by Bill Browder
This last effort started with a meeting with Dmitry Vasiliev, chairman of the Russian Federal Securities and Exchange Commission (FSEC).
I met Vasiliev, a small, wiry man with steel-rimmed glasses and an intense stare, at his office in a block of Soviet-era government buildings and told him the story. He listened carefully, and when I was finished I asked if he could help.
His answer was a simple question: “Have they broken the law?”
“Of course they have.”
He removed his glasses to clean one of the lenses with a neatly folded handkerchief. “Here’s how it works. If you believe you have a bona fide complaint, write up a detailed description of Mr. Potanin’s transgressions and file it with us. Then we’ll consider it and respond in due course.”
I wasn’t sure if he was encouraging me or brushing me off, but I chose to take him at his word. I rushed back to the office, called in a team of lawyers, and had them draw up a detailed complaint. When we were finished, we had a two-hundred-page document in Russian reciting all the laws we thought the dilutive share issue would have broken. I submitted it the day it was completed, eager and nervous with anticipation.
To my surprise, two days later an article in red appeared across the Reuters screen: “FSEC to Investigate Cases of Violating Investors’ Rights.” We were shocked. It looked as if Vasiliev was actually going to take on Potanin.
All the same, I was uncertain about what would happen during this investigation. It wasn’t just the foreigner versus the oligarch anymore. Vasiliev was in the game too, and because he was Russian he was probably more vulnerable. It didn’t matter that he was the head of the FSEC. Anything could happen.
Throughout the following weeks as Vasiliev did his job, I held daily telephone briefings with Edmond’s deputies in New York regarding Sidanco, and I was forced to give them increasingly lukewarm reports. I learned that Edmond had begun to lose confidence in my ability to sort out this situation.
I wasn’t sure what Edmond was up to, but the trepidation in his voice and the frequency of calls from Sandy and his legal team in New York suggested something wasn’t right.
It became clear when one of my brokers called to say that he had spotted Sandy in the lobby of the Kempinski Hotel. There was only one reason why he would be in Moscow without my knowledge—to negotiate with Potanin behind my back.
I couldn’t believe it. If I was right, this would have projected total weakness on our side. Potanin and Boris Jordan were probably chuckling at our internal disarray.
I called Safra’s general counsel in New York and asked, “Have you sent Sandy to Moscow to negotiate with Potanin?” There was a stunned silence. I wasn’t supposed to know, and he was embarrassed. He collected himself before saying, “Bill, I’m sorry, but you’re way out of your league here. This is serious business involving a lot of money. I think it’s best if you let us take over from here.”
He may have been right if this were New York, where the courts worked and a sixty-two-year-old Wall Street lawyer was more capable than a thirty-three-year-old hedge fund manager—but this was Russia and the rules were different. I replied, “With respect, you have no idea what you’re doing here. If you show even the smallest sign of weakness to these guys, our investors will lose everything and that will be on you.” I was emphatic and asked him at least to give me some time to see my approach through to the end. He was resistant, but said he would check with Edmond. He called me back late that evening and grudgingly said, “Edmond will give you ten more days. After that, if nothing’s happened, we’re taking over.”
I called Vasiliev’s office the next day to try to find out where he stood on his investigation, but his secretary told me he was unavailable. I called our lawyers and asked if they could estimate how long the FSEC might take to make a decision. They had no idea.
As the days ticked by, I had daily calls with Safra’s general counsel. Things didn’t look good. By day six, he said, “Look, Bill, we promised you ten days, but nothing seems to be happening. Sandy’s going to come back to Moscow on Monday to see Potanin. We appreciate all that you’ve done, but it’s not working.”
I went home that night feeling as bad as I’d ever felt. Not only was I being screwed by the Russians, but my business partner had lost confidence in me. We would probably get 10 or 20 percent of what was being taken by Potanin if we were lucky, and this was probably the end of my partnership with Safra. For all intents and purposes, this was the end of Hermitage Capital.
