Lessons From An Investor’s Tragic Experience In Russia

Red Notice, published in 2015, is one of the best books I’ve read recently. Written by investor and human rights activist, Bill Browder, it’s a riveting account of his experience investing in Russia from the early-1990s to the mid-2000s. Browder was galvanised into writing the book after one of his associates, tax-law expert Sergei Magnitsky, tragically died in November 2009 in a Russian jail. Magnitsky had been detained by Russian authorities for nearly a full-year without trial. 

In 1996, Browder, a US-born resident of the UK, started his investment firm, Hermitage Capital Management, to invest in the Russian stock market. He thought that bargains were plentiful among Russian stocks because the country had exited communism and embraced capitalism, somewhat chaotically, only a few years earlier. In the process of unlocking the bargains, Browder became renowned for shareholder-activism in Russia and for exposing corruption within the country’s political and business elite. Over the years after its birth, Hermitage grew to become the largest foreign investor in Russia.

But in 2005, Browder was refused entry to Russia and was labelled “a threat to national security” by the country. The Russian offices of Hermitage were raided by Russian security forces in 2007 and Browder tasked Magnitsky, along with a few other lawyers, to investigate the raid. Magnitsky’s investigations caused him to become a target of the Russian authorities and this eventually led to his detention in November 2008 and his demise nearly a year later.

To me, Red Notice was equal parts educational, exhilarating, and infuriating. It taught me that crazy bargains could be found in massive dislocations in a country’s economy or financial markets, that shocking acts of theft by management teams can happen to listed companies, and that investing in countries with authoritarian governments can come with immense risks. It also read like a spy novel at times, and it stirred up anger and indignation in me because of the corruption, unjust, and cruelty displayed by certain members of Russia’s political system. Here, I want to discuss my most striking and poignant takeaways from the book.

State-owned companies in formerly-communist-Poland were returned to the private sector at incredibly low valuations in the early 1990s

Prior to setting up Hermitage, Browder was working as a management consultant and was tasked to help restructure a bus company in Poland in June 1990. Back then, the country had only recently exited the Soviet Union and was feeling its way around democracy. 

While in Poland for his restructuring project, Browder came to know of the country’s privatisation program, where formerly state-owned companies were now being owned by the private sector. These companies’ shares were trading on the Polish stock exchange for incredibly low valuations. In the book, Browder shared an example of one company he found with US$160 million in profit but a market capitalisation of only US$80 million. In other words, the company had a price-to-earnings ratio of just 0.5! Shortly after learning about the cheap valuations that Polish companies were trading at after they were privatised, Browder invested in a number of Polish stocks. This portfolio went on to increase in value by almost 10 times over a year or so.

Russian companies were available for incredibly low valuations throughout the 1990s

The Soviet Union’s collapse in 1991 meant that Russia, like Poland, was thrust into a capitalistic regime in the early 1990s. It was a chaotic time for Russia’s financial markets, so much so that even by the mid- and late-1990s, Browder was able to learn about Russian stocks that had incredibly low valuations. 

One example came in the early 1990s, from a component of Russia’s own privatisation program where formerly state-owned companies had their ownership transferred to the private sector. The component was known as voucher privatisation, where the Russian government gave one privatisation certificate to each Russian citizen. Back then, there were around 150 million citizens, so there were around 150 million certificates. These certificates, which were free to purchase by anybody – including foreigners – collectively represented 30% ownership of nearly all Russian companies. But their market price was only US$20 per certificate, which meant that a 30% stake in all Russian companies could be bought for just US$10 billion ($20 per certificate multiplied by 150 million certificates). This was significantly lower than Russia’s economic output; back then, Russia accounted for 24% of global natural gas production, 9% of oil production, and 6.6% of steel production, for example. The voucher privatisation gave such low valuations to Russian companies because it was dysfunctional. Here’s why the market price for each certificate was only US$20:

• After living for decades under communism, the general Russian population had no concept of stocks or company ownership. As a result, individuals were happy to trade the privatisation certificates for a few dollars’ worth of goods.
• There were people who bought these certificates in villages and sold them for US$12 apiece in small batches to consolidators.
• The consolidators, in turn, packaged these small batches of certificates into larger packages that consisted of a few thousand certificates each and sold them to dealers for a price equivalent to US$18 per certificate.
• The dealers would further consolidate the packages into bundles of 25,000 certificates each. These bundles would then be sold for a per-certificate price of US$20.

