In early September, American Interest publisher Charles Davidson spoke with Hermitage Capital co-founder and CEO William Browder about the origins, impact and future of the Magnitsky Act.Charles Davidson: Welcome, Bill; we appreciate you talking with us. Our timing is good, given the news out of New York two days ago. William Browder: Yes, the timing couldn’t be better. CD: Why don’t we start by having you introduce yourself to our readers? WB: I come from a strange American family. My grandfather was the general secretary of the American Communist Party. As often happens in American families, in my teenage years I went through a rebellion. I figured the best way to rebel against a family of communists was to become a capitalist and ended up going to Stanford business school. I graduated in 1989, the year the Berlin Wall came down. After graduation, as I was trying to figure out what to do with my life, I had an epiphany. I figured that if my grandfather was the biggest communist in America, it would be perfectly symmetrical that I become the biggest capitalist in Eastern Europe. CD: That seems logical. WB: So I moved to London in 1989 and tried to get involved in Eastern Europe. I ended up at Salomon Brothers at the beginning of the Russian privatization program. When Yeltsin became President, he thought the best way to go from communism to capitalism in the country was by giving away state property for free to all Russians; then they’d all be capitalists by virtue of owning property. The program was very ill thought-out and badly designed, so instead of creating 150 million capitalists, it created 22 oligarchs and left most Russians living in destitute poverty. Having said that, there were opportunities for non-oligarchs to buy shares of these newly privatized Russian companies. When the program first started, the shares were trading at a 99.7 percent discount to the value of similar companies in the West. And as a newly minted Stanford MBA, I did the math and thought if you’re going to be an investor, why not invest in companies trading at a 99.7 percent discount to their Western comparables? So I initially convinced Salomon Brothers to invest some of the firm’s own money in Russia. We invested $25 million and very quickly turned it into $125 million. On the back of that success for Salomon Brothers I decided to set up my own company. I founded Hermitage Capital in 1996 and moved to Moscow full time to invest in the Russian stock market. My investments initially did very well. In the first 18 months, my portfolio went up more than 800 percent, and then in 1998 it went down 90 percent, basically back to square one. After that, I discovered that the oligarchs had no incentive to behave themselves after Russia defaulted and devalued, because Wall Street was effectively closed for business for them. At the same time, there was no disincentive to misbehaving because the laws that exist in other countries didn’t exist in Russia. So the oligarchs embarked on an orgy of stealing that was unprecedented in the history of business. I had to choose whether to allow everything to get stolen or to try to stop the stealing in the hope of recovering some of the lost money. Even though I was in completely uncharted territory and very dangerous, I decided to fight the stealing and become the first shareholder activist in Russia. I did so by researching how the thefts were occurring in big companies like Gazprom, Unified Energy Systems, and Surgutneftegaz, and then I shared my research with the international media. Remarkably, this had a very dramatic effect on the companies because, strangely, Putin and I had roughly the same interests. This was because initially Putin’s presidency was not a real presidency; all the powers of the office had been stolen by the oligarchs and regional governors. So the first thing Putin did was to take back his power from these people. When he saw me fighting with the oligarchs, well… You know the expression, “the enemy of my enemy is my friend.” I’ve never met the man, but he jumped in on my side of the fights—not because he believed in good corporate governance, but because he wanted to weaken some of these oligarchs. For example, he wasn’t happy with the management of Gazprom at the time we were fighting with them, and he ended up firing the CEO in 2001. He wasn’t happy with how Chubais was restructuring the electricity company so Putin changed the charter of the company. All of this had two effects: it weakened Putin’s enemies, which he seemed to be very keen on, and it stopped a lot of bad things from happening in the companies we invested in. So for a brief period of time I was very enthusiastic about Putin’s presidency—until 2003, when he arrested Michael Khodorkovsky, the owner of Yukos, and put him on trial, and allowed television cameras to film the richest man in Russia sitting in a cage. This had a very profound psychological effect on the other oligarchs, because if the richest and cleverest oligarch in Russia was sitting in a cage, they’d be just as likely to find themselves in a similar situation. CD: So that was a real turning point, then. WB: At that point Putin had won his war with the oligarchs. They all came to him asking what they