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Practice English Speaking&Listening with: Hermitage CEO Browder: Don't Invest in Russia Today

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BILL B.: One thing I can tell you is that the story I'm

gonna tell

today is a kind of story you're not gonna hear from any

other speaker

coming to this room at any other point.

Will the me start out by telling you a little bit about


I was here at Stanford 20 years ago.

I'm actually back for my 20-year reunion which is what

brought me here


And so I thought maybe I would share with you a little bit

of my own

psychology when I was sitting in these seats 20 years ago.

Probably when you hear me speaking, one of the questions

that would

show up in your mind is: What is this guy with an American


from Chicago doing having been the -- at one point the

largest foreign

portfolio investor in Russia,

and, what I will describe to you in a minute, now one of the


enemies of the State of Russia?

And so let me explain to you how that all happened.

Indeed I am an American.

I'm from Chicago.

But I come from a very unusual family.

My grandfather who was also American, his name is Earl

Browder, grew

up in Wichita, Kansas.

And the family lost its farm, the home on the farm in the

1920s and he

had to work in a factory.

And the factory was mistreating their workers and so he

became a labor

union organizer and he was very good at it.

And so after working in Wichita he was recruited by the

Union to work

in Kansas City then to work in New York City and in New York


there were various Communists that were running around and


Communists spotted him and said, this is a talented guy.

Let's invite him to Moscow.

And so the Communist Party invited him to Moscow in is the

27, he

moved to Moscow there, he met my grandmother in Moscow, and

my father

was born there.

And hen in 1942 he was sent back by the Communist Party to

America to

become the General secretary and head of the Communist Party


America for the next 13 years.



BILL B.: This is my grandfather.



BILL B.: The McCarthy era came in the is the 50s and I'm

sure you all

know about that and so it wasn't such an easy time -- he got


out of the Communist party.

I should my grandfather 1945 for proposing that Communism


Capitalism could co-exist and unfortunately many of his

followers in

eastern Europe was assassinated.

He was fortunate, living in America, that he wasn't.

And then he was persecuted by McCarthy and had a very

terrible time

even after being kicked out of the Communist party in the


So this is my family.

Things normalized.

I was born in 1964, so I'm 45 years old, and I grew up in a


community in the south side of Chicago and I basically was

just a

regular American kid.

And when I became a teenager, as often happens in American

families, I

decided to rebel against my family.

How do you rebel against a family of Communists?



BILL B.: Well, I'll tell you how I rebelled.

I put on a suit and tie and became a businessman.

There's nothing else I could do the piss off my parents more





BILL B.: And I came to Stanford Business School.

And so I sat in these rooms for two years, as many of you do

and will

be doing and have done, and I went to brown bag lunches and

I went to

recruiting events trying to figure out what I was gonna do

with my


And something didn't quite feel right because even though I


rebelling against my family to become a businessman, I just


quite feel right.

And so as I was searching my soul to say what should I would

do with

my life?

I said, what's my unique comparative advantage with all

these other

people that are all so smart, and all so good, and all so


And I thought, well, I'm a businessman but I am also the

grandson of

the head of the Communist Party.



BILL B.: That's my competitive advantage.



BILL B.: And it just so happened that 1989 was the year the


Wall came down.

And so I had a chance to do a business in the former



And guess what?

Not a single person I knew anywhere in the world had any

interest in

doing it.

And so I showed up, I started looking for jobs where I could

be doing

business in eastern Europe.

Everyone said, why would you wanna do that?

There's no business in eastern Europe.

And I looked for jobs and looked for jobs.

People offered me all sorts of mainstream, normal jobs but I

wanted to

do business in eastern Europe.

And eventually a got a job in the Boston Consulting Group in


And they had an excentric partner there who said that, well,

we don't

have any business in eastern Europe but if we ever do, you

can be our


You can be the head of our eastern European practice.



BILL B.: So I said, okay.

That's as good as I'm gonna get.

So, I went to London, I went to work at the Boston

Consulting Group,

and indeed a few months later we got a first nibble of work

in eastern


And the work we got was with a bus factory in Poland in the


corner of Poland about six hours from Warsaw by car on the



The bus factory was being -- almost going out of business.

I think their sales had declined by 90 percent and somehow

the World

Bank got involved can said, we need a consultant up here.

And BCG put in a big proposal that said we have experts in

buses and

we have experts in manufacturing we have experts in all


different things.