Adding to the dysfunction was the way the certificates were then used to exchange for shares in Russian companies. Owners of the certificates had to participate in weird voucher auctions. Browder wrote:

“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 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 rumoured to have been behind the closure of the airport the night before their voucher auction. Another oil company supposedly put up a roadblock of burning tyres on the day of their auction to prevent people from participating. Because these auctions were so bizarre and hard to analyse, 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.”

At the time these voucher auctions were taking place, Browder was working for the investment bank Solomon Brothers and was investing US$25 million of the bank’s capital in these auctions. Through them, he turned the US$25 million portfolio into US$125 million in short order.

Another example of a low-valuation situation Browder discovered involved a company named MNPZ. This was in the mid-1990s, and he had already started Hermitage. At the time, publicly-available information on listed Russian companies was not available and investors had to speak to company officials to obtain data. During a meeting with a representative of MNPZ, Browder found that the company’s preferred shares were entitled to dividends amounting to 40% of the company’s profit whereas the ordinary shares had no such privilege. There were no other major differences between the two types of shares. But amazingly, MNPZ’s preferred shares were trading at a 95% discount to the ordinary shares. Even more incredibly, Browder soon realised that there were many other Russian companies with ordinary shares that were trading at discounts of 90% or more to their ordinary shares.

In yet another instance of low valuations that were available among Russian stocks, Browder came across an unknown oil company called Sidanco, which had six billion barrels of oil reserves. This was in August 1996. He was offered an opportunity by a broker to buy a 4% stake in Sidanco for US$36.6 million, a price which valued the whole company at US$915 million.

But as he studied Sidanco, Browder realised that the company was effectively trading at US$0.15 per barrel of oil reserves, at a time when the market price for oil was US$20 per barrel. Even more interestingly, there was a more widely known oil company in Russia at the time called Lukoil. Both Sidanco and Lukoil had near-identical assets and financial characteristics and the only difference was that Lukoil had significant research-coverage from brokerage firms whereas Sidanco had none. As a result, Sidanco was six times cheaper than Lukoil. Browder decided to invest in Sidanco’s shares. The company’s stock price did not move for many months after Browder’s investment – 96% of Sidanco’s shares were controlled by management, so there was very little trading of the shares. But in October 1997, BP bought 10% of management’s Sidanco shares at a price 600% higher than what Browder had paid and he made a killing.

My last example of the bargains that Browder found in Russia was the oil & gas company, Gazprom. Browder started to invest in Gazprom in the late 1990s. Through his research, he found that Gazprom was trading at a 99.7% discount to Western oil & gas companies. At the time, Gazprom had a market value of US$12 billion, but yet had hydrocarbon reserves that were eight times that of ExxonMobil’s and 12 times that of BP’s.  There was a huge discount because of investors’ perception that Gazprom’s managers were stealing all of the company’s assets. But Browder realised this perception was wrong.

Yes, Gazprom’s managers were egregiously stealing the company’s assets (more on this in the “The oligarchs were incredibly brazen with the way they mistreated minority shareholders” section below). But only 10% of the company’s assets were misappropriated by the company’s management team. Browder started a shareholder activism campaign against Gazprom’s management team by sending his research findings to major Western news outlets. The subsequent media coverage on Gazprom was heavy and this led to public outroar within Russia. Initial investigations on Gazprom’s management by Russian authorities and auditors concluded that there were no wrongdoings. But Russia’s then-president, Vladimir Putin, eventually fired Gazprom’s CEO, Rem Vyakhirev. A new CEO was installed, who promised to secure Gazprom’s remaining assets and recover what the previous managers stole. Gazprom’s stock price rocketed in response and by 2005, was up 100 times what Hermitage initially paid.  

Russia’s voucher privatisation was ripe for abuse

As I mentioned earlier, Russia’s voucher privatisation program in the early 1990s was riddled with problems and I shared excerpts from Browder’s book showing how the managers of some Russian companies were gaming the system. 

But the biggest problem for Russia was that voucher privatisation – and the massive room for abuse that the program had – led to the emergence of the oligarchs in the early- and mid-1990s. The oligarchs were a group of around 20 individuals who controlled nearly 40% of Russia’s economy while the general population was mired in poverty.

The oligarchs were incredibly brazen with the way they mistreated minority shareholders

Sidanco was one of Browder’s earlier victories investing in the Russian stock market. But the company was also the source of one of his earliest conflicts with the oligarchs. When Browder invested in Sidanco, it was being led by an oligarch named Vladimir Potanin. Shortly after BP bought 10% of Potanin’s Sidanco shares – the event which helped lift Browder’s investment in Sidanco by 600% in value – Potanin wanted Sidanco to nearly triple its share count by issuing new shares.

