I walked away in a daze. Traders aren’t known for their manners, but still. I called Bobby back. «Bobby, I’ve tried. Nobody will give me a desk. Can you please do something?»
This time, Bobby was annoyed. «Bill, why are you bothering me with this? If they won’t give you a desk, then just work from home. I don’t care where you work. This is about investing in Russia, not desks».
«O'kay, O'kay», I said, not wanting to mess things up with Bobby. «But how can I get my travel authorized and expenses reimbursed and that kind of stuff?»
«I’ll sort that out», he said gruffly, and hung up.
The next day an overnight package arrived at my home containing twenty presigned travel authorization forms. I filled in the details on one of them, faxed it to the Salomon travel department, and got a ticket to Moscow for two days later.
Once I arrived in Moscow, I set up a makeshift office in a room at the Baltschug Kempinski Hotel on the south bank of the Moscow River, across from Saint Basil’s Cathedral. The first step was to get the money to Russia, which meant we needed somebody who could receive the cash and help us buy the vouchers. Fortunately, we found a Russian bank that was owned by a relative of an employee at Salomon. Bobby thought that would be better than wiring our money into an unknown Russian bank, so he had someone from the back office organize the paperwork, and authorized the transfer of $1 million for a trial run.
Ten days later we began purchasing vouchers. The first step was to collect the cash at the bank. I watched as the clerks withdrew the cash from the vault in crisp $100 bills and loaded it into a canvas sack the size of a gym bag. This was the first time I had ever seen a million dollars in cash, and it was strangely unimpressive. From there, a team of security guards took it by armored car to the voucher exchange.
The Moscow voucher exchange was in a dusty, old Soviet convention hall across from the GUM department store[5] several blocks from Red Square. It was organized in a series of concentric rings of picnic tables under an electronic trading board hanging from the ceiling. All transactions were done in cash, and, since it was completely open to the public, anyone could walk in with vouchers or cash and transact business. There was no security, so the bank kept its guards around at all times.
The way these vouchers found their way to Moscow was a story in itself. The Russian people had no idea what to do with the vouchers when they received them for free from the state and, in most cases, were happy to trade them for a $7 bottle of vodka or a few slabs of pork. A few enterprising individuals would buy up blocks of vouchers in small villages and sell them for $12 each to a consolidator in larger towns. The consolidator might then travel to Moscow and sell a package of a thousand or two thousand vouchers at one of the picnic tables on the periphery of the exchange for $18 each. Finally, an even bigger dealer would consolidate them into bundles of twenty-five thousand vouchers or more and sell them for $20 each at the center tables. Sometimes individuals would bypass the whole process and lurk around the outskirts of the exchange, trying to find good prices on small lots. In this profusion of cash and paper, there were hustlers, businessmen, bankers, crooks, armed guards, brokers, Muscovites, buyers and sellers from the provinces — all of them cowboys on a new frontier.
Our first bid was $19.85 per voucher for ten thousand. After we announced our bid, there was a commotion on the floor and a man raised a card with the number 12 printed on it. I followed the bank employees and guards to a picnic table with 12 displayed on it, where our team presented the cash and the people at the table presented the vouchers. The sellers took our $10,000 bricks of hundreds and put them one by one into the dollar counter. The machine whirred until it stopped at $198,500. At the same time, two people from our side inspected the vouchers, looking for forgeries. After about thirty minutes, the deal was concluded. We took the vouchers to our armored car and dealer number 12 took the cash to his.
This exercise was repeated over and over for a number of weeks until Salomon had bought $25 million worth of vouchers — but this was only half the battle. After that, we needed to get the vouchers invested in shares of Russian companies, which was done at so-called voucher auctions. These auctions were unlike any other, since the buyers didn’t know the price they were paying until the auction concluded. If only one person showed up with a single voucher, then the entire block of shares being auctioned would be exchanged for that one voucher. On the other hand, if the whole population of Moscow showed up with all of their vouchers, then that block of shares would be evenly divided among every single voucher that was submitted at that auction.
The scenario was ripe for abuse, and many companies whose shares were being sold would do things to prevent people from attending the voucher auctions so that insiders could buy the shares cheaply. Surgutneftegaz, a large oil company in Siberia, was rumored to have been behind the closure of the airport the night before its voucher auction. Another oil company supposedly put up a roadblock of burning tires on the day of its auction to prevent people from participating.
Because these auctions were so bizarre and hard to analyze, few people participated — least of all Westerners. This resulted in an acute lack of demand, which meant that the prices were remarkably low, even by Russian standards. Although Salomon was effectively bidding blind at each auction, I’d carefully analyzed every major voucher auction in the past, and in each case the price of the shares started trading at a significant premium to the price paid in the auction — sometimes double or triple. Unless something changed, the firm was essentially guaranteed to make a sizable return just for participating in the auctions.
Once we started accumulating vouchers, I watched the government’s announcements of auctions like a hawk. In the end, I recommended to Bobby that we participate in a half dozen auctions, including the sale of Lukoil, a Russian oil company; Unified Energy System (UES), the national electricity company; and Rostelecom, the national phone company.
By the time we were done, Salomon Brothers had used these auctions to become the owner of $25 million worth of the most undervalued shares that had ever been offered anywhere in history. Bobby and I were convinced that Salomon would make a fortune. We just needed to wait.
And we didn’t have to wait long. In May 1994, the Economist published an article entitled «Time to Bet on Russia?» This laid out in simple terms the same math regarding the valuation of Russian companies that I had learned on my first trip to Moscow. In the following days billionaires, hedge fund managers, and other speculators started calling their brokers asking them to look into Russian stocks. This caused the nascent Russian market to move, and move dramatically.
In a short time our $25 million portfolio was transformed into $125 million. We had made $100 million!
With this success I became a local hero on the Salomon Brothers’ London trading floor, where I had finally found a desk. The same «buddies» who had stopped inviting me for lunch and drinks were now lining up at my desk each morning before I arrived, hoping I might throw them a bone to help them make five times their money in the Russian stock market.
In the weeks that followed, Salomon’s top institutional salespeople started coming around too, asking if I would be willing to meet their most important clients. «Bill, it would be a great favor to me if you could come and brief George Soros». «Bill, Julian Robertson[6] would really love to hear about Russia from you». «Bill, can you spare some time for Sir John Templeton?»[7]
6
The founder of Tiger Management Corp., one of the industry’s most successful hedge funds.
7
The founder of Templeton Asset Management, one of the largest mutual fund companies in the world.