by Bill Browder
Vadim was driving his VW Golf to work when traffic ground to a halt where the Boulevard Ring meets Tverskaya at Pushkin Square. At that junction, every car has to turn either left or right, creating near-permanent gridlock at most times of the day. With motorists stuck in their cars for as long as an hour, a small army of enterprising street urchins had popped up to sell anything from pirated DVDs to newspapers to cigarette lighters.
While Vadim sat there that day, a boy approached the car brandishing his wares. Vadim wasn’t interested, but the boy persisted.
“All right, what are you selling?” Vadim asked warily.
The boy held open his dirty blue parka to reveal a collection of CD-ROMs in a plastic portfolio. “I’ve got databases.”
Vadim’s ears perked up. “What kind of databases?”
“All kinds. Mobile phone directories, tax return records, traffic violations, pension fund info, you name it.”
“Interesting. How much?”
“Depends. Anywhere from five to fifty dollars.”
Vadim squinted at the small print on the collection of discs in this kid’s portfolio and spotted one entitled “Moscow Registration Chamber Database.” Vadim did a double take. The Moscow Registration Chamber is the organization that tracks and collects information about who owns all Moscow-based companies.
Vadim pointed to the disc. “How much for that one?”
“That? Eh . . . five dollars.”
Vadim gave the boy a $5 bill and took the disc.
As soon as Vadim got to the office, he went to his computer to see if he’d just spent $5 on a blank disc. But just as the boy had promised, a menu appeared allowing Vadim to search for the beneficial ownership of every single company in Moscow.
It was at that moment that we discovered the second most interesting cultural phenomenon in Russia—that it was one of the most bureaucratic places in the world. Because of Soviet central planning, Moscow needed data on every single facet of life so its bureaucrats could decide on everything from how many eggs were needed in Krasnoyarsk to how much electricity was needed in Vladivostok. The fact that the Soviet regime had fallen hadn’t changed anything—Moscow’s ministries continued to exist, and their bureaucracies took great pains to account for everything for which they were responsible.
After Vadim’s chance run-in on Pushkin Square, we quickly became adept at finding all sorts of other data to help us cross-check the allegations we’d collected in the Gazprom interviews. Using these databases, we calculated that the management of Gazprom had sold seven major gas fields between 1996 and 1999 for next to nothing.
These asset transfers weren’t merely huge, they were brazen, and they were done without the slightest sense of shame. The new owners of the stolen property did nothing to even try to hide their ownership.
One of the more blatant examples was the story of Sibneftegaz, a subsidiary of Gazprom. Sibneftegaz, a Siberian gas producer, obtained licenses for a gas field containing 1.6 billion barrels of oil equivalent in 1998. Based on an extremely conservative estimate, we determined this subsidiary was worth about $530 million, yet a group of buyers was allowed to buy 53 percent of Sibneftegaz for a total of $1.3 million—a 99.5 percent discount to our calculation of its fair value!
Who were these fortunate buyers? One was Gennady Vyakhirev, the brother of Gazprom’s CEO, Rem Vyakhirev. Gennady, along with his son Andrey, used a company to buy 5 percent of Sibneftegaz for $87,600.
Another 18 percent block was bought for $158,000 by a company partially owned by a Victor Bryanskih, who was a manager in Gazprom’s strategic-development department. A further 10 percent of Sibneftegaz was bought by a company owned by Vyacheslav Kuznetsov and his wife, Natalie. Vyacheslav was the head of Gazprom’s internal audit department, the very department that was supposed to detect and stop this type of thing from happening in the first place.
We uncovered six other major asset transfers using similar techniques. When Vadim added up all the oil and gas reserves that had left Gazprom’s balance sheet, he found that Gazprom had effectively given away reserves equivalent to the size of Kuwait’s. Full-scale wars had been fought over far less.