The problem for Browder was that the new shares would be issued at nearly 95% lower than the market price, and Browder and his partners were not allowed to participate. This meant that Browder and his partners’ original stake in Sidanco would be diluted by nearly two-thirds. When Browder met with Potanin’s lawyers, they openly said that his intention was simple: Potanin wanted to inflict financial pain on Browder. Here’s an excerpt from the book:

“It was Leonid Rozhetskin, a thirty-one-year-old Russian-born, Ivy League educated lawyer whom I’d met on a few occasions (and who would, a decade later, be murdered in Jurmula, Latvia, after a spectacular falling out with various people he did business with). Leonid, who’d clearly watched the film Wall Street one too many times, had slicked-back, Gordon Gekko-styled hair and sported red braces over a bespoke, monogrammed, button-down shirt.

He took the chair at the head of the table and laced his fingers over one knee. ‘I’m sorry Boris couldn’t make it,’ he said in lightly accented English. ‘He’s busy.’

‘I am too.’

‘I’m sure you are. What brings you here today?’

‘You know what, Leonid. I’m here to talk about Sidanco.’

‘Yes. What about it?’

‘If this dilution goes forward, it’s going to cost me and my investors – including Edmond Safra – eighty-seven million dollars.’

‘Yes, we know. That’s the intention, Bill.’

‘What?’

‘That’s the intention,’ he repeated matter-of-factly.

‘You’re deliberately trying to screw us?’

He blinked. ‘Yes.’

‘But how can you do this? It’s illegal!’

He recoiled slightly. ‘This is Russia. Do you think we worry about these types of things?’

I thought of all my clients. I thought of Edmond. I couldn’t believe this. I shifted in my seat. ‘Leonid, you may be fucking me over, but some of the biggest names on Wall Street are invested with me. The pebble may drop here, but the ripples go everywhere.’

‘Bill, we’re not worried about that.’ 

Browder was not cowed by Potanin. He came up with a plan to thwart the oligarch. First, he contacted Potanin’s Western business partners to warn them about the scheme. Browder hoped that these partners would pressure Potanin to give up. This failed, which led to the second part of Browder’s plan, which was to tap on Western media outlets to share his predicament and tussle with the oligarch. There was fiery media coverage, but Potanin refused to back down. Browder then enacted the third part of his plan. He filed official complaints with Russia’s financial markets regulator about Potanin’s abuse of minority shareholders. This worked, as the regulator stepped in to prevent Potanin from going through with the dilutive share issue. It was not an easy fight for Browder as his personal safety was at risk. During his conflict with Potanin, Browder was protected by a convoy of over a dozen heavily-armed bodyguards at all times. 

Coming to Gazprom, a prominent example of how management stole from the company was Sibneftegaz, a subsidiary producing natural gas in Siberia. Sibneftegaz’s assets included licenses for a gas field that contained 1.6 billion barrels of oil equivalent in 1998. Based on conservative estimates on the value of Sibneftegaz’s assets, the subsidiary had a value of around US$530 million. But 53% of Sibneftegaz was sold to a group of buyers for only US$1.3 million. These buyers included Gennady Vyakhirev and his family (Gennady is the brother of Gazprom’s then-CEO, Rem Vyakhirev; Rem was fired by Vladimir Putin after Browder’s successful shareholder activism campaign). Altogether, Browder’s research unearthed a total of seven blatantly dishonest asset transfers at Gazprom under the watch of Rem, and the transfers amounted to around 10% of the company’s total assets.

The sheer lawless-ness of the Russian authorities and how dangerous they can be

After Browder’s successful shareholder activism campaign at Gazprom, he went after more oligarchs, exposing the corruption and unsavoury actions taking place at their respective companies. These companies included Russia’s national electric company UES, and the country’s national savings bank, Sberbank.

In each of Browder’s campaigns, Vladimir Putin’s government would step in and clean up the abuses. Because of this, Russia’s oligarchs dared not harm Browder, even though people could be easily murdered in Russia for a lot less. They thought he was working in concert with Putin. But the reality was that Putin was taking advantage of Browder’s work to take down his own enemies – the oligarchs. The situation began to change in the early 2000s when Mikhail Khordovkorsky, then Russia’s richest oligarch, was arrested and jailed by Putin. Browder wrote:

“After Khodorkovsky was found guilty, most of Russia’s oligarchs went one by one to Putin and said, ‘Vladimir Vladimirovich, what can I do to make sure I won’t end up sitting in a cage?’

I wasn’t there, so I’m only speculating, but I imagine Putin’s response was something like this: ‘Fifty per cent.’

