In conversation with Ramesh Damani, William Browder, CEO and co-founder of investment fund Hermitage Capital Management, talks about the voucher system in communist Russia and how he chose to invest in the country.
William Browder, CEO and co-founder of investment fund Hermitage Capital Management released a tell-all memoir earlier this year which exposes widespread government corruption and how he started investing in the Wild East Russia. In conversation with Ramesh Damani he talks about the voucher system in communist Russia and how he chose to invest in the country.
Below is the transcript of William Browder's interview with Ramesh Damani on CNBC-TV18.
Q: Someone once wrote about you that you lived three lives. Let us start with your first life. Your family in America were communists and you wanted to become a capitalist. Why?
A: My grandfather was American from Kansas, a labour union organiser and he was invited to Russia in 1927 by the communist party. And he got there, he married my grandmother. My father was born in Moscow and then he returned to America and became the general secretary of the American communist party running for president twice against Roosevelt on the communist ticket. He was eventually persecuted and he was kicked out of the communist party by Stalin for being too capitalist and he was persecuted by McCarthy for being too communist.
Q: In the 1950s in America.
A: So, I was born in 1964. I was going through my teenage rebellion in the 1970s and I thought what is the best way of rebelling from my family of communist and for me it was to put on a suit and tie and become a capitalist and so that is what I set out to do. And, I went to Stanford Business School and I graduated 1989 which was the year that the Berlin Wall came down. And I looked at the situation and I said to myself, if my grandfather was the biggest communist in America, I going to try to become the biggest capitalist in Eastern Europe and that is what I set out to do.
Q: What peaked your interest in Eastern Europe and the privatisation programme there? Was there a flash-point?
A: So, my first job out of business school was with the Boston Consulting Group in London and one day they came to me and said, “We have an assignment in Poland in a little town about six hours from Warsaw on the Ukrainian border.” And I raised my hand and I jumped at the opportunity. I went to Poland, I sat in this little town. It was a terrible lifestyle, there were food shortages and hyper-inflation and all sorts of other stuff. But while I was there, I discovered the very first Polish privatisations being advertised in the newspaper. And I did the math and they were selling companies at one half of one year’s earnings. So, the value of the company was half of the previous year’s earnings. So I looked at this and I said to myself, you do not have to go to Stanford Business School to know that a company is selling at a PE ration of a half is a good deal. And so at the time I had a total of USD 2,000 of life savings and I took my USD 2,000. I bought shares in the privatisation and then they went up 10 times.
Q: And so, that brought you to Russia?
A: So, I then became an investor and eventually I found myself at Saloman Brothers. And I was with Saloman Brothers at the very beginning of the Russian Privatisation programme and my first trip to Russia, I went up to a town called Murmansk which is located a couple 100 miles north of the Arctic Circle to advise the management of a fishing fleet on their privatisation. So, I go to the fishing fleet and the manager takes me to one of the boats and it is an enormous big fishing vessel and I said, “How much does this thing cost?” He said, “About USD 20 million.” And I said, “How many of them do you have?” And he said, “We have about 100.” So, I said, “Okay, USD 2 billion worth of ships.” And I said, “How old is the fleet?” He said, “About seven years old.” So, I said, “Okay maybe it is about USD 1 billion worth of ships at market value.” And I said, “And what is your question for me?” And she said, “The question is, should the management buy 51 percent of the fleet for USD 2 and a half million?”
Q: Holy Toledo!
A: So, there I was I said, “So, USD 5 million to buy a company with USD 1 billion worth of ships.” And I said to myself I want to have some part of this. And that point I went to Moscow just to see if this was an anomaly or whether this was going on across the country.
Q: And Russia just launched its voucher programme? Explain that to us.
A: So, what happened was, they gave a voucher to every person and so there were a 150 million people, 150 million vouchers, the vouchers were freely exchangeable. You could buy and sell them.
Q: And no restrictions, foreigners could buy them.
