Red Notice

by Bill Browder

  “Can you tell me anything about Sidanco?”

  “Of course. I know everything about Sidanco.” He got up and left the kitchen, and in a moment he was back with a large spreadsheet. “What do you want to know?”

  “How about their reserves, for a start.”

  We looked through the spreadsheet together and he pointed to a column. According to his data, Sidanco had six billion barrels of oil reserves. By multiplying the price of the 4 percent block by twenty-five I got the price of the whole company: $915 million. I divided that by the number of barrels of oil in the ground, which told me that Sidanco was trading at $0.15 per barrel of oil reserves in the ground, which was crazy because at the time the market price for a barrel of oil was $20.

  I frowned. Something wasn’t right. If these numbers were even close to correct, Sidanco was cheap beyond belief.

  “Unbelievable,” I said under my breath.

  I thanked Dmitry and left. When I got back to the office, I had Clive figure out the valuation for Lukoil, the most widely followed Russian oil company. After hanging up with a broker, Clive passed me his calculation.

  I stared at the figures for several seconds. “These can’t be right.”

  “These are the numbers the broker gave me,” he said defensively.

  What didn’t seem right was that Lukoil was trading at a price six times higher than that of Sidanco per barrel of oil reserves, yet they appeared to be comparable companies.

  “Why would Lukoil’s valuation be so much higher?”

  Clive narrowed his eyes. “Maybe there’s something wrong with Sidanco?”

  “Maybe. But what if there isn’t? It really could just be cheaper.”

  “That would be brilliant. But how can we know for sure?”

  “We’re going to ask them. And if they won’t tell us, we’ll ask someone else until we figure it out.”

  The following day, we began our investigation.

  We started with Sidanco. Its offices were located in a former czar’s mansion on the western embankment of the Moscow River, not far from the British ambassador’s residence. Svetlana came with me. A pretty secretary with long blond hair and pencil-thin heels met us in reception and ushered us into a seventies-era conference room with wood-veneer sideboards and a faded velveteen sofa. She told us that a manager would be with us shortly.

  We were made to wait for half an hour before an executive in the strategic development department entered the room. He carried himself with the air of a board chairman who’d been shuttling between meetings all morning. He was tall and thin, in his early thirties, and already balding. He mumbled something in Russian, which I did not understand.

  “He is sorry to keep you waiting,” Svetlana translated. “He asks what can he help you with?”

  “Pozhalujsta,” the man said. “Chai?”

  “He wants to know if you would like tea,” Svetlana said, awkwardly sitting on a leather chair between the two of us.

  The man checked his watch. The clock was ticking. I turned down his offer of tea.

  “Tell him I would like to know how large their oil reserves are,” I said. I already had a number, but I wanted to know if it was right.

  He squirmed in his seat, as if he understood me, but waited for Svetlana to translate. He drew his lips in a tight smile, crossed one leg over his opposite knee, and launched into an explanation.

  After a few minutes, he paused so Svetlana could speak. “He says the most important thing about oil reserves is a company’s drilling technique. He says Sidanco has the finest equipment and best engineers in the country.”

  Before I could jump in, he held up his hand to shush me. He droned on, telling me about drilling, pipeline bottlenecks, and marketing subsidiaries, as Svetlana dutifully translated.

  “He asks if that is all?” she said suddenly.

  “Can you ask him about the oil reserves?”

  “I already did,” she said, confused.

  “But he didn’t answer. Ask him again.”

  Svetlana turned back to him, her cheeks flushed. He leaned back and waited for her to finish. Then he nodded, as if he’d finally understood my question and was about to reveal everything.

  He talked for a while longer. When I realized he wouldn’t pause for Svetlana to translate, I handed her a scrap of paper and a pen. She quickly started scribbling everything down. After five minutes, she glanced at me nervously to see if she should keep going. After ten minutes, she stopped writing.

  Finally, he wrapped up his lecture and sat forward. He nodded for Svetlana to translate.