Not 50 per cent to the government or 50 per cent to the presidential administration, but 50 per cent to Vladimir Putin. I don’t know this for sure. It could have been 30 per cent or 70 per cent or some other arrangement. What I do know for sure was that after Khordovkorsy’s conviction, my interest and Putin’s were no longer aligned. He had made the oligarchs his ‘bitches’, consolidated his power and, by many estimates, become the richest man in the world. 

Unfortunately, I wasn’t paying enough attention to see that Putin and I were on a collision course. After Khodorkovsky’s arrest and conviction I didn’t alter my behaviour at all. I carried on exactly as before – naming and shaming Russian oligarchs. There was a difference this time, though. Now, instead of going after Putin’s enemies, I was going after Putin’s own economic interests.

The increasing misalignment of Putin and Browder’s interests came to a head in 2005 when Browder was denied entry to Russia on the grounds that he was a threat to the country’s national security. Browder was concerned about Hermitage’s employees and assets after he was exiled from Russia. While working out of London, Browder successfully sold all of Hermitage’s Russian stocks and transferred his firm’s investment capital out of Russia by early-2006. At the same time, he also managed to get Hermitage’s employees out of Russia safely. 

The threats to the security of Hermitage’s people were grave. Shortly after Browder’s expulsion, one of his close employees, Vadim, was contacted in early-2006 by a man named Aslan. Aslan identified himself as an employee of the Russian government and the Hermitage circle surmised that he was probably with the FSB, Russia’s secret police. Aslan claimed that there was a power struggle within Russia’s government and that he was in conflict with the group that was targeting Hermitage. He also told Vadim that the FSB was responsible for Browder’s problems, that the authorities were after Hermitage’s assets, and that Vadim would soon be arrested. Here’s a chilling excerpt from Browder about Vadim after his encounter with Aslan:

“I saw things differently, and I implored Vadim to talk to Vladimir Pastukhov, a Moscow lawyer Hermitage had used as outside counsel over the years. Vladimir was the wisest man I knew and like no one else I’d ever met. He was nearly blind, and the Coke-bottle glasses he wore made him look like a scribe from a Dickens novel. Because of his disability however, Vladimir’s mind was sharper, bigger and more well-rounded than that of anyone else I’ve ever known. He had a rare gift: the ability to read any complex situation to the deepest level and the smallest detail. He was like a great chess player, able to anticipate an opponent’s every move not merely before it was made but also before his opponent even realised it was available. 

Even though Vadim wouldn’t leave, he did agree to see Vladimir. When Vladimir opened the door to his flat just before midnight, Vadim put a finger to his lips, indicating that they shouldn’t talk – just in case Vladimir’s apartment was bugged. He stepped aside and Vadim entered. They made their way in silence to Vladimir’s computer. Vadim sat and started to type. 

I’ve been warned by somebody in the government that I’m going to be arrested. Can they do that?

Vladimir took a turn at the keyboard. Are you asking me as a lawyer, or as a friend?

Both.

As a lawyer, no. There are no grounds to arrest you. As a friend, yes. Absolutely. They can do anything.

Should I leave?

How credible is your source?

Very. I think.

Then you should leave.

When?

Right away.”

Browder’s problems did not stop even after Hermitage had no significant investment interests in Russia. Around the middle of 2007, Hermitage’s office in Russia was raided by 25 Russian plainclothes police, led by Artem Kuznetsov. This was the same man who contacted Browder in February 2007, after Browder had unsuccessfully tried to appeal for a Russian visa through many diplomatic routes. Kuznetsov was with the Interior Ministry and wanted to see Browder or his associates in person to explain the entire situation concerning Hermitage and Browder. But as most of Hermitage’s people were not in Russia, a physical meeting was impossible. Browder figured that something was wrong: 

“This wasn’t a normal inquiry. In a legitimate investigation Russian officials always sent their questions in writing. What became apparent to me from my decade in Russia was that when an official asks to meet informally, it means only one thing: they want a bribe. In the many instances where officials had tried to shake me down, I’d uniformly ignored them and they always went away.

Kuznetsov finished the conversation by saying, ‘The sooner you answer these questions, the sooner your problems will disappear.’”

While Kuznetsov was raiding Hermitage’s Russian office in the middle of 2007, a group of 25 Russian policemen were simultaneously raiding the office of Hermitage’s law firm, Firestone Duncan, without a valid warrant. During the raid, the Russian police confiscated Firestone Duncan’s client files, computers, servers, and corporate stamps and seals that belonged to clients. The police were also brutal. When one of Firestone Duncan’s lawyers, Maxim, said that the warrant was not valid, he was beaten up badly and had to go to the hospital. The police also threatened Maxim – if he filed a complaint, they would accuse him of pulling a knife and jail him.