And the World Bank said great, send 'em.

And so they sent me, as a first-year associate, fresh out of




BILL B.: So I go to this failing bus factory and it's pretty


that there's no hope for this bus factory.

Their sales have declined by 90 percent.

They're just gonna have to lay off 90 percent of their

employees if

they wanna stay in business.

And so it was not a very pleasurable assignment.

But one thing happened to me while I was sitting in this

little town

six hours from Warsaw.

And I notice that in the newspaper one day they had all


financial statements in the middle of the newspaper.

And I asked my translator -- I didn't speak a word of Polish

-- I

said, what are these financial statements? And he said, oh,

these are

the first privatizations of the Polish government's doing.

I said, oh, that's interesting.



BILL B.: I said, what does this thing say in what does this



And so we started to write down the numbers and basically

they were

selling seven Polish companies at valuations which were half

of their

one-year previous earnings.



BILL B.: Okay, now, I wasn't actually all that great a

student at

Stanford but even not being a great student I understood

that if you

buy a company at half of one year's earnings that's got to

make sense;




BILL B.: And I didn't have a lot of money.

I don't come from a wealthy company or anything but I had

saved up

4,000 bucks at that point and I took my entire life savings

which was

4,000 bucks, I converted it to Polish zloty, I took it down,

and I

applied for shares in these first privatizations and I

bought 'em.

And they went up ten times over the next 12 months.

Now, if you've ever made ten times your money on anything

you'll know

that it releases a certain chemical in your body.



BILL B.: And you want that chemical release again.



BILL B.: And so I knew I had found my vocation. I was gonna

go and

buy into privatizations in eastern Europe.

So we fast forward a couple years and I end up at Salomon


And I'm -- I got a job at Salomon Brotherss as an investment


So I go to work at Salomon Brothers as an investment banker


Salomon Brothers doesn't exist anymore.

It became part of City Group and City Group hardly exists or


exist or whatever.

And I go to work at Salomon Brothers and for those of you

who have

ever read "Liar's Poker", it's a great book and if you

haven't, you

you should.

And it talks about the incredible culture of Salomon

Brothers which

was this dog-eat-dog place.

And I go to work at Salomon Brothers and on my first day at


Brothers as an investment banker for eastern Europe, they

give me my

business cards, they give me my desk, and they say, you

basically have

to earn five times what we're paying you otherwise you're

gonna get


Earn it for the firm.

Get to work.

So I -- there's no training program, there's no mentors,

there's no

here's what you need to do.

Get to work.

Five times what we're paying you otherwise you get fired.

So I hear that there's a privatization of the Hungarian

Airline and

there's some team working on it.

And so I go to the conference room where they're supposed to

be having

a team meeting and I walk in and they say, what are you

doing here?

I said, well, I'm here to help.

And they say, we don't need your help.

This is well taken care of.

Please leave.

Because they didn't wanna share any of their five times with


because that was just gonna make their life more difficult.

So no Hungary.

I then heard about a Polish telecom privatization going on a


days later and so I go ask try to wedge my way into that.

And they say, don't etch think about trying to come anywhere





BILL B.: And I'm thinking, how am I ever gonna survive in

this firm?

They're extremely uncollegial.

How am I ever gonna survive in this firm?

And then I came up with this idea.

At the time, this was 1992, there was no investment banking

work in


And so none of these guys were trying to protect their turf.

And so I just declared myself the investment banker in

charge of

Russia because nobody --



BILL B.: -- nobody was -- and there was nobody -- and I

declared it

waiting for somebody to object but nobody objected because

there was

no money.

There was just nothing going on.

Then I had an interesting opportunity about three months

into my

investment banking leadership in Russia.



BILL B.: I got my first bite of a mandate and it was a

fishing fleet

located in Murmansk which was 300-miles north of the arctic


And this fisher fleet, it's called the Murmansk Charter

Fleet, had

some kind of fishing dispute with somebody buying their fish

and they

had hired Cleary GottliebCleary Gottlieb to settle this

dispute and

Cleary Gottlieb, the big New York law firm, had recommened

that they

hire an investment banker to advise them on privatization.

And so I went to the library at Salomon Brothers and

discovered that,

like, 20 years before, Salomon Brothers had done some

fishing deals in


And I proudly put these into a presentation to the Murmansk


Fleet and lo and behold they called us up and said, you've

won the


Please come and negotiate fees.