The next morning I dragged myself into the office with the intention of controlling the damage any way I could. But I didn’t have to. Without any warning, a fax arrived with a printout of the front page of the Financial Times. The headline read, “Watchdog Annuls Sidanco Bond Issue.” Vasiliev had shut the whole dilutive share issue down.
That was it.
I had won. This nobody from the South Side of Chicago had beaten the Russian oligarch on his own turf. Edmond Safra called to congratulate me. Even his general counsel grudgingly admitted that I had been right.
With the deal officially dead, Potanin backed off. This reaction was every bit as Russian as his desire to go after me in the first place: once the money was off the table, there was no reason to struggle.
I’d met the oligarch in the prison yard and earned some respect. More than that, I’d learned how to fight the Russians, who weren’t as invincible as they wanted to appear.
14
Leaving Villa d’Este
Along with my win over Potanin, everything else seemed to be going my way in Russia. In 1997 the Hermitage Fund was ranked the best-performing fund in the world, up 235 percent for the year and 718 percent from inception. Our assets under management had grown from the original $25 million to more than $1 billion. The New York Times, BusinessWeek, the Financial Times, and Time magazine all profiled me as a wunderkind of modern-day finance. My clients competed with each other to invite me to their yachts in the south of France, and I was being wined and dined in every city in which I set foot. All of this was hugely exhilarating, and it was happening to me, a thirty-three-year-old who had started his business only two years earlier.
In hindsight, I should probably have been a little more circumspect. Any one of these developments was cause to celebrate, but taken collectively they constituted, in the parlance of Wall Street, one big “sell signal.” I understood this intellectually, but viscerally I just wanted my blessed life to carry on forever. Therefore, I stayed fully invested, thinking that everything would continue the way that it had.
Others did not share my optimism, principally Edmond Safra.
He gave me a call in early April 1998 and said, “Bill, I’m concerned about all the stuff going on with Asia. Shouldn’t we be liquidating our positions?” He was referring to the Asian economic crisis that had started in the summer of 1997, in which Thailand, Indonesia, Malaysia, and South Korea suffered major currency devaluations, bond defaults, and severe recessions.
“I think we should hold tight and wait until this storm passes, Edmond. Russia will be okay.”
“How can you say that, Bill? We’ve taken a huge hit already.”
He was justified in his concern. In January 1998 the fund lost 25 percent of its value, but by April it had recovered about half of its losses, and I was convinced that things were on the way back up.
“The market is bouncing now. When things calm down, we’ll make everything back.”
“Tell me why you think that’s the case,” he said, sounding unconvinced.
“Because the fear that Russia is on the brink is just that—fear. It’s based on sentiment, not fundamentals.”
“What do you mean?”
“Well, first, Russia doesn’t do much trade with Asia. Second, Russia doesn’t compete with Asia. And third, the Asians don’t invest in Russia. I just don’t see how the Asian problems will jump over here.”
Edmond took a second or two before he said, “I really hope you’re right, Bill.”
&nb
sp; I hoped I was right too.
Unfortunately, I was dead wrong.
What I’d completely missed was that the world is one big sea of liquidity. If the tide goes out in one place, then it goes out everywhere. When big investors started to lose money in Asia, they began unloading risky securities from their portfolios everywhere else in the world and anything Russian was at the top of that list.
This created a pernicious situation for the Russian government. Over the previous few years Russia, running a huge budget deficit to pay for public services, had borrowed $40 billion by issuing three-month ruble Treasury bills. That meant, just to keep its head above water, every three months the government had to sell $40 billion of new bonds to pay back the $40 billion of previous ones that were due. On top of that, Russia had to pay interest rates in excess of 30 percent to attract buyers, so the debt bills kept getting bigger and bigger.
This wouldn’t be a prudent financing strategy in the best of times, but it became downright suicidal in the worst of times.