Shortly after the raids on Hermitage and Firestone Duncan’s offices happened, Browder engaged Sergei Magnitsky for help with investigations. Magnitsky was from Firestone Duncan and Browder considered him to be the best tax lawyer in Moscow. In the fourth quarter of 2007, Browder and his associates realised that the Russian police had raided Firestone Duncan with the intention of stealing ownership of Hermitage’s investment holding companies. In Russia, a company’s owners can be changed illegally without the actual owners knowing if the thief has the company’s original seals, certificates of ownership, and registration files. These happened to be the items the Russian police had confiscated from Firestone Duncan. The ownership of three Hermitage investment companies ended up being re-registered to a company named Pluton that was owned by Viktor Markelov, a person convicted for manslaughter in 2001. Backdated contracts were also forged to show that one of the investment companies – Mahaon – owed US$71 million to a shell company that had never done business with Hermitage.

It was not until June 2008 when Magnitsky finally worked out the whole scam. The people who stole Hermitage’s investment companies had opened accounts at two obscure banks: Universal Savings Bank (USB) and Intercommerz Bank (IB), with a combined capital of only US$13.5 million. Their small size meant that any large movement of capital within them was noticeable on the website of Russia’s central bank. Magnitsky saw that USB and IB received deposits of US$97 million and US$147 million, respectively, in December 2007, shortly after Hermitage’s stolen investment companies opened accounts with these banks.

Magnitsky realised that the deposits were nearly identical to what Hermitage’s investment companies paid in taxes in 2006. Further light bulbs went on. The US$71 million Mahaon supposedly owed a shell company was exactly the same as its profit in 2006. Parfenion, another of Hermitage’s stolen investment companies, was slapped with a US$581 million judgement against it, the same amount as its profit in 2006. In all, corrupt Russian officials had cooked up US$973 million of fake judgments against Hermitage to offset US$973 million in real profits. Piecing all the information together, Magnitsky discovered that the bank accounts opened by Hermitage’s stolen investment companies had collectively received deposits of US$230 million, a sum identical to what these companies had paid in taxes in 2006. Corrupt Russian officials had stolen Russian taxpayers’ money, and they wanted to frame Browder and Hermitage for the crime.

After working out the intricacies of the scam against Hermitage, in July 2008 , Browder and his associates started to find ways to indict the corrupt officials. They filed detailed complaints about the tax fraud to Russia’s law enforcement agencies and regulatory bodies, and also contacted the media. But this caused a backlash, so much so that two other lawyers engaged by Hermitage to help with investigations – Vladimir Pastukhov and Eduard Khayretdinov – had to flee Russia. In particular, Khayretdinov’s experience was terrifying. On 23 August 2008, he disappeared under the radar – going so far as to remove the battery of his mobile phone – so that Russian officials could not locate him. Khayretdinov hid for a few months in a cabin in a Russian forest, using a satellite phone and depending on a generator for electricity. It was only on 18 October 2008 that he managed to escape Russia. Browder described Khayretdinov’s harrowing journey:

“The man leaned forward. ‘Because Eduard, I wanted to tell you face to face – you must leave Russia. You’re in danger of being killed. These people who are after you will stop at nothing.’ This shook Eduard to the core. After this meeting, he called Mikhail and said, ‘I need to get out of Russia. Can you help?’

‘I’ll do what I can,’ Mikhail said. Since Russia is such a decentralised country, the power of an influential businessman in some areas could rival that of the Moscow Interior Ministry. Mikhail was one of the most important businessmen in the region, and Eduard had no choice but to put his faith in Mikhail’s influence. He had to hope that it would help him navigate the security and immigration checkpoints that every traveller had to pass through on their way out of the country.

Mikhail arranged to have a local fixer escort Eduard through the airport all the way to the gate. Eduard asked over and over if this fixer would be able to get the border agents to let him pass. Mikhail just told him not to worry. Of course, Eduard couldn’t help but worry.

On 18 October 2008, at 10.00am, Eduard went to the airport and was met by the fixer, a short man with friendly eyes in a well-tailored grey suit. Eduard already had a UK visa, so he went to the Asiana ticket desk and bought a round-trip economy ticket to London via Seoul. Eduard checked in and waited until an hour before the flight to go through security and passport control. When he couldn’t wait any longer, he and the fixer walked towards security.