And so I started getting in touch with them to negotiate

fees and it

turned out that they were ready to pay $50,000 a month for

two months

to advise on their entire privatization.

Now, there's not an investment banker that would get out of

bed for

50,000 bucks for two months or for a month but it was $50,

000 greater

than zero, which is what I had earned so far as the head of


Russian investment banking business.



BILL B.: And so I took the assignment.

And I got on a plane to Murmansk and I got to Murmansk which

is a

very, very desolate, terrible place.

Really just a horrible place.



BILL B.: And I sat down with the head of the fishing fleet

and I

asked him, what's going on?

How could I help?

And he walked me through the math.

They basically had a hundred ships, each ship costs $20

million new,

so there's $2 billion worth of ships, maybe seven years old

and total

so about half depreciated, so a billion dollars worth of


And he had hired me to decide whether the management should


their right under the privatization program to purchase 51

percent of

this fleet for two and a half million dollars.



BILL B.: So it was actually quite an easy assignment.



BILL B.: And, again, you didn't have to be a Stanford MBA to


on this stuff.

5 million market cap, a billion dollars worth of ships, uh .




BILL B.: I had that chemical reaction that I had from Poland

sort of

pumping through my system at this point and I thought to

myself, I

wanna get involved in some of this stuff.

And so the first thing I did after leaving there was I

instead of

going back to London I went to Moscow to see whether this

was just an

ano, ma'am lee in fishing fleet or whether the whole

situation was the

same all other Russia.

And it turned out that the entire Russia was being put

through the

same type of privatization program.

And what I learned -- I didn't know a soul in Moscow, I

didn't speak a

word of Russian, and I got ahold of an English language

Yellow Page

directory that they had for English language business

visitors and I

just started circling people in the Yellow Page directly and


around meeting them.

And I met about 30 people and over the course of a week I

put together

the sort of thought about what this is.

And it was very simple.

That they had vouchers that they gave to every person in the


and there was a hundred 150 million people in the country

and each

voucher costs 20 bucks.

So that gave you $3 billion worth of vouchers and that was

exchangeable for 30 percent of all the shared capital of all


shares in Russia which meant the entire value of Russia in

1992 was

$10 billion for the whole country.

All the oil, all the gas, all the metals, all the


$10 billion.

And, boy, at this point, the adrenaline is just pumping

through my

system and it was clear that this was just the most


unbelievable opportunity ever.

So, I go back to Salomon Brothers, where I had been working

and I say,

listen, we're wasting our time with all this 50,000-dollar



We should get in there, buy all this stuff, and make a


They're just giving it away.

Gold for free.

And they looked at me like I was completely out of my mind.

And I thought, how could -- and people said, what?

Russia? Invest in Russia?

What are you?

Crazy is this and I didn't know how to work in an

organization, or

politics, or anything.

And so the more that they -- the more people sort of blanked

me and

didn't wanna talk about it the more I would just, like, try

to find

somebody else who would listen to me.

Ask so I was just talking to more and more people which is

exactly the

wrong this I think to do in an organization that starts

going on.

And so pretty soon -- we used to have these group lunches

with the

young guys who are in the same year and people stopped

inviting me to

the group lunches, no more.



BILL B.: No more drinks.

People didn't wanna with seen with me.

I was some excentric outcast.

And I wasn't earning any money for the firm, either.

That five times thing was coming close to being due.

So I was in this terrible situation of becoming, like, an

outcast in

the firm, and very unpopular, and my job was on the line and

I was

feeling very bad about myself.

And one day I got a call from a very senior person in the

New York

office who's responsible for the firm's balance sheet.

And he said, I heard that you might have something

interesting to say

about Russia.

Why don't you come and tell me about it?

And so I prepare myself a PowerPoint presentation so

hopefully I can

somehow get through to this guy and maybe turn this

situation around.

Can so I go with New York and this guy is meeting with this

very, very

strange fellow with no social graces whatsoever and he was,

like, one

of their most successful investors in the firm but nobody

could ever

work on his team for long 'cause he just had no -- not a

character to

work with.

And so I go and sit down with him and I start taking him

through my

PowerPoint presentation showing him these numbers that I've


shared with you.

And he wasn't nodding, or giving me any kind of feedback.

He was just looking at it very blankly.

And I was going through my PowerPoint page after page and no


no response, no nothing.

