Around 1992 Russia privatized state companies. The government gave each citizen one voucher they could bring to an exchange for a share of that day’s company. A simple plan – until humans get involved.
Not all Russians wanted to own shares. Local markets emerged. A small fish bought all the vouchers in one neighborhood, a medium fish bought all the neighborhoods in a town, a large fish bought all the towns in a region. Eventually sacks of vouchers made it to the national exchanges.
Though unintended, these mini-markets worked. Free economies FTW. So far so good.
Each exchange had a schedule. A modern Monday might be 1,000 shares of Apple at nine, 200 of IBM at ten, 500 of Ford at eleven and so on. If only one person showed up Monday at nine they would get all the shares for their vouchers. It was the market mechanism at work. It’s cheaper (more valuable) to not bid against someone in an auction. When one companies shares went up they shut down the airport the day before their voucher offering. Another company ignited a tire fire on train tracks leading in and out of town.
Insiders were insistent on owning their companies because the valuations were way off. By one estimate, the voucher privatization program valued the entire Russian economy at ten billion dollars, or one sixth the market cap of Walmart. If you could buy a legitimate twenty dollar Amazon gift card for one dollar would you? Rather, how many? This economic transition was called a katastroika. A combination of the catastrophe and perestroika – Gorbachev’s politics.
George H. W. Bush has his last year as president, Achy Breaky Heart finishes the year as the fifteenth most played song, and there’s money to be made in Russia.
“I went to someone in the investment management division,” Bill Browder writes in Red Notice, “expecting him to hug me since I was sharing the most joyous jaw dropping investment opportunity he would ever see. Instead he looked at me as if I was suggesting the firm should invest in Mars.”
Russian privatization was a huge opportunity. Everyone at Salomon Brothers missed it. Why? Incentives.
On Browder’s first day, his first manager explained the system: generate five times your salary or you’re done.
“Nobody at Salomon Brothers could divorce themselves from their own narrow mindset. Perhaps if I had been more subtle and clever I could have pierced their myopia, but I wasn’t, I had no political skills. I presented my idea for weeks and weeks hoping that through repetition I would get through to someone.”
Incentives and culture form what people do when they’re not told what to do.
At the London office the formula – which worked wonderfully – was fees through consulting.
Eventually Browder’s repetition got through and he got a call from Bobby Ludwig in New York. Two days after a phone call with Ludwig, Browder pitched the idea. An hour later Ludwig delivered twenty-five million dollars and marching orders. At the New York office the formula for Bobby Ludwig was to make money.
When Browder returned to London he had to switch departments but couldn’t find a desk. “Bill, why are you bothering me with this?” Ludwig asked when Browder appealed to him, “If they won’t give you a desk just work from home, I don’t care where you work. This is about investing in Russia, not desks.”
There’s this idea that to understand what’s going on in the world someone has to know the history or stay on top of things. But sometimes we can come back to first principles. We’re all humans with incentives. Also, the Red Notice audiobook performance is amazing.