Red Notice: A True Story of High Finance, Murder, and One Man's Fight for Justice (15 page)

“Well, I guess we’ll just have to go and get the information ourselves, then,” I said.

Going after information in Russia was like hurtling down the rabbit hole. Ask a question, get a riddle. Track a lead, hit a wall. Nothing was self-evident or clear. After seventy years of KGB-instilled paranoia, Russians were careful to guard their information. Even inquiring after a person’s health could feel like asking someone to reveal a state secret, and I knew that asking about the condition of a company would prove exponentially more difficult.

I was undaunted, though. As I got started, I remembered that one of my classmates at Stanford ran a monthly trade magazine about oil and gas. Maybe he would have some information on Sidanco. I called him up, but instead of talking about Sidanco, he tried to get me to sign up for a subscription. “It’s only ten thousand dollars!” he said cheerfully.

I had no interest in subscribing. “That’s a little out of my price range.”

He laughed. “Tell you what, Bill. Since we were at Stanford together, I’ll send you some back issues for free.”

“Great. Thanks.”

Next, I turned to the pile of business cards on my desk. If I’d been a London investment banker, my Rolodex would have been bursting with embossed cards on thick stock. In Russia, my collection was humbler. Some were printed on cardboard. Others were orange or green or light blue. Some looked as if they’d been printed on a home computer. Two cards were stuck together because of cheap ink. Still, I went through them.

I peeled a couple of cards apart and discovered someone I’d forgotten: Dmitry Severov, a consultant at a Russian finance company. I’d met Dmitry while still at Salomon Brothers and remembered that he was in the business of advising Russian oil companies on how to get bank loans. I figured he would know something about Sidanco. I picked up the phone, called his office, and asked for a meeting. He didn’t seem to be a man in demand and readily agreed.

Dmitry’s office was in a residential apartment building on a quiet side street north of the Kremlin, which was one of the most desirable neighborhoods in Moscow. A single guard was sitting in a security booth at the entrance, smoking a cigarette, dressed in an all-black uniform. He could have passed for a Special Forces soldier were it not for his rubber sandals. Without even looking up, he waved me through to the elevator.

I pulled out the address Svetlana had written down and frowned. Dmitry’s office was located on the fifth-and-a-half floor. I had no idea what that meant. Did I take the elevator to the fifth floor and walk up, or the sixth and walk down?

A man brushed past me and hit the call button. The elevator was slow to arrive and was as narrow as a telephone booth. I had to squeeze in next to the man or risk waiting another ten minutes. He hit 5 and eyed me suspiciously. I looked at the floor and said nothing.

We exited the elevator and went our separate ways. I followed a trail of cigarette butts up a half flight of stairs. There, a round, elderly woman let me into the apartment and I wondered if she was Dmitry’s mother or his secretary. She told me he was having lunch and directed me to the kitchen.

“Sit! Sit!” he said when I entered, pushing aside a basket of gray bread and a glass jar full of sugar. I sat in a vinyl chair opposite him and tried not to watch as he sopped up his cabbage soup with the bread. “What can I do for you?” he asked between mouthfuls.

“I’m researching oil companies.”

“Good! You came to the right place.”

“Can you tell me anything about Sidanco?”

“Of course. I know everything about Sidanco.” He got up and left the kitchen, and in a moment he was back with a large spreadsheet. “What do you want to know?”

“How about their reserves, for a start.”

We looked through the spreadsheet together and he pointed to a column. According to his data, Sidanco had six billion barrels of oil reserves. By multiplying the price of the 4 percent block by twenty-five
I got the price of the whole company: $915 million. I divided that by the number of barrels of oil in the ground, which told me that Sidanco was trading at $0.15 per barrel of oil reserves in the ground, which was crazy because at the time the market price for a barrel of oil was $20.

I frowned. Something wasn’t right. If these numbers were even close to correct, Sidanco was cheap beyond belief.

“Unbelievable,” I said under my breath.

I thanked Dmitry and left. When I got back to the office, I had Clive figure out the valuation for Lukoil, the most widely followed Russian oil company. After hanging up with a broker, Clive passed me his calculation.