And I'm starting to feel a little worried.

And about halfway through my presentation he just gets up

and leaves

the room without saying a word.



BILL B.: And I'm sitting there, and I'm thinking to myself,

umm, this

is not good.

This is probably my last chance of getting -- doing this.

And I'm trying to think about what I'm gonna say when he

comes back to

this room so I can somehow salvage it.

And I'm getting more and more worked up trying to think

about how can

I pull this out in because this is my whole dream.

This is how it's gonna work.

And he comes back and before I have a chance to open my

mouth, he

says, this is the most unbelievable story I've ever heard.

I've just gone to the Risk Committee and I've gotten the


for you to invest $25 million.

Stop all this nonsense that you're doing with investment


We're gone in invest in this stuff.

This is amazing.

All of a sudden a big cloud and the big weight has been

lifted off my


I go back to London and I start investing -- I go to London,

get my

stuff organized, I then go to Moscow, and we start investing


$25 million which was an enormous amount of money for the


market back then.

And we get the $25 million invested and seven months later,

now we're

in the middle of 1984, the Economist Magazine writes an

article which

outlines the same economics I've just taken you through, and


called "Sale of the Century" and all of a sudden about 30

people, rich

guys, head funds, wake up and say, "God, we should be

invested in this


And so they started calling up brokers or whoever and try to



And our 25 million-dollar portfolio, in that seven month


because of this economist's article went up five times in

seven months

because all of a sudden 30 people started showing up and

buying this


So I've gone from 25 to 125 million this was back in the

days where a

hundred million was a lot of money.



BILL B.: And so all of a sudden all the guys who weren't

inviting me

to lunch and weren't hanging out with me anymore started

coming around

my desk saying, Bill, how can we get involved in this

Russian stuff?

And I'd like to buy some of this stuff for my personal


And literally, every morning, there was, like, four guys


around my desk before I arrived waiting to get some advice

on how they

could make some of this money in Russia.

But more importantly than that, the senior salespeople who

had big

hedge fund clients at Salomon Brothers started coming around


saying, Bill, would you be willing to come the New York and


George Soros?

[Laughing] No.



BILL B.: Could you meet John Templeton?

Michael Steinhardt?

So I was in, like, my late 20's and I was being invited to

meet the

most successful investors on earth to explain to them what I

had done

in Russia.

So I go to these meetings and I take them through my

PowerPoint and

every single one of them says at the end of the meeting, "

That's the

most amazing thing that I've ever heard.

Can we give you some money to manage?"

And I said, well, we're not actually in the business of


people's money.

Let me go back and ask my colleagues and see whether we can

do this.

So I get back and I ask my boss in London if this is

something that we

can do for other people.

He said, great idea.

For sure.

Let's form a task force to study it.



BILL B.: So he said, next Monday will be the first task



So I show up to the task force meeting and it's like this


There's like 50 people showed up for the first task force

meeting and

there's only, like, two people in the firm who knew anything



And I look around the room and people -- and there was,


directors, managing directors, and senior managing

directors, and I

was like, some junior vice president, and I was looking

around the

room, right, and all these guys were sort of arguing with

each other

about which part of the firm was gonna get the credit for

this and who

was gonna get the money.

And I was looking around thinking to myself I know there's

one thing I

know for sure who's not gonna get any money outta this




BILL B.: So I got really angry and I went back and I was

tossing and

turning for a few days and I just -- I said, I just can't do


And so I sucked up my gut, and I went into the head of the


floor and I said, I'm quitting.

I'm gonna set up my own fund to do this.

He said, Bill, you're crazy.

You have such a promising career.

And I said, I'm sorry.

I'm setting up my own fund to do this.

And I went -- I left Salomon Brothers and I set up my fund

called the

Hermitage Fund.

And I went back to all of these famous guys who I had met on


Street and I said, would you be willing to invest with me in


Hermitage Fund?

And one of the guys who I had met was a very famous, now

deceased man,

named Edmond Safra, who was the owner of Republic National

Bank in New


And in the world of private banking his name was as good as

it ever --

his name is a legend in private banking.

You might not know about him now, but if you knew the

history of

wealth and private banking this man was just like gold.

And Edmond Safra put up the first $25 million to be my



We became joint venture partners and he said, if you do a

good job

with this 25 million then I will introduce you to all the

rich people

in the world and will make you a spectacular success.

