At Home in the Wild East

By ANDREW MEIER/MOSCOW

The bodyguards were hard to get used to. "Thank God, I could fire them," says Bill Browder, founder of the $450 million Hermitage Fund, which has weathered--with dramatically varying results--Russia's turbulent investment market since 1996. "That was when I was fighting a particularly fierce oligarch," he says, recalling his recurrent battles with Russia's corporate chieftains. "Russia has a long way to go, but it's in danger of becoming a much more civil marketplace." And as it does, Browder hopes to cash in big-time as one of the best-known U.S. investors on the Moscow scene.

Browder's grandfather would hardly have approved of this particular foray into Lenin's former land. Millions of Americans in the 1930s and '40s knew Earl Browder as the general secretary of the American Communist Party, who twice ran for the White House. At 36, the younger Browder has been driving a capitalist wedge into Moscow's often lethal capital markets. Granddad would also have boggled at the money his young relative has made--and unmade. At its peak in 1997, Browder's fund held $1.1 billion in Russian stocks and was fabulously profitable for its fortunate members. At one point, the fund boasted a delirious return of 866% on initial capital. From interests in Siberian oil fields to shares in chocolate factories on the Volga, Browder seemed to know just what to buy.

Then came the crash of August 1998, when Russia overnight devalued the ruble and defaulted on $40 billion in domestic debt. The stock market tanked, hitting near rock bottom in October 1998. By year's end, the ruble had sunk to less than a third of its former value. Browder's fund--which was long on Russian oil and gas stock--lost 90% of its value from a peak in October 1997 to a trough almost exactly one year later. Many of the big Western investors went under or went home. Browder stayed on. "I believed Russia would rebound," he says. This year his fund--and the Russian market--is showing new signs of life. Hermitage is up 23% on the year. In his climb back, Browder has relied on an uncanny ken for value and a relentless self-confidence--the twin qualities that led him to Russia in the first place.

A graduate of the University of Chicago and a Stanford M.B.A., Browder ventured into the wild east in the early 1990s, years before the army of Western brokers and traders arrived. He had always had Russia in his blood; as a result of his grandfather's calling, his father Felix, later a mathematics professor at Rutgers, was born in Moscow during the Stalin era. "I wanted to see where my family came from," says Browder. After business school, Browder helped manage the portfolio in Eastern Europe of the late British media baron Robert Maxwell. Then in 1994 he took over a desk "no one wanted to touch" at Salomon Brothers in London--Eastern European equities. In 1996 he set off on his own, founding Hermitage with $25 million from Republic National Bank.

Browder has been one of the few foreigners to engage Russia's economic oligarchs in battle. In late 1997 he took on Vladimir Potanin, at the time Russia's top banker. Potanin had offered a closed bond issue for Sidanko, a major oil company that was one of his pet properties, to insiders of his own choosing. Browder cried foul and adroitly used the Western press to plead his case that the new shares arising from the bond issue would dilute minority shareholders' stakes. In the end, Russia's Federal Securities Commission canceled the issue.

This summer Browder was back at it, heading up a very public fight against another Russian titan. This time his target was Anatoli Chubais, chief of Russia's electricity giant, Unified Energy Systems. Chubais had proposed to restructure UES by selling off regional subsidiaries at their value at the time. The plan, Browder claims, amounted to "asset stripping, pure and simple." He rallied 45 Western investors, who owned 15% of the company, to call for Chubais' ouster and demand that the UES charter be rewritten to their tastes.

In July, Browder was summoned to the Kremlin, where he helped negotiate a deal to ensure greater transparency in UES. "We got the state [which owns 53% of UES] to vote with us," he crows. In late October all sides struck a deal to tailor the UES charter to take into account minority shareholders' interests. "Chubais will stay," Browder says, "but we've made it impossible for management to strip assets."

Russia is still far from a healthy free market. But Browder is determined to persevere. His battles in Russia's unbridled market have pushed him to the vanguard of investors, both foreign and native, who yearn for a rule of law in Russia. Of course, not everyone in the country is ready to fight fair. But Bill Browder is prepared to keep his guard up and go the distance.