  She looked at her notes. “He says the best oil in Russia comes from western Siberia—it is much better than the heavy oil coming from the central provinces of Tatarstan and Bashkortostan. He says—”

  “Did he say how large the reserves are?” I asked, cutting her off.

  “No.”

  “Are you sure?”

  “Yes.”

  “Ask him again.”

  Svetlana froze.

  “Go ahead,” I nudged. “It’s okay.”

  Slowly, she turned to face him. He was no longer smiling. Annoyed, he pulled a mobile phone from his pocket and began to flip through its menus. She meekly asked him the question a third time.

  He stood and brusquely said something to Svetlana.

  “He says he is very late for another meeting,” she translated quietly. Clearly, he had no intention of answering my question. I didn’t understand why he was afraid to tell us his reserve numbers. Perhaps he didn’t know himself, but in Russia the conventional wisdom was that only bad things could come from passing real information to anyone. The best way for Russians to deal with direct questions was to talk pointlessly for hours and essentially filibuster the issue. Most people are too polite to keep pushing in this kind of situation and they often forget the question they asked in the first place. With a good Russian dissembler, you have to be incredibly focused to have even a chance of finding out what you need.

  “He says he hopes he has told you everything you need to know.”

  The man reached out to shake my hand. “Please, come again soon,” he said in perfect English. “We are always happy to meet with Western investors.”

  Clearly, the people at Sidanco weren’t going to reveal any information about the company. So I started meeting with other oil companies to see if they knew anything about their competitor.

  At Lukoil, I was patted down, my possessions x-rayed, my mobile phone and passport held aside until I left. Then I was handed over to a former KGB officer who’d been hired by the investor relations department to deal with foreigners. He took me through an hour-long PowerPoint presentation showing oil rigs complete with beaming company managers posing in hard hats.

  At the oil company Yuganskneftegaz, the CFO tried to get me to lend the company $1.5 billion to pay for its new refinery.

  At the Moscow office of Tatneft, a smaller but still large oil company headquartered in Tatarstan, I was invited to help build a highway. Each meeting went the same way. I started out hopeful and optimistic, then I was bombarded with irrelevant information, and I left without anything useful.

  By then, my hunch about Sidanco had developed into something that was taking up way too much time and energy. What did I hope to find out when every analyst at every investment bank had written off Sidanco? Maybe there was a good reason why no one was interested in the 4 percent block.

  When I returned to the office after my last meeting, ready to give up, Svetlana handed me a brown envelope.

  “This just arrived from the US,” she said excitedly. “From that trade-magazine guy you spoke to.”

  “You can toss it,” I said without looking at the envelope. I figured it was probably more marketing material promoting the benefits of investing in oil rigs. But then I thought better of it. Maybe there was something in there.

  “Hang on,” I called. “Bring it back.”

  As I leafed through the magazine, I realized that my Stanford
classmate had sent me a treasure trove, the golden ticket to this whole puzzle. This obscure glossy oil magazine had an appendix with all the relevant data on Russian oil companies, including the elusive Sidanco. Everything I could have wanted to know was there: oil reserves, production, refining, everything. I didn’t have to visit all these companies. It was all here—in one place, looking authoritative and accurate.

  I pulled out a piece of paper and drew two columns. I titled the first Sidanco, and the second Lukoil, and wrote down every fact about each company that I could find in the magazine. When I was done, I looked over the accumulated information. There was practically no difference between the two companies. Little infrastructure had been developed since the fall of the Soviet Union, and they both had the same rusting oil derricks and used the same leaky pipelines, and they both had the same unproductive workers who were paid the same measly salaries.

  The only obvious difference between them was that Lukoil was well-known and had lots of brokerage reports written about it, whereas Sidanco had none. When we compiled the information from these reports and compared them to the information on Lukoil from the magazine, they matched up perfectly. This led me to believe that the information on Sidanco was reliable too.