But you node to do a good job first.

So I moved to Moscow from London in 1996 and started


And it was really a very interesting thing because in 1996

there was

not a single Wall Street-educated principal investor who was


sitting on the ground in Russia.

There was a lot of Wall Street principal investors sitting

on the

ground in Wall Street and there was a lot of Wall Street-


brokers sitting on the ground in Moscow, but no investors.

And it was very interesting 'cause the brokers would all


research about things that they could make a lot of

commissions buying

and selling and they wouldn't write research about the

things that

made the most sense.

And basically you end up in a situation where anything --

any stock

that was researched by the brokers would trade at ten times


valuation of any stock in the same industry that wasn't

researched by

the brokers and nobody had had any confidence in buying the

stuff that

wasn't researched because they couldn't do any research.

So, again, this is not rocket science.

This is just simple stuff.

I thought, well, here I am on the ground.

I could do my own research.

Why don't I go visit the company this trades at 1/10 the

valuation of

the other one where there's a research report?

So I went and visited the oil company that traited at 1/10


valuation of Lukoil and a couple of them at did and I rooked

at them

and there was no difference between the ones that were 1/10


valuation except for the fact that there wasn't a credit


research report.

So after going through these companies and realizing that


exactly the same, they had the same surley management, the


rusting oil derricks, the same bad tax inspectors, the same

everything, one was ten times cheaper than the other.

And, by the way, the one that was ten times more expensive

was still

1/10 the valuation of the western oil companies.

These are trading at 1/100 of the valuation of the western



So I decided I'm gonna invest in the stuff that's

unresearched 'cause

I can do my own research.

So I did my own research, invested in them, and my fund went

up in the

first month of operations it went up 35 percent.

Not in a year but in a month.

So some of Edmond Safra's clients had heard about this new

hot thing

in Russia and they called Edmond and said, can we invest in

your fund?

He said, no, no, no, no.

We don't know this guy.

He could be stupid.

He could be a crook.

I have no idea.

I wanna audit -- I wanna have, like, a year's track record,


everything, and then I'll let everybody in but I don't wanna

put my

name next to his until I know he's a solid guy.

The next month we were up 40 percent.



BILL B.: And the guys who had called him and said, Edmond,

what are

you trying to do?

That was 40 percent we would have made if we had invested.

And people were getting angry with him.

They said, listen, Edmond, we're gonna take some of our

money out of

your bank if you're being so greedy and not letting us in

this thing,

just keeping it for yourself.



BILL B.: And he couldn't have imagined that his business

risk was not

gonna be me blowing up, but me doing too well.

All of these people were threatening to leave his bank

because I had

done so well and he wouldn't let 'em in.

And so he relented, opened up the fund to outside investors,

and by

the end of the first year we had about a $100 million under


We were up, like, a hundred 50 percent.

The next year it was even better.

We were up 200 -- I think we were up 242 percent in 1997.

We were up 800 percent from when we had launched 18 months


My fund was over a billion dollars -- and again, this was

when a

billion dollars really meant something.



BILL B.: -- and I was the largest investor by any stretch of


imagination in a small market.

They were writing articles about how clever I was ton front

page of

the New York times.

My clients were inviting me to their yachts.



BILL B.: I was in my early 30s's.

I thought, I've just figured it all out.



BILL B.: And I had no perspective.

Everything that I've just told you was like -- one of them


themselves might not have been a sell signal but a young guy

in his

30's with the biggest fund in the market up 800 percent in

18 months,

clients and yachts, front page articles, that was a sell

signal if

there ever was one.



BILL B.: But I was too young and too inexperienced to





BILL B.: In 1997 the Asian currency started to devalue,

Asian markets

started to go down, the Russian government had a huge debt

burden, it

was rolling on a three-month basis with hedge funds and rich

guys and

they couldn't roll it over.

Russia defaulted, devalued, the stock market went down 80

percent, my

1 billion went down to a hundred million.

There was no more yacht invitations after that.



BILL B.: But then I discovered something far more disturbing


losing 90 percent of your money which was that the companies

I had

invested in which were basically oil and gas companies in

Russia were

run by people who you've now -- who are now sort of properly


The Russian oligarchs.

This small group of about 22 guys basically owned a majority

of all

these companies.

And they used to behave a little bit when they thought that

they had

access to western capital, when the western capital markets

were open.