They walked straight to the front of the security line and went through. The fixer stayed with Eduard the whole time, nodding and winking to the security people, and even shaking a few hands. Eduard put his bags on the scanning belt, presented his boarding pass and went through the metal detector.

They then moved towards passport control, and when they reached the immigration booth, the fixer shook hands with the border guard and they exchanged pleasantries. The guard then took Eduard’s passport. He placed it on his desk, looked at Eduard, looked back to the fixer, found a blank spot in the passport, slammed his stamp on a red-ink pad and punched the stamp on to the paper. He didn’t even bother to look at his computer. He closed the passport and handed it back. Eduard’s eyes met those of the fixer. He winked. ‘Thank you,’ Eduard said. He turned and hurried to his gate. He had only a few minutes until the doors closed. He made the flight, and the plane took off. Not until two hours later, when Eduard could see that the plane was flying over the Sea of Japan and was therefore out of Russian airspace, did he finally, after all these weeks, feel at ease.

He was out.”

Around the time Vladimir Pastukhov fled Russia and Eduard Khayretdinov was on the run in the country, Browder also desperately wanted Sergei Magnitsky to leave. But Magnitsky refused. He still believed in the rule of law in Russia, and wanted to punish the corrupt officials who stole from his countrymen. Browder wrote:

“After this, Vadim tried to convince Sergei to leave, but Sergei steadfastly refused. He insisted that nothing would happen to him because he had done nothing wrong. He was also indignant that these people had stolen so much money from his country. He was so adamant and believed so faithfully in the law that, on 7 October he actually returned to the Russian State Investigative Committee to give a second sworn witness statement. Once again, he sought to use procedure to insert more evidence into the official record, and this time he provided a number of additional details about the fraud and who was behind it.

This was a bold move. It was also a worrying one. While I couldn’t help but be impressed by Sergei’s determination and integrity, given what they had tried with Eduard and Vladimir, I was terrified that they would just detain him on the spot. Remarkably, they didn’t.”

Unfortunately, Magnitsky was eventually arrested on 24 November 2008 by a team of officers led by Artem Kuznetsov. Two days later, Magnitsky appeared in court for his bail hearing. An investigator from the Interior Ministry, Oleg Silchenko, claimed that Magnitsky was a flight risk. He lied that Magnitsky had bought a plane ticket to Kiev and had applied for a UK visa. The judge wouldn’t hear Magnitsky’s defence and said, ‘I have no reason to doubt the information provided from investigative bodies.’ Ultimately, Magnitsky was denied bail and would be held in Russian prisons – without trial – for 358 days before his death.

While Magnitsky was detained, Browder was desperately seeking help for him. In early-2009, Browder got in touch with Sabine Leutheusser-Schnarrenberger, a German MP and former justice minister. At the time, she was recently appointed by the Council of Europe to investigate Russia’s criminal justice system. After meeting with Browder, Leutheusser-Schnarrenberger agreed to report on Magnitsky’s case. In April 2009, she wanted to physically meet with Russian law enforcement agencies but they rebuffed her. Instead, they replied to her in writing with lies that would be hilarious if only they did not concern the safety of a human being. Browder recounted:

“Her first question was simply, ‘Why was Sergei Magnitsky arrested?’ The answer: ‘Sergei Magnitsky was not arrested.’

Of course he was arrested. He was in their prison. I couldn’t imagine what the Russians were thinking when they said this to her. 

Her second question was ‘Why was he arrested by Interior Ministry officer Kuznetsov, whom he testified against before his arrest?’ She got an equally ridiculous answer. ‘The officer with such a name doesn’t work in the Moscow Interior Ministry.’ We had proof that Kuznetsov worked in the Interior Ministry for many years! They must have thought Leutheusser-Schnarrenberger was stupid.

Nearly all the other answers were similarly absurd and untrue. Leutheusser-Schnarrenberger would put all these lies and absurdities in her final report, but it wouldn’t be ready until August and Sergei didn’t have the luxury of time.”

After Magnitsky died, Browder and his team were determined to seek justice for their fallen friend. While doing so, they came to know Alexander Perepilichnyy in August 2010, who was residing in London at the time. He provided valuable information to Browder and his team regarding the financial transactions of two of the Russian officials who were involved in the tax fraud against Hermitage, Vladlen and Olga Stepanova. Perepilichnyy was a former private banker in Russia and the Stepanovas were his clients. As their banker, Perepilichnyy helped the Stepanovas to invest their money but the couple incurred losses in 2008 when the markets crashed. The Stepanovas were unwilling to accept the losses and wanted Perepilichnyy to cover their hole, which he refused. Olga Stepanova was then the head of the tax office in Russia and subsequently abused her power to pursue Perepilichnyy for tax-evasion, causing him to flee the country. In November 2012, Perepilichnyy died one day while jogging near his London home. The initial post-mortem had no conclusive findings – his cause of death was a mystery. Given the entire chain of events leading up to Perepilichnyy’s sudden death, Browder was deeply concerned that the Russian authorities had an assassin on the loose in the UK.