  This was a remarkable discovery. Everyone knew that Lukoil was a steal, since it controlled the same amount of oil and gas as British Petroleum but was ten times cheaper. Now here was Sidanco, sitting on a bit less oil than Lukoil, but not much, only it was six times cheaper than Lukoil. In other words, Sidanco was sixty times cheaper than BP!

  This was one of the most obvious investment ideas I had ever seen. My fund bought 1.2 percent of the company starting at $4 per share, spending roughly $11 million. It was the largest single investment decision I had ever been involved with in my life. When Edmond Safra heard about what was happening he wanted to get involved as well, and he promptly bought the same amount for himself.

  Typically, when a company’s shares are publicly traded, the market sets the price for them. But in the case of Sidanco—where 96 percent was held by one investment group and 4 percent by minority shareholders, including us—hardly any stock was trading. Therefore we had no idea if we had done a good deal or not. For a while I was comfortable with this, but as the months started to pass I became increasingly worried. Good legwork and a bit of self-confidence is one thing, but if I’d screwed up I would lose a large portion of the fund. As time passed, I began to wonder if maybe I should have stuck with the crowd and not gotten involved in something so adventurous. I fought this trepidation and forced myself to stay hopeful that something good would eventually happen. Finally, a little more than a year later, something did.

  On October 14, 1997, BP announced it was buying 10 percent out of Vladimir Potanin’s 96 percent block of Sidanco for a 600 percent premium to the price we had paid a year earlier.

  It was a home run.

  12

  The Magic Fish

  It had been an eventful year. Not only had my business finally taken off, but more importantly, my son, David, was born in November 1996. As Sabrina had promised, she brought him to Moscow after his birth and we’d lived there as a family ever since. She decorated the nursery, even making the curtains and cushions herself, and found a few other expat mothers to be friends with.

  Even though she made these efforts, Moscow didn’t gel for her. During 1997 she made more and more frequent trips to London and by Thanksgiving she and David were barely in Moscow at all. I wasn’t happy about it, but I couldn’t force her to stay if she was miserable. So I went back to London every other weekend to see her and David.

  That Christmas, Sabrina insisted on taking a vacation to Cape Town, South Africa. I’d grown up associating South Africa with apartheid and racism, so I had no desire to visit. Sabrina’s persistence was more powerful than my prejudices, though, and in the end I agreed. I didn’t care that much, anyway, since I had to keep working—as long as my cell phone had a signal and I had access to a fax machine, I’d be fine.

  We flew to Cape Town on December 19, 1997, and checked in to the Mount Nelson Hotel—and my low expectations vanished. I’d never seen such an amazing place in my life.

  The Mount Nelson was a grand British colonial building under the fortresslike shadow of Table Mountain. The Cape Town sun shone every day and the green lawns, guarded by dark, swaying palms, went on forever. The pool was full of frolicking children as parents lounged nearby. A continual warm breeze fluttered through the white tablecloths of the outdoor dining area and waiters with perfect manners stood by attentively, ready to bring drinks, food, or anything else we desired. The Mount Nelson was like heaven. It was the polar opposite of Moscow in December.

  We settled in and I started to relax for the first time in years. As I lounged on a sun bed next to the pool, watching David play with his toys on a towel, I became aware of just how tired I was. I drifted into a state of complete relaxation. Sabrina was right to have chosen this place. I closed my eyes. I could have sat in that chair and basked in the sun for days.

  But a few days after we arrived, just as I’d started to truly decompress, my mobile phone rang. It was Vadim, my new head of research. Vadim was a twenty-seven-year-old financial analyst with a PhD in economics from the top university in Moscow whom I’d hired five months earlier to professionalize my fledgling operation. He had thick glasses, a mop of curly dark hair, and the ability to figure out the most complex economic puzzles in minutes. “Bill,” he said gravely, “some really disturbing news just came across the Reuters wire.”

  “What is it?”