What was most astonishing, though, was that while these oil and gas reserves were huge, Vadim determined they represented only 9.65 percent of Gazprom’s total reserves. In other words, more than 90 percent of Gazprom’s reserves had not been stolen. No other investors understood this. The markets had assumed that literally every last cubic meter of gas and every drop of oil had been pilfered from the company, which was why it traded at a 99.7 percent discount to its Western peers. But we had just proved that more than 90 percent was still there—and no one else knew it.
What should an investor do in a situation like this? I’ll tell you what: you buy the shit out of that stock.
In a world where people fight tooth and nail to make 20 percent, we’d just found something that might generate 1,000 percent, or even 5,000 percent. It was so obvious, that the fund increased its investment in Gazprom right up to the 20 percent limit, the largest percentage for a single stock that the fund allowed.
For most investment professionals, this is where you would stop. You do your analysis, make your investment, and then wait for others to discover what you’ve learned. But I couldn’t do that. Our discoveries about Gazprom were too great. I had to share them with the world.
I then did something very unusual in my profession. I divided the Gazprom dossier into six sections and gave each one to a major Western news outlet. The reporters and editors at these outlets immediately saw the impact this story would have, and our research was so exhaustive that they couldn’t resist. We’d saved them months of investigative work, and it didn’t take long for them to turn our research into a slew of staggering articles.
The first appeared in the Wall Street Journal on October 24, 2000, entitled “Gas Guzzler?” It described how the stolen gas fields had enough natural gas “to keep all of Europe going for five years.” The next day, the Financial Times came out with its story, “Gazprom Directors to Meet over Governance.” This article detailed all of the “friends and family” transactions at Gazprom. On October 28, the New York Times published “Directors Act on Asset Sales at Gazprom” in its international-business section. Less than a month later, on November 20, BusinessWeek published “Gazprom on the Grill.” And on December 24, the Washington Post published “Asset Transfers May Provide Challenge to Putin.”
The public in Russia and abroad was shocked by the level of corruption at Gazprom. Over the next six months, there were more than 500 articles in Russian and 275 in English, all reporting what we had exposed at Gazprom.
This coverage had a noticeable effect in Russia. Russians accepted the concept of corruption and graft in the abstract, but when they were given concrete examples of who was getting money and how much they were getting, they were furious. So furious, the Russian Parliament called for debates in January 2001 about the situation at Gazprom. These led to a recommendation for the Audit Chamber, Russia’s equivalent to the US General Accounting Office, to conduct its own investigation of Gazprom.
Responding to the Audit Chamber’s investigation, Gazprom’s board of directors commissioned PricewaterhouseCoopers, the big American accounting firm, to conduct an independent review.
After several weeks, the Audit Chamber announced the results of its investigation. Perhaps not too surprisingly, it said that they hadn’t found anything wrong with the conduct of Gazprom’s management. It justified the asset transfers by saying, “Gazprom was capital constrained and needed the outside capital.”
All that was left was the PwC report. This accounting firm was making millions of dollars off Gazprom as its auditor, so any indictment of Gazprom would have been an indictment of itself. Sure enough, it also exonerated Gazprom’s actions. It came up with obtuse and irrational arguments to explain why all the things that we’d exposed were reasonable and legal.
While these were not completely unexpected outco
mes, I was so fed up with everything that I didn’t want to be anywhere near Moscow when Gazprom held its annual general meeting on June 30, 2001. I knew that in spite of all we’d exposed, the management would strut around like proud peacocks, telling the world how well managed the company was.
I wanted to avoid the whole spectacle, so I asked Elena if she wanted to get away from Moscow for a long weekend. She had just finished a big project at work and agreed, so I booked two tickets to Istanbul, one of the few desirable places we could go without Elena’s having to get a visa.