had to do to make sure they wouldn’t be put in a cage like Khordorkovsky. I would imagine he said something like, “give me 50 percent of what you have and you won’t sit in a cage.” Most oligarchs, I believe, did a deal with Putin and changed their behavior. The ones who didn’t were run out of the country or arrested. All of a sudden, Putin became the biggest oligarch in Russia. CD: How big is he as an oligarch? WB: No one really knows, because the way in which his wealth is held. In my opinion, it is held through what are described as trustee arrangements where oligarchs hold his money for him. When you look at the wealth of some of the biggest players in Russia, I think you should divide the total by two, because a lot of them don’t hold it for their own account, but his account. CD: If we look at Putin’s wealth, and that of the oligarchs in general, how much of it is in Russia, and how much would you estimate is spread around in tax havens and secrecy jurisdictions at this point? WB: This is one of the most interesting aspects of this situation. Because all this money was effectively stolen in Russia—either stolen from the government, or stolen by Putin from the oligarchs who stole it from the government—no one feels safe keeping their money in Russia, because at any point it could be stolen from them. As a result, most of it is in the West, where it is protected by the rule of law and can’t so easily be taken. This brings us to the power of the Magnitsky Act, because if their money is in the West, it’s vulnerable, as we saw two days ago when the Feds announced the forfeiture action in New York. CD: So, the fact that a lot of that looted wealth is outside Russia was a premise for the Magnitsky Act. I think readers are somewhat familiar with it because the ban on orphan adoption received so much attention. Why don’t we go over that briefly? WB: Well, after Putin started cozying up to the oligarchs, it seems to me that all my attacks on them were no longer falling on his enemies, but on his own financial interests. So in November 2005 I was expelled from the country and declared a threat to national security. I definitely threatened national security insofar as the national objective was to steal money, and I was in a position to expose that. When the Russian government turned on me, I knew that being expelled was only the beginning of my problems. I quickly evacuated my staff and liquidated all of our holdings in Russia. It was quite fortuitous that I did that, because 18 months after I was expelled, the Russian police raided my offices in Moscow, as well as the offices of my law firm. They seized all of our corporate documents, and then those documents were used in a complex fraud—first to try seize our holdings in Russia, which they didn’t succeed in doing because we had already taken the money out. Then, through a complicated scheme, this group of police officers and other government officials stole $230 million of taxes we had paid to the Russian government in the previous year. So they didn’t steal our money, but ended up stealing their own money, the government’s money, in the largest tax refund fraud in the history of Russia. We hired a young lawyer named Sergei Magnitsky, who was at the time 36 years old and working for an American law firm, to help us investigate the crime and protect us against any repercussions. Sergei collected the full details and evidence of the complicity of law enforcement and government officials in this crime. He testified against the officials, and shortly after, some of the same people who had been implicated in his testimony came to his home on the morning of November 24, 2008, and arrested him. He was in pre-trial detention and then tortured in attempts to get him to withdraw his testimony. CD: Did Magnitsky actually believe, as he was doing this, that the law would prevail, or was he willing to be a hero? WB: Both he and I believed that Putin was not a good man, but that Putin was inclined to act in the interests of his state. If $230 million was stolen from the state and he became aware of it, we thought Putin would go after the people who did it, because we were pretty convinced that it was a rogue operation, and couldn’t have been approved at the highest level. We were wrong—profoundly wrong. It had been approved at the highest level, with the complicity of the most senior government officials and possibly Putin himself. Certainly Putin had been involved in the cover-up afterwards. CD: Is this, in your view, another turning point? We had Yukos, and Michael Khodorkovsky being jailed. Is this now going to another, even worse level in terms of how Russia is functioning? WB: It’s hard to know at this point whether Putin was in on it. We do know for sure that, after the crime had been committed, Putin became personally involved in a conspiracy to cover up the murder. That we can say with certainty. It’s one thing for vague rumors to exist that a President is corrupt. It’s another thing when he gets on stage, with evidence completely pointing to the contrary, evidence that he’s aware of, and uses his power to cover up evidence of a whistleblower exposing the theft of $230 million. That was profound, and political, and it caused a