But after the Russian economy defaulted and devalued, and

went to

hell, there was no more western investors in any case and so

they no

longer had any need to behave themselves.

And so in 1998 and 1999 the Russian oligarchs embarked on an

orgy of

stealing that's been unprecedented in the history of


I mean, it's just remarkable every type of scam you could


imagine, they were trying to do.

Asset stripping, transfer pricing, delusion, embezzlement,

you name

it, they were doing it.

And I was owning one or 2 percent of these companies and

just watching

all the money that the companies had just disappearing.

And so I had to decide something.

I was either gonna stay there and just put up with all this

stuff or I

was gonna have to -- I mean, basically there was really only



You could either leave or you could fight.

I could not just watch it happen.

And so we decided to fight.

And the most famous fight involved Gazprom.

Gazprom was a company that nobody had really heard of in the


until, like, ten years ago.

And Gazprom, it's biggest gas company in the world.

It's about ten times the size of Exxon in terms of



And Gazprom, in 1999, was trading at a 99.7 percent discount

to BP or

Exxon per barrel of hydrocarbon reserves.

Why was it at such a big discount in because everybody

thought that

everything was being stolen out of Gazprom.

So I looked at this thing and I said to myself, could they

really be

stealing everything out of Gazprom?

That would be just the most remarkable thing.

A company ten times the size of Exxon everything being


So I got together with my team and I said, let's do a


analysis of Gazprom.

And they looked at me, how do you do a stealing analysis?



BILL B.: So we started thinking, well, how to you do a



And in the introduction they didn't teach me this at

Stanford Business


You couldn't go to the company and say, "How much are you

stealing" --



BILL B.: -- because they wouldn't tell you.

That might do worse things. You couldn't go to the brokers


the brokers are so busy preening themselves in front of

Gazprom to get

corporate finance work that the last thing they would do was


anybody how much stealing was going on.

But I learned something as a consultant at the Boston

Consulting Group

which was if you wanna find out the answer to something

where it's not

written down somewhere, you just go and interview people.

That's what the consultants do for any of you who are

thinking about

consulting. And so I said, let's make a list of all the

people who

know about stealing at Gazprom and just ask them to

breakfast, lunch,

dinner, tea, coffee, and see what we can learn from

interviewing them.

We didn't know whether anyone would accept our invitations

or tell us

anything but why not try?

So we set up about 40 of these meals and most people

accepted the


Why not?

And we discovered something very interesting is that in the


days the itchest person in Russia was maybe ten times richer

than the

poorest person. But by 1999, the richest person in Russia

was, like,

250,000 times richer than the poorest person.

And that just poisoned the whole environment of the country.

Everyone hated everybody else, they just hated the rich

people, they

hated the people that stole.

And so people were in these meetings were spilling these

guts out to

us about all the different scams they knew about.

We were filling up notebooks with all these different

allegations of


It was interesting, really interesting stuff that people

were telling


Writing it all down.

We filled up a whole notebook with these allegations but how

do you

know any of the stuff is true?

A lot of sour grapes.

Now, Russia has one other great, interesting anomaly which

is it's got

to be the most bureaucratic country in the world.

Everything that ever happens in Russia get filed in

quadruplicate in

four different ministries.

If you go to the bathroom you write it down, some ministry,


registers it.

And so -- and what's interesting is that you can go and just

ask for

the information.

It's just a question of going to the ministry.

And so one of my guys, one of the guys who works for me, my

head of

research, started going around to different ministries

picking up

databases on different things and we were able to take these


we got from the ministries and cross reference them with all

the stuff

we learned in these breakfasts, lunches, and dinners, and we


exactly how much had been stolen from Gazprom, by who, in

what way.

And basically what we learned was that nine individuals from

management of Gazprom had stolen an oil company the size of

Exxon out

of Gazprom.

That's pretty dramatic.

That's the size of Kuwait.

The oil reserves the size of Kuwait had been stolen out of


But we also learned that the oil company the size of Kuwait

is only

9 percent of Gazprom's reserves.

91 percent was still there.

So what do you do if the market's pricing as if there's 99.

97 percent

discount and you've just discovered that really there should

only be a

10 percent discount?

You go and buy the hell out of the thing.

And that's what we did.

We made Gazprom our single largest investment.

That's usually where a fund manager would stop but we said


ourselves, this is just so morally outrageous what these

guys is done

and it's so obvious.