We flew on the day of Gazprom’s annual meeting, and after arriving at Atatürk Airport we took a taxi to the Ciragan Palace Hotel, a former sultan’s palace on the European side of the Bosporus. It was a beautiful summer day. We went to the veranda next to the pool and ate lunch under a huge white umbrella, with the sun beating down. Ships of all sizes slowly passed below as they made their way in and out of the Sea of Marmara. It had only been a three-hour flight, but the exotic sights and sounds of Turkey, combined with Elena’s soothing presence, made me feel a million miles away from the dirty dishonesty of Russia.
As we ordered mint tea and dessert, my mobile phone rang. I didn’t want to answer, but it was Vadim, so I did.
And he had the most amazing news.
Gazprom’s management wasn’t strutting around their annual general meeting at all. Rem Vyakhirev had just been fired as CEO by none other than President Vladimir Putin.
Putin replaced Vyakhirev with a virtually unknown man named Alexey Miller. No sooner had Miller taken office than he announced that he would secure the remaining assets on Gazprom’s balance sheet and recover what had been stolen. In response to that, the stock price went up 134 percent in one day.
In the following two years, it doubled again. Then, it doubled again . . . and again. By 2005, Gazprom was up a hundred times from the price at which the Hermitage Fund had purchased its first shares. Not 100 percent—one hundred times. Our little campaign had gotten rid of one of the country’s dirtiest oligarchs. It was, without question, the single best investment I have ever been involved with in my life.
* * *
1 Barrel of oil equivalent, or BOE, is a unit of energy used to compare cubic meters of gas to barrels of oil.
18
Fifty Percent
Aside from work and spending time with Elena, one of the things I most enjoyed in Moscow was playing tennis, which I did often.
One cold Saturday in February 2002, I was running late for a game with a broker friend. Alexei was driving fast, and Elena and I sat in the backseat of the Blazer holding hands. As the car approached the final stretch of road that led to the tennis bubble, I saw a large, dark object in the middle of the street. Cars were swerving left and right to avoid it. I thought it was a canvas bag that had fallen off a truck, but as we got closer, I saw that it was not a bag at all, but a man.
“Alexei, stop,” I shouted.
He didn’t say anything or show any indication of slowing down.
“Goddammit, stop!” I insisted, and he reluctantly pulled the car next to the man. I opened my door and jumped out. Elena followed, and when Alexei saw there was no way out of this situation, he got out too. I knelt next to the man, cars zipping by and horns honking. He wasn’t bleeding but was unconscious, and I noticed that he was twitching and foam was bubbling from his mouth. I didn’t know what had happened, but at least he was alive.
I bent down and looped my arm under one of his shoulders. Alexei took his other shoulder, and Elena grabbed his feet. Together we moved him to the side of the road.
Once we were on the sidewalk, we found a soft bank of snow and gently laid him down. He started to come around. “Epilepsia,” we heard him mumble. “Epilepsia.”
“You’re going to be okay,” Elena told him in Russian, patting his arm.
Somebody must have called an emergency number because just then three police cars arrived. Shockingly, the officers paid no attention to the man and started thumping across the sidewalk looking for someone to blame. After hearing me speak in English and concluding I was a foreigner, they moved on to the Russians in the crowd who’d gathered around. The cops then converged on Alexei, whom they accused of hitting the man with our car. The injured man, who was at this point completely conscious, tried to explain that he hadn’t been hit and that Alexei was trying to help, but the police ignored him. They demanded Alexei’s documents and forced him to puff into a Breathalyzer. They then had a heated argument with Alexei that lasted fifteen minutes. Finally, when they were satisfied that nothing was wrong, they got back in their squad cars and drove off. The man thanked us and got into an ambulance that had arrived while Alexei was speaking with the police, and we piled back into the Blazer.
As we drove off, Alexei explained why he’d been so reluctant to help, as Elena translated: “This is what always happens in Russia. It doesn’t matter if that guy was even hit or not. Once the police get involved, they will blame someone and that’s the end of the story.”
Thankfully, because Alexei had been a colonel in the traffic police, he was able to extricate himself. But for the average Muscovite, a single act of Good Samaritan–ship could lead to a seven-year prison sentence. And every Russian knew this.