lot of people in the West who were looking for reasons to give Putin the benefit of the doubt to no longer be able to give him that. CD: So did that stoke the appetite in the U.S. legislative branch for the Magnitsky Act? WB: Well, there’s one thing very important to point out about how the Magnitsky Act was worked in America more easily than in Europe. The U.S. Constitution ensures a separation of powers between the legislative and executive branches. And in America, I would argue, there was lots of support from the legislators even if there was opposition from the executive branch. The Obama Administration is under no illusions that Russia is a criminal state, but Obama’s advisors came up with the concept of the “reset” to try to avoid problems with Russia on Obama’s watch. They hoped that eight years could pass without Putin doing anything crazy, which would pose a challenge to the President and create a crisis in Obama’s foreign policy. Congress was entirely different. Congressmen aren’t elected by the President, but by their own constituents. They are independent, and they’re also human beings. So when I went and presented the Magnitsky case to them, it was a pretty straightforward. I said, “Do you or do you not want to have Russian torturers and murderers coming to America and spending their blood money here?” There’s not an elected official in any state or district who could answer “yes” to that question. As a result we ended up with 92 in favor in the Senate and four against. CD: It’s quite extraordinary. Has the Act been effective as a deterrent? WB: The Act is the most terrifying thing to happen to Putin since he became President of Russia. Putin is all about stealing money and keeping that stolen money safe in the West. The Act puts his money at risk, because it says: If you commit human rights abuses in Russia, your money will be frozen in America. The Russians understand very clearly that if America passes the Magnitsky Act, the Europeans eventually will too. If both pass it, then there’s no place where stolen Russian money is safe. CD: You mentioned that similar legislation will pass in Europe. Can you give us an update on where that stands? WB: Well, since Europe doesn’t have the separation of powers, as the United States does, there isn’t the same mechanism for forcing things through. So you cannot introduce legislation that the government does not want. As a result the Magnitsky Act could only get passed in the UK if Russia’s behavior became so outrageous that it’s no longer publicly possible to not do something about it. CD: I see. What about Germany, France, Italy? WB: It’s all more or less the same thing. The European Parliament has already passed four resolutions calling for Magnitsky sanctions across Europe. However, the European Union as an executive body hasn’t taken up those resolutions. Again, it would require Russian behavior to be so outrageous that there would be no moral position one could take other than adopting the Magnitsky Act. I think that Russia has now effectively entered that territory in the way the government is persecuting the LGBT community and other things. CD: Right. Now, if we look at this more broadly, is the Magnitsky Act replicable to deal with similar situations in other countries where gross human rights violations have become systemic? In other words, is this the basis of a new politics of humanitarian interventionism? And if so, is that desirable? WB: In my opinion, this is the new technology for dealing with human rights abuses throughout the world. It’s like the iPad for human rights advocacy. The reason is that the world has become very globalized in the past twenty years, and people who commit human rights abuses in their countries increasingly do it for economic gain. It used to be that the only tool human rights advocates and activists had was to be had through the voice of a Western government condemning an atrocity. What we found was that, if autocrats and dictators want to commit human rights abuses, they don’t care what the U.S. government or the European Union says. But if they’re not able to travel, if their children aren’t able to attend Western schools, if their bank accounts are getting frozen, there are personal consequences that make them very scared. It raises a question, every time there’s a choice, these new consequences effect the motivation to carry out potential abuses. CD: Right, that’s very interesting. If we go back to Russia, Mikhail Prokhorov, for instance, who was operating a cell openly in the opposition in Russia—is he taking real risks, or is he somehow out of Putin’s reach? His behavior seems surprising, in the context of what we’re talking about. WB: There are a lot of opinions about him and other politicians. I think the only effective opposition politician is Alexei Navalny. There are a lot of people standing behind him, like Nemtsov, Kasyanov, Kasparov, Ryzhkov and others. But Navalny, in my opinion, is the true leader of the opposition at this point. As for Prokhorov, anyone who has significant wealth in Russia can have that wealth taken away in a heartbeat, and so it’s hard to imagine that someone would risk that—as well as risk imprisonment, impoverishment and death—to exercise