Let's share this information with the world.



BILL B.: And so we did.

We broke it into seven chapters.

I gave a chapter to the Financial Times, a chapter to Wall


Journal, a chapter to the New York Times, Business Week, and

each of

them wrote a story, and boy did that set the Moscow night on




BILL B.: There are parliamentary hearings, there were


votes, there was articles, more articles, there were



And about seven months later, Putin, who had been President

in 1999,

stepped in, fired the head of Gazprom, put a new guy in and

said his

responsibility was to recover the lost assets and not let

any more

Gazprom assets leave the company. And from the moment that

we started

this thing until 2005 the stock price was up a hundred




BILL B.: We got so excited by this that we started doing it


We did it at the Unified Energy Systems, the National


Company, we did it at Spear Bank, the National Savings Bank,

we did it

at Sergey Nevta Gas, and it was working like a charm.

Not everything was remarkable as Gazprom but it was all



The fund went up something like 40 times from -- we went

from a

hundred million to more than 4 billion.

I became the largest investor in Russia.

It was just amazing.

And now I'm gonna show you a video for the last ten minutes

of what

happened next because the video is better than I could ever

do it.



>> It's the true kafka-esque situation.

It's black is white, white is black, it's the most

unbelievable thing

you could ever imagine.

It's one thing to be victimized of a crime.

It's another thing to be charged for the crime you're

convicted of.

>> The following is a story so extraordinary you couldn't

make it up,

a story about the risks of investing in Russia today.

A story about how companies are stolen, criminals take over

banks, and

murderers dictate to judges, about how politicians pay lip

service to

cleaning up the system but in fact do nothing or actively

assist the


It's a story whose twists and turns lead down a dark trail


corruption, violence, and the theft of $230 million from the



Crimes like the one we're about to describe happen in Russia



And this is how it can happen.

>> Hermitage Capital Management is an investment firm that

started in

1996 to focus on the Russian equity market and I founded it


partnership with the late Edmond Safra and we were the

largest foreign

portfolio investor in Russia.

Everything had been going beautifully with the business, we

had been

growing the fund, we had been making money for our

investors, we had

been stamping out corruption in the companies we invested


But as often happens when you step on enough toes,


people -- certain people -- get angry with you.

>> On November the 13th, 2005, when he was returning home to


from a business trip, Bill Browder was refused entry at the


Later he was told by the Russian authorities that he'd been


from the country on the grounds of national security.

>> I then tried using every friend and contact I had to get

back into


I had an interesting opportunity.

I was tending the world economic forum in Davos in January


Dmitri Medvedev, who's now the President who was then the

First Deputy

Prime Minister was making his official foreign debut and at

the forum

I had an opportunity to have a brief conversation with him

where I

asked him for help in restoring my visa.

And he was responsive, he said he would help, he asked for a

copy of

my visa application.

I thought with the help of the First Deputy Prime Minister

my visa

would be approved in no time at all.

>> What happened next was very different from what Bill had


Lieutenant Colonel Artem Kuznetsov of the tax crimes unit of


Moscow Ministry of the Interior who, a few weeks after Bill


appeal to the first deputy prime minister Kuznetsovto re-

issue his

visa, telephoned Hermitage.

>> Lieutenant Colonel Artem Kuznetsov called up my head of



[Speaking in native language]

>> And he said, I understand that the CEO of your company

wishes to

get a visa to visa our country and I'm responsible for

writing the


Before I write the report, I'd like to have an informal

meeting, show

you a few papers, ask a few questions.

Depending on how you behave and what you provide in this

meeting will

be the determining factor in whether the visa gets issued or


>> Hermitage rejected this extortion attempt and refused to

talk with

Kuznetsov but Kuznetsov had he has own plans.

On July the fourth, 2007, Lieutenant Colonel Kuznetsov led a

team of

25 officers in a raid on the Hermitage Moscow offices taking


computers, and documents.

The official reason he gave for this raid was that one of


Hermitage companies, Kamaya, had supposedly underpaid


withholding tax.

This was not true.

Not only had Kamaya paid up its tax, but the Russian tax


certified in writing that it had overpaid them by as much as

4 million


>> In addition to Kuznetsov raiding our offices he then

joined an

ongoing raid on the same day at our offices at the offices

of our law

firm, Firestone Duncan.

One of their young lawyers protested instead of trying to


whatever their legal logic was.