This was the story of Russia.
I went to my tennis match, but as hard as I tried, I couldn’t get the incident out of my head. What if we hadn’t stopped? Sooner or later a car wouldn’t have swerved and the man would have been severely injured or killed. Similar situations must have played out all over Russia every day, and this thought made me shudder. This perverse scenario wasn’t just confined to road safety, either. It happened in all walks of life: business, real estate, health care, the school yard, you name it. Anywhere that bad things happened, people would not get involved in order to save their own skin. It wasn’t that people weren’t civic-minded, it was just that the price for intervention would be punishment, not praise.
Perhaps I should have viewed this incident as an omen. Perhaps I should have minded my own business in Russia and not tried to fix the corrupt companies in which I was investing. But I believed that I could help. Because I wasn’t Russian—the police had ignored me as soon as they heard me speaking English—I believed I could do things that a Russian in my position would have never been allowed to do.
• • •
Which explains why, after seeing how well our campaign worked at Gazprom, I decided to go after corruption in other big companies in our portfolio. I went after UES, the national electricity company, and Sberbank, the national savings bank, to name just two. As with Gazprom, I spent months investigating how the stealing was taking place. I packaged the results into easily understandable presentations and then shared these presentations with the international media.
As with Gazprom, once the campaigns reached a fever pitch, Putin’s government would generally step in to flex its muscles.
After I revealed that the CEO of UES was trying to sell his company’s assets at a huge discount to various oligarchs, the Kremlin put a moratorium on asset sales. After I sued Sberbank and its board of directors for selling cheap shares to insiders and friends at the exclusion of minority shareholders, Russia changed the law on abusive share issues.
You may wonder why Vladimir Putin allowed me to do these things in the first place. The answer is that for a while our interests coincided. When Putin became president in January 2000, he was granted the title of President of the Russian Federation, but the actual power of the presidency had been hijacked by oligarchs, regional governors, and organized-crime groups. As soon as he took office, it became his highest priority to wrest power from these men and return it to its rightful place in the Kremlin, or more accurately, into his own hands.
Basically, when it came to me and my anti-corruption campaigns, Putin was operating on the political maxim of “Your enemy’s enemy is your friend,” so he would make regular use of my work as a pretext to knock his oligarch enemies off-balance.<
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I was so wrapped up in my own success and the runaway returns of the fund that I didn’t understand this. I naively thought that Putin was acting in the national interest and was genuinely trying to clean up Russia.
Many people have asked why the oligarchs didn’t just kill me for exposing their corruption. It’s a good question. In Russia, people get killed for a lot less. It was a completely lawless society where anything could happen, and where anything often did happen.
What saved me was not anyone’s fear of the law, but paranoia. Russia is a country that lives on conspiracy theories. There are layers upon layers of explanations for why things happen, and none of them is straightforward. In the mind of an average Russian, it was inconceivable that an unassuming American guy who barely spoke Russian would aggressively be going after Russia’s most powerful oligarchs on his own. The only plausible explanation was that I must have been operating as a proxy for someone powerful. Considering how each of my battles with the oligarchs led to an intervention by Putin or his government, most people assumed that this someone was none other than Vladimir Putin himself. It was a ridiculous thought. I had never met Putin in my life. But because everyone thought I was “Putin’s guy,” no one touched me.
The upshot of our campaigns and Putin’s interventions was a spectacular recovery in my fund. By the end of 2003, the fund had gone up more than 1,200 percent from the bottom of the market. I’d recovered all of the losses from 1998. It had taken five years and a Herculean struggle, but I’d achieved my goal of pulling my clients out of that terrible hole. In addition to vindicating myself, I also felt that I’d discovered the perfect business model: not only was I making lots of money, but I was also helping to make Russia a better place. There are very few jobs in the world that allow you both to make money and do good at the same time, but I had one of them.