  “Sidanco is doing a share issue. They’re going to nearly triple the total number of shares, and they’re selling them cheap—almost ninety-five percent lower than the market price.”

  I didn’t get it. “Is that good or bad?” If everyone was allowed to buy the new shares, it might have been neutral or even marginally good for us.

  “Very, very bad. They’re allowing every shareholder other than us to buy these new securities!”

  This was absurd. If Sidanco was able to increase the total number of shares by nearly a factor of three without letting us in on the action, then Safra and the fund would essentially go from owning 2.4 percent of the company to owning 0.9 percent of the company and get nothing in return. In broad daylight Potanin and the people around him were going to get $87 million of value from Safra and my clients with the simple stroke of a pen.

  I sat upright. “This is unbelievable! Are you sure, Vadim? Maybe Reuters got the announcement wrong or something.”

  “I don’t think so, Bill. It looks real to me.”

  “Go and get the original documents and translate them for yourself. This can’t be right.”

  I was shocked. If this dilutive share issue ended up having a bad ending, the credibility I’d built by finding Sidanco would evaporate and bring my investors enormous losses.

  I was also confused. I couldn’t fathom why Potanin would do something like this. What was his purpose? Why dilute the value of our shares and create a scandal when he had just had a spectacular windfall himself? After his big sale to BP, he still owned 86 percent of the company, and with this dilution he was only getting the benefit of 1.5 percent from us. It didn’t make any financial sense.

  Then I remembered why he would do this: because it is the Russian thing to do.

  There’s a famous Russian proverb about this type of behavior. One day, a poor villager happens upon a magic talking fish that is ready to grant him a single wish. Overjoyed, the villager weighs his options: “Maybe a castle? Or even better—a thousand bars of gold? Why not a ship to sail the world?” As the villager is about to make his decision, the fish interrupts him to say that there is one important caveat: whatever the villager gets, his neighbor will receive two of the same. Without skipping a beat, the villager says, “In that case, please poke one of my eyes out.”

  The moral is simple: when it comes to money, Russians will gladly—gleefully, even—sacrifice t
heir own success to screw their neighbor.

  This was the exact principle on which Potanin and his control group seemed to be operating. Never mind that they’d made forty times more money than us: that a group of unconnected foreigners also had a big financial success was unbearable to them. This was simply not supposed to happen. It was not . . . Russian.

  What was Russian was to have your business ruined—which was exactly what would happen to me if I didn’t get back to Moscow and fix this situation. I spent the next few nights in Cape Town trying to forget about my problems, but I simply couldn’t.

  Our vacation ended several days later, and Sabrina, who wanted nothing to do with winter in Russia, took David back to London. I arrived in Moscow on January 12, 1998, the day before Russian New Year’s Eve (Russia celebrates the Gregorian calendar’s New Year on January 1, and then twelve days later celebrates again for the Julian calendar’s New Year’s Eve on January 13). As soon as I got there, I spoke with Vadim, who had confirmed everything. The share dilution would take about six weeks to worm its way through the regulatory apparatus, but the deal was going to happen.

  I needed to do something to stop it.

  A day later, on January 13, I saw an opportunity. I received a call from a friend who told me about a Russian New Year’s party at the home of Nick Jordan, a wealthy Russian American banker at JP Morgan. Nick had a brother, Boris, who was Potanin’s financial adviser and the head of a new investment bank called Renaissance Capital. I knew them both as acquaintances, and I convinced my friend to bring me along to the party.

  The party was in an enormous luxury Brezhnev-era apartment several blocks from the Kremlin—the type that investment banks paid $15,000 a month for so that their expat employees could “endure the hardships of Moscow.” It didn’t take long to pick out Boris from the crowd of caviar-eating, champagne-swilling Russian American expats. In many ways Boris Jordan was what Russians considered a classic American: a loud, chubby glad-hander cut from the same cloth as your stereotypical Wall Street broker.