They took him into a conference room, beat him viciously,

arrested him

for resisting the search, he was fined 15,000 rubles to get

out of

jail, and then he was in the hospital for two weeks having

to recover

from his beating.

>> In fact, Kuznetsov's raids were the first part of the


plan: A fishing expedition to find out the amount of


assets and in which banks they were held.

At the same time, Kuznetsov seized all of Hermitage's


documents and certificates.

These official documents would be used by the criminals to

steal the

Hermitage companies.

What happened next occurred without Hermitage knowing.

The criminals went to the Russian courts in Kazan, St.

Petersburg, and

Moscow and obtained judgments against the Hermitage

companies on the

basis of forged contracts.

They even used real lawyers, armed with bogus powers of

attorney to

represent the Hermitage companies.

Instead of defending the Hermitage companies, the lawyers



HROZ PWHROSZ and two other companies belonging to the

criminals were

fraudulently awarded hundreds of millions of dollars by the


Later, Hermitage discovered that the three individuals who'd


installed as the new directors of the stolen companies, were


Victor Markelov, a convicted murderer; Valery Kurochkin, a


thief, and Vyacheslav Khlebnikov, a convicted burglar.

All three had been released from jail early by the Russian


In total, three companies were stolen from the Hermitage


According to the sham court judgments, together, the


allegedly owed nearly $1.3 billion to the criminal's


The criminals could not have stolen the Hermitage companies

or secured

the judgments against them without the corporate documents


certificates seized by Kuznetsov in his raid of June the

fourth and

supposedly kept in his safe custody since then.

Armed with the sham judgments, the criminals sent Kuznetsov

to the

banks to seize the assets.

>> The one thing that this group of criminals hadn't

bargained on was

that there would be no assets there.

So they put millions of dollars into this scam bribing


officials, bribing judges, getting all sorts of people

involved in

this thing, and they got nothing.

And so for a brief period of time we felt very relieved and

happy that

they got nothing and that was the end of the story.

But it wasn't.

>> Phase two of the criminal's fraud was to steal the $230

million of

tax money already paid by Hermitage to the Russian

authorities by

claiming a tax rebate.

This they did through the brilliant ruse of demonstrating

that the

$1.3 billion of alleged debt, which resulted from the sham


judgments, had wiped out Hermitage's profits in 2006.

Within a mere three days of submitting the claim of the 24th


December 2007, Olga Tzymai and Sergei Zhemchuzhnikov,

officials of the

Russian tax office, authorized a staggeringly huge tax

repayment of

$230 million to the criminals.

The largest single tax repayment in Russian history was made

without a

single question being asked.

$230 million, which belonged to the Russian people, had been

stolen by

the criminals in an organized conspiracy supported by


officials in the higher reaches of the Russian state.


[Music playing]

>> The Russian tax authorities paid the money into the


accounts at two obscure banks, Universal Savings and


They covered their tracks.

They laundered the money and filed to liquidate the stolen



Hermitage filed dozens of complaints at every level of the



Not a single constitution or person on the special


committee set up by President Medvedev has looked into the


against Hermitage.

>> The most absurd part of the whole thing is that the only


that got any traction was one which we sent to the Russian


Investigative Committee and what traction did that get?

They blamed us for the tax crime.

>> Meanwhile, for Bill Browder, matters took a further turn

for the


Bill Browder has been put on the federal search list for

standing up

to corruption and organized crime.

>> You can't steal $230 million from the Russian budget

without having

very, very senior officials involved.

Clearly we can see the names of the senior law enforcement


going right up the chain.

We can also see the involvement of senior tax officials,


judges, lawyers, and then on top of that, you have all the

people that

we wrote to that decided to do nothing about it.

That tells you something.


[Music playing]

>> Has this video is being produced, the Russian Ministry of


Interior Police have arrested Sergey Magnitsky, a lawyer and

accountant, working on the Hermitage affairs at the law firm



Six other Russian lawyers working for Hermitage, who have

been trying

to seek justice by reporting the 230 million-dollar tax

fraud to the

Russian authorities, have either fled Russia or have gone

into hiding.

So, a story so extraordinary you couldn't make it up, a

story about

the risks of investing in Russia today, a story that sound

like a

thriller but isn't, it's a true story and it's one that's


repeated every day.


[Music playing]

The Description of Hermitage CEO Browder: Don't Invest in Russia Today