Fanatics are an evil breed
Whom decent men should shun;
I’d like to flog them till they bleed,
Yes, every mother’s son,
I’d like to tie them to a board
And let them taste the cat,
While giving praise, oh thank the Lord,
That I am not like that.
Sing it loud, Roger Woddis. That passage, from “Down With Fanatics” kicks off our closer look at a perennial thorn in Russia’s side – William “Bill” Browder, CEO of Hermitage Capital Management. For those just joining us, Kovane did an excellent post on Mr. Browder and his hedge-fund company earlier. But Mr. Browder appears to love attention, so I’m happy to oblige. Besides, he’s been in the news a good deal of late, flitting about from America to Europe agitating against Russia, stumping for the Sergei Magnitsky Rule of Law Accountability Act (which would bar entry to supportive countries for those Russians suspected to have been complicit in his death, as well as entry by their spouses and children and – in some cases – freeze their assets in the subject country), and generally trying to discourage any foreign investment in Russia by anyone.
Mr. Browder, an investment banker by profession, started Hermitage Capital Management in 1996 with $25 Million in seed money from his benefactor. For the fiscal year ending 1997/1998 it was awarded best-performing fund in the world by Micropal and best Russian fund by Lipper, won its CEO the 2004 Industry Achievement Award by Global Investment Analysis, and at its peak controlled assets in excess of $4 Billion. For anyone who likes making money – and who doesn’t? – it was a success story of staggering proportions. But, inexplicably, in November 2005 he was refused entry to Russia upon landing at Sheremetyevo airport in Moscow, allegedly for being a threat to national security, and sent packing. He has not returned to Russia since. As the Army lawyer says in “A Few Good Men”, these are the facts, and they are not in dispute.
A great deal that Mr. Browder has said since his dismissal from Russia is in dispute, however, although you’d never know if you only read the western press. As usual, a willingness to satisfy the wishes of a very rich man, an interest in promoting a negative view of Russia and a general disinterest on the part of the media in following things up result in the narrative reflecting pretty much whatever Mr. Browder tells them is true. Is it? That’s what we’re going to take a look at today.
Russia, early 1990’s. Turbulent, chaotic. President Yeltsin, famously perched atop a tank, seizes power from the “Gang of 8” conspirators. What is less well-known is that immediately upon the conspirators’ declaring themselves the interim government (a rule that lasts 3 days), the KGB commences 157 criminal investigations into economic crimes, citing “concealment of superprofits” and “connections with criminal groups”. Fully two-thirds of these cases involve foreign firms in joint ventures. Yeltsin’s assumption of power effectively torpedoes those investigations, which must have inspired a great sigh of relief. President Yeltsin’s first round of privatizations results in the issue of vouchers to all Russian citizens that will buy the bearer about 10,000 rubles worth of shares in selected state enterprises. Within months, most such vouchers have been purchased through intermediaries for cash, and are concentrated in the hands of a few emerging power brokers. The rise of the oligarchs has begun; as the reporters for Fortune Magazine put it colourfully at the time, “if the notion of billions of barrels of proven oil reserves and billions of tons of gold fills your dreams with visions of red-hot cash flow and ice-cold vodka, then Boris Yeltsin just might find some work for you. ”
Russia, 1996. Still turbulent, chaotic. Boris Yeltsin is going into a re-election campaign with popularity ratings of less than 5%. Couldn’t get elected lifeguard in a car wash, you’d expect, right? Wrong. Yeltsin and faithful sidekick Anatoly Chubais recruit a dream team of oligarchs in the media business and banking who owe their wealth to connections with his administration, to finance Yeltsin’s campaign while ensuring Yeltsin’s message is the one in everyone’s ear. Just as a side note, monopolization of advertising time by the evil forces of government was the issue Boris Nemtsov later wept about when he failed to get elected mayor of Sochi; but in Yeltsin’s case, his re-election was a priority for the west, so there were no distracting reports of the government ruthlessly suppressing opposition – see how it works? When you win, the people have spoken. When you lose, the results were rigged and the people were duped. Whether the western press lets it ride, or shrieks like it’s being burned alive, depends on whether it was for you or against you. What the Russian people think about it is not a factor in either case. Obviously, Yeltsin wins.
Anyway, cut to Yeltsin’s second round of privatizations – the program, by turns spat upon and elevated as a model of free-market reform, known as “loans for shares”. As Daniel Treisman points out in his authoritative, “Blaming Russia First” for Foreign Policy Magazine, many analysts, authors and editorialists who are otherwise bright and perceptive have a blind spot about the loans-for-shares program, suggesting it enabled the incomprehensibly-rich-overnight oligarchs. While it’s accurate that the program placed tranches of shares in state-owned enterprises with selected businessmen in exchange for loans, and later allowed these businessmen to sell these shares to themselves at fire-sale prices, it was collusion and engineering by the already-powerful oligarchs themselves that resulted in the auctions.