his political views. CD: Right—Window-dressing transported by private jet, one might say. Very briefly, I think it would be interesting if you could say a little bit about this website, Russian Untouchables. WB: When Sergei was imprisoned, and being tortured, his main way of defending himself was to write down everything that happened to him and to file it in the form of criminal complaints. CD: Why weren’t these just torn up? WB: Well, because Russia has this tradition of bureaucracy and procedure, they weren’t. There may be no justice and no truth in Russia, but there’s a procedure that everyone adheres to very closely. And because it’s a closed system, no one has any fear that any documents floating within it will have any impact on the actors afterward. We had all this evidence, and we figured that his killers would have to face justice. But as we learned, the Russian government was committed to protecting anyone involved in killing Sergei. So we said, if we can’t get justice inside Russia, we’ll try to get justice outside Russia. The first and most important aspect of getting justice is to share this heartbreaking story, in its most granular detail, with the world. So together with Sergei’s colleagues and friends, we put together this website called Russian Untouchables. Anyone interested in the story can go to the site and get lots of information on the case. The website has been the crux of our campaign to get sanctions passed; to chase down the money that belongs to the bad guys; to get resolutions passed in various parliaments; and so on. Altogether, it has been an very effective way of communicating with the world about what had happened—all using raw information and data to let people see the facts for themselves. CD: I think I saw somewhere that 2.3 million people have gone to the website. WB: Yes, the YouTube videos have been viewed more than two million times. CD: You mentioned Navalny; does this whole corruption issue play well with the Russian electorate? In your view, what real political traction does the corruption issue have? WB: From my standpoint, it’s the only issue that Russians care about, because it affects every Russian citizen profoundly and personally. Nothing works in Russia because of corruption. There is terrible health care because the money for hospitals has been stolen. The schools are a disaster because educational funds are being embezzled. Roads aren’t built, fires burn out of control, damns burst because all the money has gone missing. People are furious. CD: So you’d say that for the populace at large it’s the number one issue? WB: Yes, it’s the only issue that matters to them. And that’s why an anti-corruption activist like Navalny can go from total obscurity, with a team of five people, to become the most popular opposition politician in the country—all while the authorities are doing everything they can to stop him, including keeping him off television and newspapers. This issue is so resonant that he’s in a position to become the next President of Russia, under the right circumstances. CD: On another subject, though, what about China? Do you have anything to say about China in this context that might be of interest? WB: The Chinese are more subtle in certain ways than the Russians are. Russia is a criminal state. The people who are running Russia are doing it explicitly to commit economic crimes. In China, there may be corruption, and there may be criminals at work in the government, but it’s not a criminal state. I think that’s the distinction. CD: Yes, that’s interesting. Finally, Bill, what’s next as you entangle the post-Magnitsky phase of your career? WB: Well, the Magnitsky phase is nowhere near done; we’re just in the middle of it. We have a lot more work to do. We have to get the Magnitsky list in America fully populated with human rights abusers. It requires a lot of pressure and advocacy to get the government to do what it’s required of them by law. We have to roll out the Magnitsky Act in all of Western Europe and Canada and Australia and all other civilized countries. We have to chase down all the money that was stolen by this group of criminals and make sure that it gets taken away from them by Western police authorities, as it was two days ago in New York. CD: Right. Do you want to comment a little more on what happened there? WB: Federal authorities filed a forfeiture complaint against roughly $24 million worth of real estate that belonged to a company that received money for that real estate directly from the theft that Sergei Magnitsky uncovered. So we were able to trace the money, the $230 million tax refund, through a number of accounts in various countries, to New York—and to New York real estate. We then shared that information with the New York District Attorney and the U.S Department of Justice. They verified it, investigated it, and then froze the assets. There will be many more asset seizures going forward. If these people were ready to kill Sergei Magnitsky for money, then the best way to get justice is to take away their money. CD: Sounds good to me, Bill. Thanks for talking with us.
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Published on: September 16, 2013The Power of the Magnitsky Act