Some Thoughts About Bill Browder

Bill Browder was a client of mine when I was a broker, and a number of friends have worked at Hermitage, and he is a good friend of a good friend of mine. He used to be a major Russian success story, a Salomon banker who took a small amount of seed money from some investors, and turned it into a $3 bln fund. His presentations were always fascinating, because they were sure to include some data analysis that you had not seen anywhere else, and which gave you something new and interesting to think about.

He spent a lot of time and money to improve corporate governance in the biggest Russian companies. This was partly a business move - normally when you don't like a company's practices you just vote with your feet and sell the stock. This wasn't really an option for Hermitage because they were so big - they had to try to change the way that companies were managed because they had no choice but to own them. Actually, it would be good for the economy if shareholders the world over were to follow his example - portfolio investors have had woefully little input into the boards of the world's largest companies and this has undoubtedly weakened management.

This preamble is intended to show that Bill Browder and Hermitage have, by and large, been a force for good on the Russian market. They have acted toughly in their own interests, and I'd be willing to believe that if management of a company offered them, say, a buyout on terms that were not available to other shareholders, they would take it. I have been in a meeting with them where they made it clear they expected to trade on inside information. They are not saints, but as activist shareholders they have worked tirelessly to improve Russian corporate governance. Yes, their primary motivation for this is that it will help make money for their investors and themselves, but the beauty of the free market is that it aligns the greater good with individuals pursuing their self interest.

The background to the story is that Bill Browder lost his Russian visa back in 2007 - my general feeling back then was that he had been a little too vigorous in his investigations of Surgut, and that this had threatened the incomes of some well-connected people. There was no official explanation for the denial of the visa, and Browder has been a little coy about the subject, but this is understandable - the last thing you want to do in these situations is to go public, as this only makes things worse.

Fast forward to this year, and it turns out that in the aftermath of the visa denial, Hermitage were investigated for tax evasion, and during this investigation, documents for some of their shell companies were confiscated. It then turned out that those shell companies were used to defraud the Russian tax ministry of hundreds of millions of dollars. The fraud was complicated, but the basic idea was that the shell companies had been quite profitable, because they had held Gazprom and Sberbank over a long period of time. Hermitage had paid taxes on those profits. The confiscated documents were used to make fictitious transactions that nullified the profits, and on the basis of this, the people who now controlled these companies demanded tax refunds from the government, which they duly got.

Anyone who lives and works here will tell you that it's virtually impossible to get tax refunds. It's a sore point with exporters, who must pay VAT on everything that they make, and can then claim that VAT back when they show that the goods have been exported. It takes months and months, and often ends up in court. In this case, the tax claims were paid within a week, according to Hermitage - there have to be some questions about this, because although the court cases that underlay the tax refunds are relatively easy to get, I'd be interested to know how they got hold of information that the claims were actually paid.

Taking the Hermitage view of the story at face value, it's clear that very senior people must be involved in this - you couldn't get that kind of tax refund without senior ministerial approval - I wouldn't be surprised if it required ministerial approval. Of course these revelations have merely provoked more backlash - here's an article on the aftermath.

I don't think that this is showing corruption at the very top of Russian power. What it shows is that there are people embarrassingly close to the Russian leadership who have been caught stealing, and they are backpedalling furiously to fight back. Interestingly, the story was initially broken in Vedomosti, which gave chapter and verse - this suggests that there are people in the leadership who want there to be questions raised about it. I wouldn't be surprised if the Kudrin finance bloc, for instance, is very unhappy at the rampant corruption of the security services leaders who are close to Putin, is behind this sort of disclosure.

How does it play through? Russia has put out an extradition request for Browder. Interestingly the justification for this request is tax evasion, using a scheme that is used by just about every Russian finance house - certainly two of my former employers used it, and although it's wrong, it's perfectly legal. Browder's lawyers should have no problems in fending off this one, especially since no one has a particularly high opinion of the Russian court system and its independence. And Browder will continue to ensure that this keeps a high profile, and who knows what else he may be able to disclose - he recently opened a court case that will allow him to subpoena documents from the offshore domains where the tax refund money was transferred. He's happy to name names, and presumably those names have enemies, who will use this to go after them. It's times like these when you start to worry about a person's personal safety, although one protection is that although no one really went to town about the Litvinenko case, because the victim was a Russian, Medvedev would get some very tough questions about any assassination of Bill Browder. It's not so much that the perpetrators would be worried about being brought to justice, it's just that they would probably have to pay away most of their ill-gotten gains to avoid this.

What does this mean for the future of Russia? Nothing good - the criminals who did this are very very sophisticated. I had a feeling of some admiration for the ingenuity of the scheme, and they are clearly very financially literate. These are not thugs with umbrellas. The original motivation for the attack on Browder was to stop revelations about theft from an oil company. Yet they were smart enough to check all the documents that they confiscated as part of the intimidation, and used that to steal more money. This suggests that the new generation of Russians who have reached adulthood since the fall of communism are not a new generation that will abandon the ways of their parents, but are doing much the same thing, only in much more modern ways. And they have no interest in making the government more transparent and accountable.