I stared at the figures for several seconds. “These can’t be right.”

“These are the numbers the broker gave me,” he said defensively.

What didn’t seem right was that Lukoil was trading at a price six times higher than that of Sidanco per barrel of oil reserves, yet they appeared to be comparable companies.

“Why would Lukoil’s valuation be so much higher?”

Clive narrowed his eyes. “Maybe there’s something wrong with Sidanco?”

“Maybe. But what if there isn’t? It really could just be cheaper.”

“That would be brilliant. But how can we know for sure?”

“We’re going to ask them. And if they won’t tell us, we’ll ask someone else until we figure it out.”

The following day, we began our investigation.

We started with Sidanco. Its offices were located in a former czar’s mansion on the western embankment of the Moscow River, not far from the British ambassador’s residence. Svetlana came with me. A pretty secretary with long blond hair and pencil-thin heels met us in reception and ushered us into a seventies-era conference room with wood-veneer sideboards and a faded velveteen sofa. She told us that a manager would be with us shortly.

We were made to wait for half an hour before an executive in the strategic development department entered the room. He carried himself
with the air of a board chairman who’d been shuttling between meetings all morning. He was tall and thin, in his early thirties, and already balding. He mumbled something in Russian, which I did not understand.

“He is sorry to keep you waiting,” Svetlana translated. “He asks what can he help you with?”

“Pozhalujsta,”
the man said.
“Chai?”

“He wants to know if you would like tea,” Svetlana said, awkwardly sitting on a leather chair between the two of us.

The man checked his watch. The clock was ticking. I turned down his offer of tea.

“Tell him I would like to know how large their oil reserves are,” I said. I already had a number, but I wanted to know if it was right.

He squirmed in his seat, as if he understood me, but waited for Svetlana to translate. He drew his lips in a tight smile, crossed one leg over his opposite knee, and launched into an explanation.

After a few minutes, he paused so Svetlana could speak. “He says the most important thing about oil reserves is a company’s drilling technique. He says Sidanco has the finest equipment and best engineers in the country.”

Before I could jump in, he held up his hand to shush me. He droned on, telling me about drilling, pipeline bottlenecks, and marketing subsidiaries, as Svetlana dutifully translated.

“He asks if that is all?” she said suddenly.

“Can you ask him about the oil reserves?”

“I already did,” she said, confused.

“But he didn’t answer. Ask him again.”

Svetlana turned back to him, her cheeks flushed. He leaned back and waited for her to finish. Then he nodded, as if he’d finally understood my question and was about to reveal everything.

He talked for a while longer. When I realized he wouldn’t pause for Svetlana to translate, I handed her a scrap of paper and a pen. She quickly started scribbling everything down. After five minutes, she glanced at me nervously to see if she should keep going. After ten minutes, she stopped writing.

Finally, he wrapped up his lecture and sat forward. He nodded for Svetlana to translate.

She looked at her notes. “He says the best oil in Russia comes from western Siberia—it is much better than the heavy oil coming from the central provinces of Tatarstan and Bashkortostan. He says—”

“Did he say how large the reserves are?” I asked, cutting her off.

“No.”

“Are you sure?”

“Yes.”

“Ask him again.”

Svetlana froze.

“Go ahead,” I nudged. “It’s okay.”

Slowly, she turned to face him. He was no longer smiling. Annoyed, he pulled a mobile phone from his pocket and began to flip through its menus. She meekly asked him the question a third time.

He stood and brusquely said something to Svetlana.

“He says he is very late for another meeting,” she translated quietly. Clearly, he had no intention of answering my question. I didn’t understand why he was afraid to tell us his reserve numbers. Perhaps he didn’t know himself, but in Russia the conventional wisdom was that only bad things could come from passing real information to anyone. The best way for Russians to deal with direct questions was to talk pointlessly for hours and essentially filibuster the issue. Most people are too polite to keep pushing in this kind of situation and they often forget the question they asked in the first place. With a good Russian dissembler, you have to be incredibly focused to have even a chance of finding out what you need.