New York, 1996. Ramzi Yousef goes on trial for the World Trade Center bombing 3 years previously, and for fomenting a plot to blow up American airliners. National Police Week kicks off with a candlelight vigil to honour fallen officers, attended by 10,000 police officers and family members and featuring a speech by mayor Rudy Giuliani. A story by Robert Friedman appears in New York Magazine – entitled, “The Money Plane“, it relates a startling account of regular deliveries of crisp new $100.00 bills flown by the planeload from JFK International Airport nonstop to Moscow, five nights a week, where the money allegedly becomes part of the Russian mob’s vast international crime syndicate in a money-laundering operation of mind-boggling proportions. According to Mr. Friedman, principals in this operation – aside from its eventual recipients – are the National Republic Bank of New York and the United States Federal Reserve. Rarely less than $100 Million – allegedly – and sometimes more than $1 Billion, these regular-as-clockwork infusions of laundered moola are said to total more than $40 Billion since 1994, over two of the most Dante-esque and tormented years in Russia’s history. Put in perspective, that amount far exceeds the value of all rubles in circulation at the time.
Exasperated officials at the Federal Comptroller of the Currency Office as well as a Federal money-laundering task force expressed their opinion that what both the U.S. Federal Reserve and National Republic Bank were doing was unethical and directly contributed to the burgeoning power of organized crime. But according to money-laundering laws, banks are obligated only to not knowingly do business with criminals or their agents. The Federal Reserve claimed it was not their responsibility to know who National Republic’s clients were, and National Republic suggested anytime anybody could prove their clients were criminals, they would stop. Considering the money disappeared into the network of incredibly corrupt Russian banks – many of which were owned outright by criminals – that seemed unlikely to happen. Meanwhile, both the Federal Reserve and National Republic made millions on the shipments of cash.
Boy, howdy; if anyone can come up with a system that shouts “win/win” like that does, I’d surely like to see it. Russia struggles with corruption and crime, while the west feeds a steady flow of laundered cash to its organized crime element, simultaneously hammering on Russia for not getting with the rule of law, and pocketing a tidy profit.
National Republic’s owner was billionaire Lebanese investment banker Edmond Safra. But National Republic was not his first acquaintance with allegations of money-laundering and questionable banking practices; oh, no. Prior to that, in the mid 1980’s, Safra’s Trade Development Bank was implicated in operations to circumvent U.S. money-laundering laws in support of Oliver North’s (and President Reagan’s, although he was happy to let Mr. North take most of the credit) Iran-Contra operation.
Moscow, 1996. Hermitage Capital Management, a hedge fund wealth-management firm, opens its doors for business under the leadership of CEO William “Bill” Browder. Hermitage gets off the ground thanks to $25 Million in seed money, courtesy of….Edmond Safra.
Just before we consign Mr. Safra to the Ancient History bin, another side note. William Browder worked for him, and could not have failed to observe his principles appeared to have been cast in Jell-o where Making More Money was concerned. Mr. Safra died in a fire under circumstances that were, at best, difficult to explain. Before working for Mr. Safra, Mr. Browder worked for Robert Maxwell, also known as “The Bouncing Czech”. Mr. Maxwell subsequently drowned off the Canary Islands (named, incidentally, for dogs rather than canaries: Insula Canaria, Island of Dogs). After his death (naturally), it was discovered by British regulators that Maxwell had stolen more than three-quarters of a Billion dollars from the pension funds of Mirror Group. While neither of these deaths rises to suggestion that Browder stole the money himself and killed them both or had them killed – in fact, the idea is faintly ridiculous – one cannot help but notice that he was neck-deep in unscrupulous examples during his developmental years in business, although he naturally affects to have noticed nothing untoward. The man legendary for missing nothing – for seeing emerging opportunity before even other professional opportunity-watchers – was oblivious to the fact that his mentors were wealthy crooks.
Mr. Browder, in Russia. Although he likes to paint himself as an “activist investor” and journalists are happy to go along with it, that’s not quite true. He says he agitates for Russian companies to adopt western-style governance – which would only be good for them in the long run, right? – but he only does that with companies he is targeting for destabilization. If he were really an activist, he’d lobby the government to adopt western-style governance for all businesses. No evidence suggests he did that, and his methods – lawsuits, probing for whistleblowers, starting whisper campaigns in the western and financial presses – were all hostile-takeover body blows geared toward destabilizing the company.