And even when Red Notice was published in 2015, a few years after the deaths of Magnitsky and Perepilichnyy, Browder still feared for his life. But he sees the book as a form of protection for himself. He warned:

“I have to assume that there is a very real chance that Putin or members of his regime will have me killed some day. Like anyone else, I have no death wish and I have no intention of letting them kill me. I can’t mention most of the countermeasures I take, but I will mention one: this book. If I’m killed, you will know who did it. When my enemies read this book, they will know that you know.”

Sergei Magnitsky’s immense bravery in the face of impossible cruelty by corrupt Russian officials

Magnitsky had to put up with atrocious conditions while he was detained by Russian authorities. For example, he was in a cell where the lights were on 24 hours a day to deprive him of sleep. One cell he was moved to had choked sewage that was so bad he had to climb onto his bed and chair. Oleg Silchenko also refused to allow Magnitsky to have any contact with his family – this was psychologically painful because Magnitsky was a family man. Browder wrote:

“When Sergei applied for his wife and mother to visit, Silchenko replied, ‘I reject your application. It’s not expedient for the investigation.’ Sergei then applied for permission to speak to his eight-year-old son on the phone. ‘Your request is denied,’ Silcheko said. ‘Your son is too young to have a phone conversation.’ Silchenko also refused a request for Sergei’s aunt to visit because Sergei ‘couldn’t prove’ she was a relative.

The purpose of everything Silchenko did was simple: to compel Sergei to retract his testimony against Kuznetsov and Karpov. Yet Sergei never would, and every time he refused Silchenko made Sergei’s living conditions increasingly worse, further isolating him from the life he knew and the freedom he had so recently enjoyed.”

What was even more despicable was the fact that Silchenko and his conspirators cruelly denied Magnitsky any healthcare even when he was gravely ill. By June 2009, while detained in Matrosskaya Tishina, a Russian detention facility, Magnitsky was diagnosed with pancreatitis, gallstones, and cholecystitis, and was scheduled for possible surgery on 1 August 2009. But a week before the date, Silchenko moved Magnitsky to Butyrka, a maximum-security prison that had no medical facilities capable of treating him. While at Butyrka, Magnitsky was repeatedly denied any form of medical care. Browder wrote heartbreakingly:

“It was now clear that the authorities were deliberately withholding medical attention from Sergei. They were using illnesses he had contracted in detention as a cudgel against him. They knew that gallstones were one of the most painful conditions anyone could suffer from. In the West, you might last two hours before you crawl to casualty, where the doctors will immediately give you a dose of morphine before treating you. Sergei though, had to deal with untreated gallstones for four months without any painkillers. What he had to endure was unimaginable.

Sergei and his lawyers wrote more than twenty requests to every branch of the penal, law-enforcement and judicial systems of Russia, desperately begging for medical attention. Most of these petitions were ignored, but the replies he received were shocking.

Major Oleg Silchenko wrote, ‘I deny in full the request for a medical examination.’ A Tverskoi District Court judge, Aleksey Krivoruchko, replied, ‘Your request to review complaints about withholding of medical care and cruel treatment is denied.’ Andrei Pechegin from the Prosecutor’s Office replied, ‘There’s no reason for the prosector to intervene.’ Judge Yelena Stashina, one of the judges who ordered Sergei’s continued detention, said, ‘I rule that your request to review the medical records and conditions of detention is irrelevant.”

But through it all, Magnitsky never gave in. He refused to cover up for the perpetrators of the tax fraud he had uncovered. Browder detailed:

“From inside his prison cell, Sergei was also bravely trying to explain the truth even after all the torture he had been subjected to.

On 14 October 2009, he submitted a formal twelve-page testimony to the Interior Ministry in which he further documented the role of officials in the financial fraud and the subsequent cover-up. He provided names, dates, and locations, and left nothing to the imagination. At the end, he wrote, ‘I believe all members of the investigation team are acting as contractors under someone’s criminal order.’

It was a remarkable document, and he was incredibly brave to have filed it. It’s hard to describe to someone who doesn’t know Russia just how dangerous it was for him to do this. People in Russia are regularly killed for saying much less. That Sergei was saying it from jail, where he was at the mercy of the people who had put him there and whom he had testified against, showed how determined he was to expose the rot in the Russian law enforcement agencies and go after his persecutors.”