“He says he hopes he has told you everything you need to know.”

The man reached out to shake my hand. “Please, come again soon,” he said in perfect English. “We are always happy to meet with Western investors.”

Clearly, the people at Sidanco weren’t going to reveal any information
about the company. So I started meeting with other oil companies to see if they knew anything about their competitor.

At Lukoil, I was patted down, my possessions x-rayed, my mobile phone and passport held aside until I left. Then I was handed over to a former KGB officer who’d been hired by the investor relations department to deal with foreigners. He took me through an hour-long PowerPoint presentation showing oil rigs complete with beaming company managers posing in hard hats.

At the oil company Yuganskneftegaz, the CFO tried to get me to lend the company $1.5 billion to pay for its new refinery.

At the Moscow office of Tatneft, a smaller but still large oil company headquartered in Tatarstan, I was invited to help build a highway. Each meeting went the same way. I started out hopeful and optimistic, then I was bombarded with irrelevant information, and I left without anything useful.

By then, my hunch about Sidanco had developed into something that was taking up way too much time and energy. What did I hope to find out when every analyst at every investment bank had written off Sidanco? Maybe there was a good reason why no one was interested in the 4 percent block.

When I returned to the office after my last meeting, ready to give up, Svetlana handed me a brown envelope.

“This just arrived from the US,” she said excitedly. “From that trade-magazine guy you spoke to.”

“You can toss it,” I said without looking at the envelope. I figured it was probably more marketing material promoting the benefits of investing in oil rigs. But then I thought better of it. Maybe there was something in there.

“Hang on,” I called. “Bring it back.”

As I leafed through the magazine, I realized that my Stanford classmate had sent me a treasure trove, the golden ticket to this whole puzzle. This obscure glossy oil magazine had an appendix with all the relevant data on Russian oil companies, including the elusive
Sidanco. Everything I could have wanted to know was there: oil reserves, production, refining, everything. I didn’t have to visit all these companies. It was all here—in one place, looking authoritative and accurate.

I pulled out a piece of paper and drew two columns. I titled the first Sidanco, and the second Lukoil, and wrote down every fact about each company that I could find in the magazine. When I was done, I looked over the accumulated information. There was practically no difference between the two companies. Little infrastructure had been developed since the fall of the Soviet Union, and they both had the same rusting oil derricks and used the same leaky pipelines, and they both had the same unproductive workers who were paid the same measly salaries.

The only obvious difference between them was that Lukoil was well-known and had lots of brokerage reports written about it, whereas Sidanco had none. When we compiled the information from these reports and compared them to the information on Lukoil from the magazine, they matched up perfectly. This led me to believe that the information on Sidanco was reliable too.

This was a remarkable discovery. Everyone knew that Lukoil was a steal, since it controlled the same amount of oil and gas as British Petroleum but was ten times cheaper. Now here was Sidanco, sitting on a bit less oil than Lukoil, but not much, only it was
six times
cheaper than Lukoil. In other words, Sidanco was
sixty
times cheaper than BP!

This was one of the most obvious investment ideas I had ever seen. My fund bought 1.2 percent of the company starting at $4 per share, spending roughly $11 million. It was the largest single investment decision I had ever been involved with in my life. When Edmond Safra heard about what was happening he wanted to get involved as well, and he promptly bought the same amount for himself.

Typically, when a company’s shares are publicly traded, the market sets the price for them. But in the case of Sidanco—where 96 percent was held by one investment group and 4 percent by minority
shareholders, including us—hardly any stock was trading. Therefore we had no idea if we had done a good deal or not. For a while I was comfortable with this, but as the months started to pass I became increasingly worried. Good legwork and a bit of self-confidence is one thing, but if I’d screwed up I would lose a large portion of the fund. As time passed, I began to wonder if maybe I should have stuck with the crowd and not gotten involved in something so adventurous. I fought this trepidation and forced myself to stay hopeful that something good would eventually happen. Finally, a little more than a year later, something
did
.