Washington Profile: To begin this interview and provide a context for our readers, could you speak a bit about your background and what brought you to Russia?

William Browder: I come from an unusual family.  My grandfather, Earl Browder, was an American who in 1927 went to Russia, where he met and married my grandmother.  After my father was born in Moscow, the family moved back to America in 1932. Upon returning here, my grandfather became the General Secretary of the American Communist Party from 1932 to 1946. This family history inspired me and made me curious to follow my grandfather’s footsteps back to Russia after the fall of the Berlin Wall.  What I found there made me go into business – very specifically at the beginning of the Russian privatization program.  I realized that the privatization of these industries offered great opportunities for fund managers to buy and manage shares.

Washington Profile: How much time have you spent in Russia altogether?

W.B.: I first started traveling to Russia in 1992, spending about half my time there from 1992 until the end of 1995. Then I moved to Russia full-time in 1996. So I’ve been in Russia for about 13 years.

Washington Profile: You have put so much effort into promoting Russia as a good place to invest, and your Hermitage Fund is the largest of its kind in Russia, yet in November you were kicked out of the country. Why do you believe this happened?

W.B.: One of the most important parts of my business strategy developed out of necessity in the mid-1990s.  I realized that in order to invest in Russian companies, one has to be absolutely intolerant of corruption. In order to make money in the face of corrupt management, minority shareholders in Russia need to actively promote their interests.  Passive investors in Russia will lose money; one cannot rely on a culture of corporate governance that, even with all of its problems, exists here in the West.  What I found was that there was an enormous lack of transparency in many of the companies available for investment, and that the market was discounting these companies’ valuations as a result.  The most effective way I figured out to tap the unrealized value of these companies was to buy up a big minority stake and then run for the board, file lawsuits against corrupt management, publicize problems in the “court of public opinion” and otherwise agitate for change. 

Over time, as our efforts gain traction at these companies and corporate governance begins to improve, their share price starts to appreciate.  That’s my investment approach. So over the last 10 years, I’ve been fighting for clean business in a number of major Russian companies.  This has been a very positive process for the value of my investments and for my investors, but it’s also been extremely unpleasant for those people who are benefiting from the corruption. The revocation of my visa, I believe, is the result of someone who was upset with my activist approach and now has used the administrative resources of the state to block my entry to the country.

Washington Profile: Do you believe this is emanating from the Kremlin?

W.B.: No. I think it is emanating from one of the companies we have been fighting with. And I believe people inside the government for one reason or another have decided to grant a favor to a business group and uphold its request to keep me out of the country.

Washington Profile: You have said that Russia is about "halfway" through its journey toward Western-style business practices. Could you explain what the second half of that journey will entail if Russia is to enjoy the same business environment that the West does? 

W.B.: When I first arrived in Russia, it had more in common with Nigeria or Somalia than Western Europe or the United States.  There was complete chaos. There were no rules, no enforcement of laws; nobody had any incentive to behave themselves whatsoever. And so you ended up having a very inhospitable investment climate, and it was a very difficult place for almost anyone to do business. Since the mid-1990s there have been a number of big improvements, probably the biggest being that the oligarchs who took over most of the crown jewels of Russian industry in the 1990s no longer run the country.  It’s now run by the government. And as a result, taxes are now being paid, most basic commercial rules work and key minority shareholder rights legislation has been passed by the Duma. Having said all that, we’re still only halfway through the transition. And the reason we are only halfway is that Russia still lacks a fundamental rule of law. The laws might look good, but it is still unrealistic to go to a Russian court and expect the court to apply the law fairly. As my own recent experience attests, too many government officials are still pursuing whatever narrow personal agendas they have rather than acting in the interests of the Russian people. So, for Russia to really be a civilized country, the leadership needs to stamp out this corruption that appears at all different levels of the government, and there needs to be an independent judiciary where you can expect fair treatment in court.  Russia is halfway on the transition from horrible to good, but it’s still a relatively mediocre business environment.

Washington Profile: Do you believe that you, and others like you, i.e., foreigners who have come to Russia, can take any credit for the development of Western-style business standards in Russia?

W.B.: I can take credit for helping to provide the momentum to push through a number of key laws and to institutionalize some market practices. For example, one of the most important laws that came into effect three or four years ago requires all companies to issue shares to all shareholders equally – it basically grants preemptive rights to minority shareholders in the event of a follow-on stock offering.  This prevents controlling shareholders to issue stock to themselves at knock-down prices and to dilute the minorities in the process. This was one of the standard market abuses we suffered in the 1990s. Hermitage lobbied very hard for this prohibition to come into force, and we are recognized as one of the driving forces behind its enactment.  Another example is our work in the ongoing restructuring of the Russian national electricity company called Unified Energy Systems (UES).  Under the restructuring as originally conceived, management planned to strip key assets out of UES at the expense of the Russian government and minority shareholders. We lobbied extremely aggressively and worked with the government to ensure that the shareholders of UES would be able to participate in the distribution of any assets on a pro rata basis – similar to the way AT&T was broken up here in the United States.

So there are a number of examples where we have played a significant positive role – and of course numerous examples when certain publicly-minded government officials did the right thing that we had nothing to do with. In the background behind all of this, the bar is slowly being raised for Russian corporate governance generally – and that improves the climate for all investors and businesses in Russia.

Washington Profile: You have been a dogged supporter of investing in Russia. Are there any circumstances under which you would throw in the towel and say: “Russia’s no longer a good place to invest; don’t go there.” And if so, what might those be?

W.B.: It all depends on the valuation of the market. Right now Russia is still a very rough place to do business, so the asset-based valuations of Russian companies, like the oil companies, are still discounted from between 75 percent and 90 percent. If the valuations were, let’s say, at a 25 percent discount, I would probably say that that doesn’t make sense in the current environment.

Washington Profile: What is it specifically that makes Russia such an attractive investment destination?

W.B.: At the moment, Russia is good at one thing, which is the extraction of raw materials for the rest of the world to consume. Ninety percent of the exports that come out of Russia are raw materials: oil, gas, metals. In the long-term, Russia needs very much to develop a more integrated and diversified economy, but at the moment they are not doing that because commodities and extractive industries are so rewarding.

Washington Profile: So, if you take away the commodities from Russia…

W.B.: If you take away the commodities from Russia, you end up with not much of anything.

Washington Profile: In what ways did your grandfather influence your decision to dedicate so much of your time to Russia?

W.B.: Our legacy in the family was contacts with Russia and the former Soviet Union. We also spent a great deal of time and energy in our family, before I was born, fighting off the attacks in the McCarthy era. So there was a very strong history in our family of being connected to Russia, both in a positive and a negative way. That really stuck with me when I was trying to decide my own career.