On 12 November 2009, Magnitsky was scheduled to appear in court for another hearing on his detention. He wrote more than a dozen complaints to be read in court, only for the judge, Yelena Stashina, to reject them, at times cutting him off before he could even finish reading. The hearing’s verdict was to simply extend Magnitsky’s detention. Then in the same night, Browder received a distressing voice message on his mobile: It was a two-minute recording of a man wailing in pain while being brutally beaten up. 

Around 16 November 2009, while still being held in Butyrka, Magnitsky was sent to Matrosskaya Tishina, on the pretext that he would get the necessary medical care there (remember, Magnitsky was still riddled with disease). But when Magnitsky reached his destination, he was handcuffed to a bedrail in an isolation cell and beaten to death by eight prison guards. Browder recounted:

“‘Keeping me in detention,’ Sergei had written in his prison diary, ‘has nothing to do with the lawful purpose of detention. It is a punishment, imposed merely for the fact that I defended the interests of my client and the interests of the Russian state.’

Sergei Magnitsky was killed for his ideals. He was killed because he believed in the law. He was killed because he loved his people, and because he loved Russia. He was thirty-seven years old.”

The Russian authorities’ cruelty did not end even with Magnitsky’s death. A few hours after learning of Magnitsky’s passing, Browder and his team contacted the media and sent them a press release and a 40-page document handwritten by Magnitsky that detailed his entire ordeal. Major news outlets picked up the story and contacted Russian authorities for comments. Browder described the atrocities that happened next: 

“The press officer at the Interior Ministry was a plump blonde woman in her early forties named Irina Dudukina… According to her, Sergie hadn’t died of pancreonecrosis and toxic shock as the prison official had told Natalia [Magnitsky’s mother] earlier, but rather of ‘heart failure, with no signs of violence’. 

Later that day, Dudukin went further, posting an official statement on the Interior Ministry’s website saying, ‘There has not been a single complaint from Magnitsky about his health in the criminal case file’ and ‘his sudden death was a shock for the investigators.’…

…Dudukina also lied about the time and place of Sergei’s death. She claimed that Sergei died at 9.50 p.m. on a bed in Matrosskaya Tishina’s casualty department as doctors tried to resuscitate him. This was directly contradicted by the civilian doctor who was first on the scene, who said that Sergei had died around 9:00 p.m. on the floor of an isolation cell…

…Two days later, Natalia asked for Sergei’s body to be released so the family could conduct their own autopsy. This was also denied on the grounds that ‘there is no reason to doubt the results of the state autopsy.’

Later that day, Natalia went to Morgue No.11. When she arrived, she was told that Sergei’s body wasn’t being stored in a refrigeration unit because the morgue had too many corpses, and that his body would decompose if he wasn’t buried immediately. When Natalia asked whether Sergei’s body could be released to the family so they could conduct a religious service with an open casket, the official categorically refused: ‘The corpse will only be released to the cemetery.’“

Justice prevails

In his quest for justice for Magnitsky, Browder sought help from Western governments. In March 2010, he met an American politician named Kyle Parker. Parker knew about Magnitsky’s case even before his death; while Magnitsky was detained in jail, Browder had also sought help from the US government and Parker was the official handling the issue. Although Parker had not done much to push for a solution back then, his reaction to the March 2010 meeting with Browder was different – this time, Parker was deeply moved by Magnitsky’s tragic death. Eventually, both Parker and Browder would collaborate closely to push for the Magnitsky Act.

Under the Magnitsky Act, which was signed into law in 2012 by then-US-president Barack Obama, all the Russian officials who were involved with Magnitsky’s death would be barred from entering the USA or accessing its banking system. Browder and Parker had to endure an arduous journey – with heavy politicking – to see the Magnitsky Act become law. In Red Notice’s final paragraph, Browder described how triumphant he felt when Sergei Magnitsky and his family were able to receive some measure of justice, and that his financial successes could never match that:

“Early in this book, I said that the feeling I got from buying a Polis stock that went up ten times was the best thing that ever happened to me in my career. But the feeling I had on that balcony in Brussels with Sergei’s widow and son, as we watched the largest lawmaking body in Europe recognize and condemn the injustices suffered by Sergei and his family, felt orders of magnitude better than any financial success I’ve ever had. If finding a ten bagger in the stock market was a highlight of my life before, there is no feeling as satisfying as getting some measure of justice in a highly unjust world.”  

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