The only thing that could now save Russia was the International Monetary Fund (IMF). As spring arrived in Moscow in 1998, IMF intervention was all that brokers and investors could talk about.
Interestingly, the Russian government didn’t share our obsession. I wasn’t sure whether it was arrogance or stupidity, but the Kremlin was playing hardball with the IMF when it should have been on its knees begging. In mid-May, Larry Summers, then the US deputy secretary of the Treasury, traveled to Russia to decide how the United States should deal with what appeared to be an impending meltdown. Since the United States was the biggest member of the IMF, Summers’s view would effectively determine the outcome. Although every Western politician understood that he was one of the world’s most influential financial power players, when the Russian prime minister, Sergei Kiriyenko, saw that Summers was merely a “deputy secretary,” he was insulted and refused to take the meeting. A few days later, on May 23, 1998, the IMF mission that had traveled to Russia to negotiate a $20 billion bailout package ran into similar obstinacy and gave up on its talks. Both Summers and the IMF left the country without an agreement on the table.
With no IMF money to prop up the Russian bond market, the Russian government had to raise the interest rate it paid on its domestic bonds from 30 percent to 44 percent to entice buyers. However, instead of attracting investors, this had the opposite effect. Wall Street smelled blood. “If Russia needs to raise rates from thirty to forty-four percent,” the thinking went, “then there must be something seriously wrong and I don’t want anything to do with it.”
This lack of confidence caused the Russian stock market to crash, and my fund fell a jaw-dropping 33 percent in May, leaving us down 50 percent for the year.
Edmond had been right.
Losing so much money threw me into a quandary. Should we sell when we’re already down 50 percent? Or should we stand firm and wait for a recovery? The thought of locking in a 50 percent loss forever was mortifying. I thought the market had bottomed, so I recommended holding our positions and waiting for an IMF bailout.
In early June, rumors started to circulate that the IMF was back at the negotiating table. The markets jumped and the fund went up 9 percent in a single week. But then the following week the rumors turned negative and the fund dropped by 8 percent.
By July, interest rates on Russian bonds had reached a staggering 120 percent. Russia would certainly default if the IMF didn’t step in. People such as Larry Summers and the technocrats at the IMF may have been furious at the Russian government for being so arrogant, but they knew a disorderly sovereign default in Russia would be catastrophic, and at the last minute the United States threw its weight behind a huge bailout package. On July 20 the IMF and World Bank stepped in with $22.6 billion, immediately releasing the first tranche of $4.8 billion.
When I saw the headlines, I felt an overpowering sense of relief. My nerves had been completely fried by the drumbeat of bad news, but now a backstop was in place. It looked as if this bailout would save Russia—as well as my investors’ money. The following week, the fund recovered 22 percent of its losses. The phone started ringing as I took calls from relieved clients, and we started to discuss how the recovery might play out.
But I was too quick to declare victory. The bailout package may have been big, but it was viewed by the Russian oligarchs not as a backstop but as a massive piggy bank that they could use to convert their rubles into dollars in order to get that money as far away from Russia as possible. Over the next four weeks, $6.5 billion worth of rubles were converted to dollars by Russian oligarchs. Just like that, the country was right back where it had started before the IMF stepped in.
As if these financial gyrations weren’t enough, my marriage was also slowly deteriorating. Ever since the Sidanco incident, Sabrina had grown more and more angry with me. She saw my decision to fight Potanin as a betrayal and she wanted me to move back to London. I reminded her that in spite of all the scary stuff, moving to Moscow was what she had agreed to, but she didn’t see it that way. She was also completely unsympathetic to my arguments about my duty to my investors.
We were having a difficult time finding any meaningful way to connect. Aside from taking care of David, which she did beautifully, the only part of our marriage that she was engaged with was planning our family holidays. These were the only times that Sabrina and I spent more than a weekend in each other’s company, so I gave her full rein to organize whatever she wanted in the hope that these trips would draw us closer together.
