

  “I’m researching oil companies.”

  “Good! You came to the right place.”