He took me up to the empty office on the fourth floor. It was only two hundred square feet, about the size of an average master bedroom. The plate-glass windows, which opened only a few inches, looked over the parking lot to the west and a decrepit set of Soviet apartment blocks beyond that. The space wasn’t pretty but it was functional, had multiple phone jacks, and was just down the hall from Marc. The Austrian wanted $4,000 a month, making this one of the most expensive office spaces in Moscow per square foot. I tried to negotiate, but the Austrian just laughed at me. After a bit more bickering, I gave in and signed the lease.
Once I had the office, I needed people to help me run it. While tens of millions of Russians were desperate to make a living, hiring a good English-speaking employee in Moscow was almost impossible. Seventy years of communism had destroyed the work ethic of an entire nation. Millions of Russians had been sent to the gulags for showing the slightest hint of personal initiative. The Soviets severely penalized independent thinkers, so the natural self-preservation reaction was to do as little as possible and hope that nobody would notice you. This had been fed into the psyches of ordinary Russians from the moment they were on their mothers’ breasts. To run a Western-style business, therefore, you either had to completely brainwash a fresh young Russian about the virtues of efficiency and clear thinking or find some miraculous person whose natural psychology had somehow defied the pressures of communism.
Fortunately, I got lucky. A local brokerage firm with a number of Western-trained employees had recently gone bankrupt, and less than a week after arriving in Moscow I was able to hire three good people: Clive, a British junior trader and researcher; Svetlana, a secretary who spoke perfect English; and Alexei, an experienced driver who spoke only Russian.
After getting them in the office, I sent Svetlana to find some furniture. She was a short, pretty, twenty-two-year-old Lithuanian with dark hair and a sunny disposition, who enthusiastically went about her mission. When she got to the furniture store, she called to tell me about some nice Italian chairs and desks she thought would be perfect for the office.
«How much?» I asked.
«Around fifteen thousand dollars».
«Fifteen thousand bucks? You’ve got to be kidding. What else have they got?»
«Not much. Just some ugly picnic tables and folding chairs».
«How much for those?»
«About six hundred dollars».
«We’ll take them».
By the end of that day we had four picnic tables and eight folding chairs — plus a houseplant Svetlana bought on her own initiative. We then purchased some computers and set them up, and by the end of the week my fledgling operation was ready to go.
As I got set up, Yeltsin’s poll numbers continued to move in the right direction, but the election was still more than ten weeks away and Sandy was still not releasing any more of the funds. In the interim, I started researching companies for the fund on the assumption that eventually Safra was going to honor his $25 million commitment.
The first company I targeted was the Moscow Oil Refinery, known as MNPZ. At Salomon we had made a lot of money on oil-related companies in Russia, so a big Moscow refinery seemed like a promising place to start looking.
Svetlana made an appointment with MNPZ’s chief accountant and in early April we went to meet her at the company’s headquarters. Plump, blond, and in her fifties, she wore an unfashionable maroon pantsuit. She met us at the entrance of an ugly, old building and led us inside. The place had clearly seen better days. Lights flickered on and off, tiles were missing from the floor, and the walls were filthy.
In her office I asked a series of basic questions: «What were your revenues last year?» «What were your profits?» «Can you tell me how many shares are outstanding?» These questions may sound mundane, but in Russia there was no public information on companies and the only way of getting any was by going to the company and asking.
Svetlana translated as the accountant answered the revenue and profits questions, but when we got to the question about shares outstanding, she asked, «Do you mean common shares or preferred shares?»
I’d heard the term preferred shares before, but I didn’t know what she was talking about. «What are those?»
«Preferred shares were given to the workers during the privatization process».
«How are they different from the ordinary shares?»
«They pay out forty percent of profits in dividends».
«How much do the ordinary shares pay out?»
«Let me see». The accountant grabbed a large binder off her desk, inspected several stained sheets of paper, and said, «It says here that they paid nothing last year».
«So the preferred shares paid out dividends equal to forty percent of the profits and the ordinary shares paid out nothing», I offered, not quite understanding this discrepancy.
«Yes, exactly».
As soon as I was done with the meeting, Svetlana and I jumped into Alexei’s beat-up Zhiguli — a type of small, boxy Soviet car that was ubiquitous in Moscow — and puttered back to the office. As we inched through the midday traffic, I called Yuri Lopatinski, one of my favorite local brokers. Yuri was a Russian émigré from New York who’d recently moved back to Moscow to work for the brokerage firm Creditanstalt-Grant. He was not like the other brokers who trafficked in what I called tourist stocks, the banking equivalent of hawking $10 coconuts on a beach in Fiji when the locals bought them in town for twenty cents.
Yuri was in his early twenties and had a hushed way of speaking, as if he were always telling secrets. It was often difficult to understand anything he said, but when I did understand him, his information was usually interesting.
«Hey, Yuri, do you have a price on preferred shares of MNPZ?» I asked.
«Dunno. Probably. Let me see». He cupped the receiver and mumbled to his trader. I heard some garbled shouting in the background and Yuri came back on the line. «Yeah, I can get you a hundred thousand at fifty cents». He said this so inaudibly that I had to ask him to repeat it.
«How much for the ordinary shares?»
He mumbled something again and got another response. «A hundred thousand at seven bucks».
«You sure about that?»
«Yep. Those are the prices».
I didn’t want to tip my hand, but my heart started beating fast. «Let me get back to you on this».
I hung up and wondered: These preferred shares seem much more attractive than the ordinary shares. Is there something wrong with them? Why are they trading at a 95 percent discount to the ordinary shares?
When we finally made it back to the office, I sent Svetlana back to MNPZ to get a copy of the corporate charter, which would contain the details of the rights of different classes of shares. She came back two hours later and we pored over it. The only substantive difference between preferred shares and ordinary shares was that preferred shares didn’t have voting rights. That didn’t seem to be a problem because foreign investors such as ourselves never voted our shares at annual general meetings in Russia, anyway.
I was convinced that there must be some other explanation for the deep discount and spent the next several days searching for it. Did the preferred shares have different par values? No. Was the ownership restricted to workers? No. Could the higher dividends be arbitrarily changed or canceled by the company? No. Did they represent only some minuscule part of the share capital? No. There was no explanation. The only reason I could fathom for why they were so cheap was that no one had showed up to ask about them — until I had.