Earlier in the summer, before everything was falling apart in the Russian financial markets, Sabrina had booked a suite at the Villa d’Este Hotel on Lake Como in Italy. A suite at this five-star hotel cost $1,200 per night, which was more money than I’d spent on my entire postcollege summer vacation. I was always uncomfortable with these extravagant holidays, whether I could afford them or not. My mother, who had fled the Holocaust, had instilled in me the idea that spending money on luxuries was stupid and irresponsible. Given my circumstances, this was irrational, but I still found it hard to pay $30 for a continental breakfast. I would often feign an excuse to skip breakfast and ask Sabrina to bring back a few rolls because I felt so guilty about “wasting money.”
This specific holiday could not have come at a worse time. The markets were moving up and down 5 percent a day, and I shouldn’t have been more than a few feet from my desk. But if I’d canceled, it would have thrown my marriage into complete crisis. So in mid-August I flew to Milan, got in a car, and met Sabrina and David at Lake Como.
The contrast between Lake Como and Moscow was staggering. Where everyone was aggressive, angry, and tense in Russia, everyone was tanned, relaxed, and happy in Italy. We checked into our lavish two-bedroom suite, and after getting settled I went to sit on the terrace. I saw the crystal-clear alpine lake and the rolling foothills of the Alps and watched as people splashed and laughed in the water. The air was still and warm and smelled of pine trees. None of it seemed real.
I tried to clear my head and not obsess about every twist and turn in the market, but it was impossible. The only peaceful moments came at the crack of dawn, when David woke up. I would dress him and fill his bottle with milk, and we would share a couple of quiet hours, walking around the hotel’s manicured grounds while Sabrina slept.
I really enjoyed these intimate moments, but then on August 18, after our morning walk, when David and I were both on the balcony overlooking the lake while Sabrina was taking a bath, Vadim called in a state of panic from Moscow.
“Bill, it all seems to be happening.”
“What’s happening?” I asked, not understanding the context.
“The ruble is in a free fall. The government is no longer supporting the currency. Analysts are saying it’ll level out at seventy-five percent down.”
“Oh my God.” I put my water bottle on the metal table. I was utterly shocked. A dark bird whisked past, banking hard toward the water. David made a small, happy
sound.
“It gets worse, Bill. They also announced they’re defaulting on domestic debt.”
“What? Why would they default when they can just print money to pay it back? That doesn’t make any sense.”
“Bill, nothing these guys do makes any sense,” Vadim said in a resigned tone.
“How are the markets taking it?” I asked, preparing for the worst.
“It’s a complete meltdown. The bids have evaporated. A few sporadic trades are going through anywhere from eighty to ninety-five percent down.”
I ended the call without saying anything else, picked up David, and walked inside. Not in my worst nightmares had I seen this coming. Before my conversation with Vadim, I thought the market had hit bottom.
I knew in that instant that I had to get back to Moscow.
When I told Sabrina, she asked why I couldn’t just take care of it from the hotel. I tried to explain the gravity of the situation and that it was imperative that I be in Moscow, but she just couldn’t understand. I packed hastily, and when I was ready to leave, I tried to hug Sabrina, but she rebuffed me. I picked David up and gave him a tight squeeze.
I got back to Moscow that night, and when the dust finally settled the fund was nursing a $900 million loss—a 90 percent drop. That was bottom.
It’s hard to describe what it’s like to lose $900 million. I could feel it in the sides of my stomach, as if I had been emptied out from the inside. For weeks afterward, my shoulder blades tingled unpleasantly, as if I literally carried the loss on my back. And it wasn’t just a financial loss. I had spent the previous two years extolling the virtues of investing in Russia and now I had let all of my investors down in spectacular fashion.
It was also a public humiliation. The same journalists who’d clamored to showcase me on the way up were now desperate to go into all the gory details of my downfall. It was as if I were the victim of a horrible car accident and every passerby was slowing down to see the carnage and the burning wreck of metal.
