Stop the Untouchables. Justice for Sergei Magnitsky.

The Power of the Magnitsky Act

The American Interest

In early September, American Interest publisher Charles Davidson spoke with Hermitage Capital co-founder and CEO William Browder about the origins, impact and future of the Magnitsky Act.

Charles Davidson: Welcome, Bill; we appreciate you talking with us. Our timing is good, given the news out of New York two days ago.

William Browder: Yes, the timing couldn’t be better.

CD: Why don’t we start by having you introduce yourself to our readers?

WB: I come from a strange American family. My grandfather was the general secretary of the American Communist Party. As often happens in American families, in my teenage years I went through a rebellion. I figured the best way to rebel against a family of communists was to become a capitalist and ended up going to Stanford business school. I graduated in 1989, the year the Berlin Wall came down. After graduation, as I was trying to figure out what to do with my life, I had an epiphany. I figured that if my grandfather was the biggest communist in America, it would be perfectly symmetrical that I become the biggest capitalist in Eastern Europe.

CD: That seems logical.

WB: So I moved to London in 1989 and tried to get involved in Eastern Europe. I ended up at Salomon Brothers at the beginning of the Russian privatization program. When Yeltsin became President, he thought the best way to go from communism to capitalism in the country was by giving away state property for free to all Russians; then they’d all be capitalists by virtue of owning property. The program was very ill thought-out and badly designed, so instead of creating 150 million capitalists, it created 22 oligarchs and left most Russians living in destitute poverty.

Having said that, there were opportunities for non-oligarchs to buy shares of these newly privatized Russian companies. When the program first started, the shares were trading at a 99.7 percent discount to the value of similar companies in the West. And as a newly minted Stanford MBA, I did the math and thought if you’re going to be an investor, why not invest in companies trading at a 99.7 percent discount to their Western comparables? So I initially convinced Salomon Brothers to invest some of the firm’s own money in Russia. We invested $25 million and very quickly turned it into $125 million.

On the back of that success for Salomon Brothers I decided to set up my own company. I founded Hermitage Capital in 1996 and moved to Moscow full time to invest in the Russian stock market. My investments initially did very well. In the first 18 months, my portfolio went up more than 800 percent, and then in 1998 it went down 90 percent, basically back to square one.

After that, I discovered that the oligarchs had no incentive to behave themselves after Russia defaulted and devalued, because Wall Street was effectively closed for business for them. At the same time, there was no disincentive to misbehaving because the laws that exist in other countries didn’t exist in Russia. So the oligarchs embarked on an orgy of stealing that was unprecedented in the history of business.

I had to choose whether to allow everything to get stolen or to try to stop the stealing in the hope of recovering some of the lost money. Even though I was in completely uncharted territory and very dangerous, I decided to fight the stealing and become the first shareholder activist in Russia. I did so by researching how the thefts were occurring in big companies like Gazprom, Unified Energy Systems, and Surgutneftegaz, and then I shared my research with the international media.