Why would he do that? God; considering how I hate economics, it’s amazing how often this blog forces me to talk about it. When you attack a firm’s credibility, and everybody except that country’s government is happy to join you in the pile-on, the value of that company’s shares starts to slide. When the government finally steps in to clean up the mess and shore up the company before it collapses, the price of those shares takes a leap upward. If you’re invested in the company when that transition occurs – which Mr. Browder always was, since that’s the effect he sought to inspire – you pocket the difference. Once that company straightens up, it might pay fairly nice, stable dividends: but that big upward reversal only happens once. If your timing is perfect – as it’s much more likely to be if you are the one engineering it – you can clean up. If the company you’re targeting is already undervalued, so much the better – half your work is already done.
Let’s look at it another way; are you familiar with the proportionality principle? If not, don’t feel bad, I wasn’t either. But it only makes sense – your control in a given company as a shareholder should be in proportion to your degree of risk and exposure. Nobody who’s in business to make a profit wants a bunch of know-nothing nutjobs buying a couple of shares in the company, showing up at shareholder meetings and voting to take the company in a direction that might doom it to collapse, such as occurred with Exxon-Mobil in 2000 when environmentalists and religious leaders joined forces to push the company to recognize and acknowledge global warming and dedicate significant investment to alternative energy. Whatever you believe about global warming, if you were arguing from a profitability standpoint, alternative energy was not even in the same league as petro-based energy, and still isn’t. The company fought it, because they want to profit, and bemoaned the interference of tree-huggers who just hate big business. Minority shareholders carry minimal risk, and – according to company executives – have minimal knowledge about what the company is trying to achieve, which is to harvest maximum profits for minimum outlay. Looking at the report prepared by Shearman & Sterling for the European Union, “Report on the Proportionality Principle in the European Union“, we see that deviation from the proportionality principle is undesirable, as it contributes to instability in the company. Disproportionate power in the hands of minority shareholders who incur little risk is one of the Control Enhancing Mechanisms (CEM) and, to borrow from the report, “The structure of share ownership may have an important impact on a company’s behaviour and performance, and also on investors…proportionality between ultimate economic risk and control means that share capital which has an unlimited right to participate in the profits of the company or in the residue on liquidation, and only such share capital, should normally carry control rights, in proportion to the risk carried. The holders of these rights to the residual profits and assets of the company are best equipped to decide on the affairs of the company as the ultimate effects of their decisions will be borne by them…some of these CEMs are used to allow existing blockholders to enhance control by leveraging voting power…”
Clearer now? By agitating for more power for minority shareholders – in which he was included – Mr. Browder was agitating for greater power over the company. By fighting for the latitude to allow existing blockholders to enhance control by leveraging voting power, he was merely repeating techniques he learned from the example of money-launderers and swindlers, and from practical experience such as the control of large blocks of shares purchased from ordinary people who didn’t understand their relevance and didn’t want to learn – as he did in the voucher program during Yeltsin’s first wave of privatizations, before he ever came to Russia to live. Bang the company around through lawsuits by shell companies you control, upsetting the voting proportionality among shareholders and whisper campaigns about its insolvency and corruption until it stumbles, then pressure the government to do something. In Russia, “do something” often consists of throwing a pile of money at it to prevent its collapse. Company stock soars, money flows into agitator’s pockets. Almost as easy as stealing, right? Apparently, that was pretty much the Russian government’s take on it as well.
However, Mr. Browder overstepped when he began to mess with GAZPROM. The jewel in Russia’s crown, GAZPROM’s health and competitiveness are vital to Russia’s development owing to high energy prices, and are as such matters of national security. Count me among the group of those not surprised by Mr. Browder’s persona non grata status. Prosecutors charge Magnitsky participated in a scheme to acquire – through Browder front companies in Kalmykia such as Dalny Steppe and Saturn Investments – extra shares in gas companies like Surgutneftegaz, Rosneft and GAZPROM, at the residential tax rate of 5.5% rather than the 35% foreigners have to pay.
Which brings us to Mr. Browder, back in the west. Agitating constantly against Russia from every standpoint – business, politics, you name it. Urging people who may or may not know better to stay away from capital markets such as those which allowed Hermitage’s largest competitor in Russia, Rennaissance Capital, to post results similar to those which won Mr. Browder such acclaim as a wealth manager. And riding the spirit of dead tax accountant Sergei Magnitsky to diplomatic piety heaven. “Let’s do it for Sergei” is Mr. Browder’s mantra as he jets around the west drumming up support for the “Sergei Magnitsky Rule of Law Accountability Act”. Poor Mr. Magnitsky has assumed a global stature out of all proportion to his previous footprint with the company he worked for – which was not actually Hermitage Capital Management at all, but Firestone Duncan, Hermitage’s tax accountants and auditors. The latter’s effusive grief looks a little misplaced, considering they couldn’t even spell his name right when they announced his death.
