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Looting and Murder
Life in Moscow can seem remarkably normal. Middle-class professionals wear the same clothes, drive the same cars, take the same holidays, eat the same food and do the same jobs as millions of their counterparts in cities all round the world. This is especially so in the field of finance. Shares and profits rise on the back of Russia’s oil and gas boom, and the consumption it pays for. Financiers invest; their lawyers handle the details and deal with problems. Serving them is a growing Russian middle class of articulate, confident English-speaking professionals who could easily do the same jobs in New York, London, Frankfurt or Dubai. For many people, especially those who believe Russia is on the right track, the growth of the financial and legal system in Moscow is one of the great grounds for optimism. Other parts of life in Russia, from traffic-clogged big-city streets and corrupt officialdom to terrorism and bubbling civil war along the country’s southern fringe, may be depressing, chaotic, dark and even dangerous, but that world seldom touches the bright, snazzily furnished offices of central Moscow.
In the case of Sergei Magnitsky, however, it did. His name is not well known, though it deserves to be. His story provides a moral and human backdrop to the subsequent chapters on the wiles and ways of Russia’s spies. Aged only 37 when he died in 2009, Mr Magnitsky was part of the first generation of Russians for nearly a century whose lives were unclouded by fear. When Soviet controls over speech, belief and travel withered, he was a teenager. He was well-educated in a way that previous cohorts of Russian students could only dream of. His mind was not shaped by forced study of the perverse doctrines of Marxism–Leninism but by adherence to the crystalline principles of the law. Neither brutalised by Soviet-era conscription nor burdened by compromises of adult life under totalitarianism, he enjoyed the middle-class comforts and certainties that are taken for granted in the West and had been unimaginable in the Soviet Union. He had able colleagues, stimulating challenges and a happy home. His dream, like the half-successful reformers of the Tsarist era a century earlier, was for Russia to be a law-governed state. He was the sort of person who made even sceptics feel that Russia’s long-term future was bright.
Polished and polyglot, Mr Magnitsky was the kind of Russian that readers of this book could easily encounter. You might have a drink with him on a foreign holiday, hear him at a seminar, or find him sitting across the table at a business meeting. In that sense, he is rather like the other Russians covered in this book: the undercover spies in the West. It is easy to imagine him sipping a cocktail in London with Ms Chapman, or strolling the streets of Boston in conversation with Donald Heathfield – her superspy colleague who worked as a management consultant in America. But while these people were pursuing their clandestine missions on behalf of Russia’s spymasters, Mr Magnitsky was involved in another story.1 It involves colossal sums of money, extraordinary cruelty and impunity for wrongdoers. The cast includes senior members of the FSB, working hand in hand with organised crime and senior state officials.
I will begin by introducing the man who unwittingly brought Mr Magnitsky to his doom, and since then has campaigned untiringly for his cause. William (‘Bill’) Browder is an American-born financier, now with British nationality, who used to be one of the best-known Western investors in Russia. He is an abrasive, mercurial figure, bursting with nervous energy, capable of charm and fury in quick succession. He has a fascinating family background: his grandfather Earl Browder was a leader of the American Communist Party. But it was capitalism not communism that entranced the grandson. He spotted in the 1990s that many outsiders were overestimating the risks of doing business in Russia. Admittedly, the dangers were great: the rule of law was weak, property rights flimsy, political stability uncertain, the economy rocky, and crime and corruption pervasive. But daunting does not mean impossible. The companies and shares on sale were not valueless, just cheap. If the situation improved just a little (or if even perceptions of it did) then the gains to be made were potentially huge. Suppose, for example, that investors reckoned that an ill-run Russian oil company, instead of being worth a mere 1 per cent of a comparable foreign one, was instead worth 10 per cent. That would raise the value of its shares tenfold – meaning a colossal profit for someone who bought before the perception changed.
Mr Browder’s investment company, Hermitage Capital Management, therefore pursued a threefold strategy. First, it bought shares in companies that owned an underlying asset, such as oil, gas or minerals. Second, he talked up Russia as an investment destination, insisting that it was merely ‘bad’ instead of outright ‘horrible’.[9] His third tactic was to highlight abuses of shareholder rights. His sharp-eyed team of analysts pored over company accounts and other documents, looking for evidence of fraud and waste. When they found them, Mr Browder would launch lawsuits, media campaigns and other stunts to seek redress.2
This was well timed. Some Russian companies were already realising that in order to make the most of their stock-exchange listings, they had to pay at least a semblance of attention to outside investors’ interests. From 2000 onwards, Mr Browder’s efforts also coincided with a push from the Kremlin, which disliked the way over-mighty ‘oligarchs’ (politically powerful tycoons) were running the country’s biggest companies in their private interests. The coincidence of interest was short-lived. The Putin regime’s longer-term aim was not to promote good corporate governance and shareholder value, but to seize money and power for itself. But that was for later. For nearly a decade, Mr Browder and Hermitage flourished mightily. Their campaigns brought some quick victories, some slower ones, and sometimes failed altogether, but the hard work and high profile at least helped justify the hefty management charges the investors paid. The ‘Hermitage effect’,3 as the company terms it, received the ultimate accolade in 2002: it was the subject of a Harvard Business School case study.4 During the period between Mr Putin’s arrival in office in 2000 and the fund’s moving to London in 2005, the value of Hermitage’s investments rose eightfold; during the whole period of its existence, the increase was thirty-fivefold. Few in the history of finance can boast such a record.
I did not always get on with Mr Browder during my time in Moscow as bureau chief for the Economist from 1998 to 2002. Our disputes may look like ancient history now but they were sharp at the time. In particular, although I admired his energy and brains, I disliked his backing for Mr Putin’s regime. The new government had in my view brought superficial stability, but at far too high a price. Moreover I was unmoved by the plight of foreign investors who had knowingly put their money into companies run by crooks, nincompoops and political cronies, and were then surprised to find that those businesses were run badly. If you buy shares in Russia, you should expect to be defrauded, rather as if you go mud-wrestling you expect to get dirty.
Our sharpest disagreement came in 2003 after I left Russia, when we took opposite sides over the defining issue of the early Putin era. Mr Browder endorsed the arrest of Mikhail Khodorkovsky, then Russia’s richest man, who had defied Mr Putin, not least by turning up tieless to a meeting in the Kremlin – a huge snub in protocol-conscious Russia. Mr Khodorkovsky, an energy tycoon, had also put a large number of parliamentarians on the payroll to bolster his political clout and was planning a deal with a big American oil company in defiance of Kremlin guidelines. He was certainly an obstacle to Mr Putin’s plan to seize the commanding heights of power in Russia. Some thought he might even want to displace Mr Putin from the top job (in his first years in office, the Russian president had seemed a grey and somewhat unimpressive figure). Mr Putin’s vengeance was decisive and ruthless. Mr Khodorkovsky was jailed on flimsy charges and his company Yukos (which had many foreign shareholders) was bankrupted, with its assets disposed of in a dodgy auction where Kremlin cronies bought them cheaply.5 I agreed with Mr Browder that Mr Khodorkovsky had in previous years abused the rights of his minority shareholders, and I did not see him simply as a martyr to repression. But I reckoned that the balance between the tycoon’s past misdeeds and later virtues mattered less than the authorities’ flagrant abuse of the courts in a political vendetta.
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i As well as highlighting the potential, some felt he was downplaying the dangers. A notable occasion was in early 2005 at the Davos World Economic Forum, when opinion was already turning sharply against the evident cronyism and incompetence of the Putin regime. Mr Browder was one of a handful of prominent Westerners to express a strong contrary opinion.