Once upon a time, Bill Browder was the most prolific international investor in Russia. The investment management firm he founded, Hermitage Capital Management, had at its peak as much as $4 billion invested in Russian stocks.

No more.

“[Russia] is really an uninvestable place,” he tells Private Equity International from Hermitage Capital’s offices in London, where Browder has been based since he was denied entry to Russia in 2005.

“You don’t just risk losing your money, you risk going to jail or dying, and I don’t think anyone would want to take that risk.”

Today Browder is best known for his mission to bring justice to corrupt elements of the Russian government. He originally made his name, however, identifying undervalued Russian businesses – and subsequently reaping staggering returns – and as an activist, agitating for governance changes at giants such as Gazprom.

“I made all of my money in the public markets and, as an investor, I have all my money invested in the private markets. And I actually made all my money in emerging markets and I have all my money invested in developed markets,” Browder says.

There is one key reason for the latter, which he says “a lot of seemingly smart” investors overlook. “Having been a full-on witness to what goes wrong in these places, I’ve learned that the rule of law, property rights, independent courts are not a useful addition, they are an absolute essential part of any investment case.”

Russia, and many other emerging markets, have no rule of law, property rights, or independent court, Browder says.

“If you’re investing for the long term, you have to be able to assume that when you make the money, that money is yours. You can’t just invest the money and then when it starts working, someone else takes it from you. But that’s the basic story of Russia.”

Bill Browder. Photograph by Peter Searle.

Instead of looking first at investment returns, valuations, economic growth and other indicators as to whether a company will grow and become a successful investment, investors should focus first on whether the legal infrastructure is in place to make an investment possible.

“The world undervalues rule of law and property rights when they look at different investment opportunities, and that creates a lot of bad investment decisions.”

As to why he has a preference for private equity over public equity, Browder says in all public companies “there’s effectively a principal-agent problem”.

“The shareholders aren’t represented by people who care about the outcome of what happens,” he says.

“In a private situation, generally, the private equity managers that control the companies care profoundly about what happens. And when things go wrong, which they invariably do all the time, they can make adjustments, changes, fire people, refinance, etc. to get themselves out of these problems.”

Because of this, Browder has found, “you just make more money in private equity situations than you do in public markets”.

‘YOU BASICALLY HAVE TO BECOME A CRIMINAL’

When it comes to investing in Russia, Browder agrees with those who posit that it’s virtually impossible to successfully make money in the country and remain on the right side of the law.

“If you go to Russia and you want to survive in the hostile environment, you basically have to become a criminal,” he says. “That’s the only way to survive long term in Russia, by becoming a criminal in the West. If you don’t want to get involved and assimilate, then you become a criminal in Russia, they will make up fake crimes about you, and that’s what happened to me.”

Mike Calvey, founder of one of Russia’s most prominent private equity firms, Baring Vostok Capital Partners, was detained in February along with two of the firm’s partners and an investment director over a dispute related to one of the firm’s portfolio companies. At the request of Calvey’s family, Browder declines to comment on what is a delicate and precarious situation.

Most investors have turned their backs on Russian private equity already: fundraising figures for the country dropped from a high of $6.7 billion in 2013 to zero last year, according to PEI data. Just 10 companies with backing from international private equity funds remained at the end of 2016, compared with 27 two years prior, according to the Russian Venture Capital Association.

What would it take for Russia to become an investable place again?

“Well, it would first take Putin no longer being in power, and nor one of his acolytes. It would take a dramatic change in the legal infrastructure of Russia where they cleared out the judges and prosecutors and other law enforcement officials who’ve become predators in business disputes. And it would require proven ability to enforce your property rights in the courts. Those are so far beyond any near-term possibility that it’s a complete no-go area.”

“We’re playing a game of high-stakes international geopolitics”
Bill Browder

In the intervening years since he was turned away at the border in 2005, Browder has become Russian president Vladimir Putin’s most wanted political enemy, as evidenced when Putin brought up his name at the Russia-United States summit in Helsinki in July.

The summit took place just three days after Special Counsel Robert Mueller published an indictment charging 12 Russian intelligence officers with hacking Democratic Party servers during the 2016 presidential election.

