By Steven Mufson
Washington Post Staff Writer
Thursday, July 13, 2006; D01

It speaks volumes about Russia that for most of the past decade the U.S.-born investor and financier William F. Browder was as welcome in Moscow as his grandfather Earl, longtime head of the Communist Party USA, was during the 1920s and '30s.

But in November, William Browder was turned away at the Moscow airport. Browder wasn't told why, but he says he believes he ran afoul of someone influential because of his outspoken criticism of Russian corporate governance. Since then, he's been unable to get a visa to return to Russia, even though his Hermitage Capital Management Ltd. has $4 billion invested in the country, making it the largest foreign institutional investor there.

Now, three leading U.S. senators -- presidential hopeful John McCain (R-Ariz.), Majority Leader Bill Frist (R-Tenn.) and Charles E. Schumer (D-N.Y.) -- have written a letter to President Bush urging him to make Browder's case an issue at the Group of Eight summit in St. Petersburg this week "to ensure that U.S. investments in Russia are secure." Although Browder is a British citizen now, the senators noted that U.S. citizens and institutions have more than $1 billion invested in his funds.

Russian President Vladimir Putin has been eager to use the G-8 meeting to highlight Russia's spot in the top tier of world economic powers. But Browder's case, the senators said, "reminds us that the path to a free society and an open market in Russia cannot be taken for granted," and they said Moscow "should either let Mr. Browder back into Russia or provide a credible explanation as to why it is denying entry to its largest foreign portfolio investor."

What makes Browder's case unusual, aside from his heritage, is that he's been -- and still is -- one of Putin's staunchest defenders. Even his own troubles haven't turned him bearish on Russia as a place to make money.

"I've always understood that Russia is a flawed country with arbitrary things," Browder said in a telephone interview this week from a hotel on the French Riviera. "That was the business opportunity. Because of the flaws in the country, the asset values were low. And in spite of the visa problem, if Russia today were compared with Russia 10 years ago, it is still a much better country."

"It's been on the transition from horrible to bad," he added.

Most observers see his visa battle as a measure of how bad. It has become a litmus test of how open Russia's political system is to criticism and how vulnerable foreign investors might be to corruption and capricious events.

"It's an extremely bad sign if he cannot go back," said Luigi Zingales, a professor of finance at the University of Chicago who has studied what he calls the "Browder effect" on Russian companies. "He was a force for good."

"The Russian economy is growing, so on the fear-greed continuum, people may be able to overcome something like this," said the manager of another U.S.-based fund with major investments in Russia, who spoke on condition of anonymity to protect his relationships there. "But it's yet another blot on Russia's continuing bad public relations."

A graduate of the University of Chicago (where his father taught mathematics) and Stanford School of Business, Browder joined Salomon Brothers Inc. in 1992 just as post-Soviet Russia was beginning privatization. The government had decided to hand out vouchers valued at about $30 each to every one of the 150 million Russians. Altogether, they were supposed to be exchangeable for 30 percent of Russia's state-owned industry, and they could be bought and sold without restrictions, even to foreigners.

"That meant that the entire Russian economy had a valuation of $10 billion, including . . . a third of the world's natural gas, 10 percent of world's oil, 10 percent of the world's aluminum and many other commodities," Browder recalled. "It was clear that this was an unprecedented investment opportunity."

By the end of 1993, he had convinced Salomon Brothers to invest $25 million of its own capital in Russia. By the middle of 1994, the investment was worth $125 million.

In 1996, Browder founded Hermitage Capital Management in partnership with Edmond Safra, a wealthy banker. Money invested then with Hermitage would have risen more than 24-fold by the end of last year, twice the rate of Russia's sizzling stock market.

Along the way, Browder has drawn attention to the lack of transparency and accountability in Russian companies. About five years ago, after buying a stake in OAO Gazprom, he publicized what he called "massive fraud" at the natural gas company. "People were stealing a company the size of BP out of Gazprom," he said. About eight months later, Gazprom's chief executive was fired. The new chief executive stopped the fraud and recovered most of what had been stolen, Browder says.

After investing in the state electricity firm, Browder shed light on a plan by company managers to sell much of the assets at non-transparent auctions to their friends at very low prices. He organized a shareholder meeting to change the company charter and stop the sale, but he could garner support from only 15 percent of the shareholders. But, he recounts, he got a call from the Kremlin because the Russian government held 51 percent of the shares. For eight weeks, Putin's chief of staff met every Wednesday night with one of Browder's partners and rewrote the company's charter.

"We've been very grateful for that kind of involvement from the government," Browder said. "It's not like they were looking after our interests, but our interests coincided with theirs."

It's not the kind of language his grandfather would have used. "Today it is the duty of all of us to help labor haul down the black flag of Wall Street piracy, which flies over our basic industries," his grandfather said while campaigning for president in 1936. Earl Browder died when William was only 9, and the younger Browder says his orientation is clearly different. "I'm a capitalist; he was a communist. But both of us were fighting against the injustices in our face. In his case, it was about injustice to workers, and in my case, it's about injustice to shareholders."

Although his case has become another question mark about rights and the rule of law in Russia, Browder hasn't endeared himself to the people who lament the decline in freedoms under Putin. Browder shows little sympathy for the jailed Mikhail Khodorkovsky, the former chairman of oil giant OAO Yukos and an outspoken critic of Putin. Browder says that since Khodorkovsky's arrest on tax-evasion charges, tax compliance among companies has increased sharply.

On Gazprom's controversial decision to cut gas supplies to Ukraine on Jan. 1, Browder explains it as a matter of a price dispute. "Should I, as a shareholder of Gazprom, be subsidizing Ukraine?" he said. Although the cutoff prompted European anxiety about Russia using gas supplies for political ends, Browder said that "it wasn't political because it turns out they were also squeezing the Belarusans, who are their friends."

"The problem with oil and gas is that it's all located in bad places," he continues. "In a world of bad places, Russia falls in a better place than a lot of the Middle Eastern or African countries."

Many people wonder whether Browder's huge stake in Russian companies explains his continued reluctance to criticize Putin and the state of Russia today.

"I don't think he's an angel. He looks after his own interests," Zingales said. "But Adam Smith was right: It's not because of the benevolence of the baker that you get fresh bread in the morning. In other words, it's the market that makes incentives work for the social welfare. In promoting his own interests, Browder promotes better corporate governance in Russia and better governance in general."