A: No restrictions -- foreigners, locals, everything -- and the voucher is traded on an exchange where they trade it for roughly USD 20 each. So, if you did the math. 150 million vouchers times 20 gives you USD 3 billion. USD 3 billion was exchangeable for 30 percent of all the shares of all Russian companies which meant that the market capitalisation of Russia and at this time which was 1992 was USD 10 billion, the whole country -- 35 percent of the world’s gas, 10 percent of the world’s oil, 10 percent of the world’s aluminium etc.
Q: Fertilisers, steel, tractors, real estate.
A: USD 10 billion, the whole thing. This was a minor midsize oil company in America the whole country of Russia and so on the back of that I decided to set up my company Hermitage Capital Management to invest funds from the West into Russia.
Q: Did you have any self doubt? No one was listening to your story at first and Russia even at that time was the Wild West in a manner of speaking. Did you suffer self-doubt?
A: It was pure economic calculation. You are buying stuff at a 99.7 percent discount.
Q: What can happen?
A: It could go down to a 100 percent discount or alternatively it can get slightly better from horrible and it can go to a 95 percent discount and then you have made many multiples on your money and I just did the simple math myself and I said, let’s say there is a 50 percent chance that they decide to just change the whole program and go back to communism and a 50 percent chance that they do not. So there is a 50 percent chance of making 10 or 15 times your money and a 50 percent chance of losing everything, I may need to take that bet. It was not a question of confidence versus doubt; it was purely a question of economics.
Q: And Anatoly Chubais was the Russian privatization minister wasn’t he?
A: So, Anatoly Chubais was the privatization minister and he was this ideologue guy who said let’s just give everything away for free.
Q: Because we will never go back to the old system again as I remember him saying.
A: That was the logic. Now, it was faulty logic because it did not help create capitalists, it helped create --22 guys became owners of 40 percent of the country.
A: Oligarchs, the 22 Russian oligarchs and everyone else lived in abject poverty and so it was not a fair system.
Q: But you were happy in the initial years. You and the Russian government were friends.
A:So, in the very first years I had nothing to do with the Russian government. I just bought the shares, typed my spreadsheets, did my analysis, the shares went up. It was only after the collapse and the fault of 1998 that the Russian oligarchs started to steal from all of the minority shareholders. They were organizing acid-stripping, transfer-pricing, delusions and embezzlement, etc. And at that point I had to start fighting the oligarchs and at the point that I started fighting the oligarchs, was just the moment when Putin showed up on the scene and Putin had the same enemies as I did and I never met Putin, I am not his friend, but there is an expression, your enemy’s enemy is your friend. And, so I was going after the oligarchs. The oligarchs were stealing money from me, they were stealing power from Putin and so every time I went and publicized the scandal about how these were guys were stealing from me, he would step in. And so, for about 40 years I had this blessed life where I would do research on how the oligarchs were stealing, I would publicise it, Putin or one of his officials would step in, they would then do something to stop the scandal and the share prices went up.
Q: You believe Russia had a rule and not of law?
A: What happened was, I was cheering as Putin was stepping in to help me. Cheering Putin, cheering my own economic success and then Putin arrested the richest man in Russia, Mikhail Khodorkovsky, the owner of Yukos. He arrests Mikhail Khodorkovsky and he puts him on trial and he allows the television cameras to film the richest man in Russia on trial sitting in a cage. So, imagine this, you are the 17 th richest guy in Russia, you are on your yacht parked off the Hotel Du Cap in Antibes, you walk out to the living room, you click your remote control, you switch on the CNN and there you see a man far better than you, far richer, far smarter sitting in a cage. What is your natural reaction going to be?
A: Well, they could not run because they had all their stuff in Russia, they had to run back to Russia and stand in line, go to Vladimir Putin and say, “Hey Vladimir, what do I have to do to make sure I do not sit in a cage?” And I was not there, so I could only speculate but I believe that what he said was 50 percent. 50 percent for the Russian government, 50 percent for the presidential administration, for Vladimir Putin.