When Putin was asked whether he would consider extraditing the officers, he said Russia “would expect that the Americans would reciprocate”, and mentioned Browder by name.

Russia has made seven applications to Interpol to have Browder arrested when he travels, and he was briefly detained in Madrid in May under a Russian warrant. He has twice been sentenced in absentia to a total of 18 years in prison, been accused of ordering the poisoning of whistleblower Sergei Magnitsky while in prison, and of orchestrating the poisoning of Alexander Perepilichnyy, a Russian businessman who fled to the UK and handed over to Browder documents detailing high-level corruption, according to The Telegraph newspaper.

“We’re playing a game of high-stakes international geopolitics,” Browder says.

Putin’s chief grievance with Browder is his campaigns to get Magnitsky Acts passed in as many different countries as he can, to find out where the $230 million that Magnitsky exposed ended up and to have it confiscated under money laundering statutes.

Hermitage Capital itself has transformed from a fund management business into an advocacy group singularly focused on these two aims.

“We’ve been running an investigation for more than nine years [into the whereabouts of the $230 million], and we found the money,” Browder says. “Where we find the money, we then go to the law enforcement agencies in the country where the money arrived, and there are now 16 different countries running money laundering investigations connected to the Magnitsky case.”

Not only has this work affected those who benefited from or laundered the money for the Magnitsky case, but it has opened up the entire money laundering network – what Browder calls “the pipe” – which the Putin regime was using “to take ill-gotten gains out of the country and stick it in places like London and Paris and so on.”

“It’s causing no end of grief for all the Russians who participated in this pipe.”

RED NOTICE

Browder’s team’s work in this arena led to the uncovering of the largest money laundering scandal in Europe’s history, at Copenhagen-based Danske Bank. Following an investigation, the bank’s local branch in Estonia was found to have handled around $230 billion in suspicious transactions over a nine-year period.

Browder has also asked Swedish and Norwegian authorities to investigate as much as $175 million of potentially illicit funds at Nordea Bank and has filed a complaint with Swedish authorities regarding Swedbank. An additional $20 million is frozen at Credit Suisse and UBS in Switzerland, $8 million in France and €3 million in the Netherlands in connection with the Magnitsky case.

In 2015 Browder published a book called Red Notice on his experiences with Putin’s Russia, and he’s working on a sequel. He’s also working to turn Red Notice into a mini-series.
Browder admits he lives “in danger” but clarifies he does not live in fear.

“Living in fear would mean that I would be scared, I would be changing all of my activities to reduce the risk, and that would have meant that the Russians would have effectively achieved 95 percent of their objectives, which is to try to get me to stop what I’m doing,” he says.

“So I live in risk, but I don’t live in fear. I obviously do things to try to reduce the risk, but not in terms of my actions, just in terms of making it more difficult for them to kill me.”
Does he have any desire to return to Russia?

“I have a joke with some of the other Russian opposition campaigners that I would love to come back to Russia, not as an investor, but to pull the white sheet off the statue of Sergei Magnitsky in the square in front of the KGB building.”

THE MAGNITSKY ACT
Sergei Magnitsky, Browder’s Russian lawyer, was a whistleblower who alleged Russian officials were involved in a $230 million tax fraud. He was arrested in 2008 and died 11 months later in police custody after being beaten and denied medical care. In what a Washington Post article described as “a chilling act worthy of Kafka”, Magnitsky was tried and sentenced posthumously in 2013.

The Sergei Magnitsky Rule of Law Accountability Act was signed into law by President Barack Obama in 2012, restricting the travel and freezing the assets of any individuals who had committed gross violations of human rights in Russia. The Global Magnitsky Human Rights Accountability Act – which came into force in 2016 – extends the sanctions to human rights violators outside of Russia. Most recently a bipartisan group of US senators have appealed to President Donald Trump under the Magnitsky Act for an investigation into who is responsible for the killing of journalist Jamal Khashoggi.

So far, six countries have passed Magnitsky Acts: the US, Canada, UK, Estonia, Latvia and Lithuania. Browder’s team is actively working on getting acts passed in several other countries, including Australia, Ireland, France, Germany, Sweden, Denmark, and the EU more generally.