Let’s put this in perspective. A list of the most evil people in history from a western viewpoint would inarguably include Joseph Stalin, Adolph Hitler, Kim Jong-il and Mahmoud Ahmadinejad. Is Mahmoud Ahmadinejad barred from visiting the United States? Not that I’m aware of; he visited without opposition in 2005. How does the USA deal with Kim Jong-il? More than $1 Billion in Foreign Aid. Adolph Hitler? George W. Bush’s grandfather did business with the architects of his regime right up until his business assets were seized under the Trading With the Enemy Act. Joseph Stalin? As we’ve discussed before, President Roosevelt hoped the American relationship with Stalin would survive the war, and was instrumental in granting the disputed Kurile Island chain to the Soviet Union as a measure to keep Japan docile and pacified.
And yet. A large number of Russian officials from the Interior Ministry, the FSB, the Federal Tax Service, Arbitration Courts, Prison Service and Prosecutor’s Office who all allegedly contributed to Mr. Magnitsky’s death are banned for life. Not just them, but their spouses and children. Since some people associated with the United States Government don’t even know Africa is a continent, while at least one who is a co-sponsor of the Sergei Magnitsky Rule of Law Accountability Act doesn’t know the difference betweeen Somalia and the Sudan and thought Iraq and Pakistan had a common border, I think it seems safe to assume the names on the list involved Mr. Browder’s input. What’s this act going to look like to historians in 100 years? Will they shake their heads and say, what the fuck? Transparency International posthumously bestowed an award on Mr. Magnitsky, for inspiring others by fighting corruption, while he stands accused of enabling it by his own government. I suppose the western view of him as St George slaying the dragon of corruption is only to be expected, since it supposedly took some 60 people to kill him. I wonder what the American reaction might be to Russia publicly expressing an opinion that Ken Lay was innocent. Oh, wait; scratch that – it’s not a very good example, because the U.S. government didn’t think he did anything wrong, either, and was noticeably reluctant to charge him.
It’s probably a coincidence that officials of the Interior Ministry who are banned likely had far more to do with revoking Mr. Browder’s Russian business visa than with any connection to Mr. Magnitsky’s death. Speaking of Mr. Browder’s visa, Kovane asked rhetorically in his post; if revoking Mr. Browder’s visa was such an outrage to him, why’d he wait 3 months before he said anything about it? That’s an easy one, because – in a rare moment of candor – Mr. Browder answered it himself. “From a business perspective it was very detrimental because all of my clients said, ‘Why should we give you money to manage in Russia if you can’t get into the country?’ and they withdrew their money from the fund.”
And let’s dispense with the notion that Sergei Magnitsky was a lawyer, how about? Browder’s descriptions refer with metronomic regularity to Magnitsky as a lawyerlawyerlawyer, the press helpfully repeats it and one British reporter cracked the sycophancy barrier when he described Magnitsky as “Russia’s smartest tax lawyer”. Sergei Magnitsky graduated from university as an accountant; there’s no record I could find – after a detailed search – of Sergei Magnitsky passing the Russian Federation bar exam, and his work record for Firestone Duncan lists him as an auditor. As best I can ascertain, Sergei Magnitsky was an accountant, and was so employed. Why the deception? A lawyer can cite attorney-client privilege to legally avoid giving testimony or answering certain questions – an accountant cannot, as some blogs with a marvelously developed nose for deception have noted. This seems formulated to cater to a western appetite, as Russian investigators would certainly not be fooled by Magnitsky simply declaring himself a lawyer if he was not. It might, however, support a narrative that Magnitsky was forced to answer questions that he had no legal obligation to answer – which might come in handy for discrediting the Russian investigation, considering he can never answer any now.
Life imitates art – like the critic of fanatics in the opening passage, Mr. Browder pretends to virtue, such as when evidencing complete bafflement on why his visa was refused: “The answer is, we just don’t know. You can take five highly placed, well connected individuals in Russia, who know everything and everyone, and you’ll get five different emphatic answers about who was responsible for my visa being taken away. It could be that they all got together in a room and said that “Let’s just take Browder’s visa away so he can’t come to Russia anymore”, I don’t know. ” Uh huh. Where’s my homework? Sorry, the dog ate it.
Look at the bright side, Mr. Browder- if you’re such a crook that you actually got kicked out of Russia for being a crook, you can probably drink free on that one in clubs where businessmen hang out for the rest of your life.
Note: As well as my usual thanks to Kovane and Yalensis for their assistance with Russian research, I am indebted to the authors of “Twelfth Bough” and “Suspicious Deaths” for allowing me to borrow from their efforts. You can find considerably more on Magnitsky’s death and Mr. Browder’s choirboy musings at these sites.