Billion-dollar Bet On Russia Bill Browder is making a high-stakes wager that energy stocks will continue to boom.
By Janet Guyon

(FORTUNE Magazine) – Given that the head of Russia's largest oil company was tossed in a Moscow jail in late October as part of a government power play, Bill Browder has every right to be nervous. It's not because he's likely to be next. It's that as the CEO of the largest public equity fund devoted to investing in Russia, with more than $1 billion parked primarily in just five energy stocks, he's got more than a lot to lose.

However, for Browder and other sophisticated investors in Russia, the jitters caused by the plight of Yukos oil baron Mikhail Khodorkovsky served as just another great buying opportunity. And there have been plenty of those lately. Russia's stock market gained 58% in 2003, outpacing even the 50% rise of the tech-heavy Nasdaq in the U.S. Many individual Russian stocks available to U.S. investors as ADRs did even better. Shares of Norilsk Nickel (NILSY.PK, $71), the globe's biggest producer of the mineral, nearly tripled, as did those of Gazprom (OGZPF.PK, $30), the world's largest gas company, which moved up from a 52-week low of $10.95.

The Russian equity boom has sent money pouring into Browder's Hermitage Fund (, which requires a minimum investment of $250,000 for qualified U.S. residents. The fund, which rose 67% in 2003 and has posted an average annual return of 33% since Browder started it in April 1996, collected $110 million in new money last year. Right now he has a fifth of his fund invested in Gazprom alone.

Browder calls Gazprom's locally traded shares the "single best investment in Russia." Why? The company, still 38%-owned by the government, controls the world's largest gas reserves, which have close proximity to Japan and China. Meanwhile, Gazprom remains Western Europe's biggest natural gas supplier. The local shares can't be owned directly by foreigners (Browder can buy them because his fund is registered locally), so they trade at half the value of the ADRs. Russian President Vladimir Putin has said that he will lift the restriction this year. When he does, enough liquidity will be created to bring Gazprom into worldwide emerging-market stock indexes. Browder expects the stock to soar as managers are forced to add it to their portfolios.

Gazprom ADRs are worth owning too, Browder says. In fact, almost any Russian energy stock remains a good play despite the run-up. "Investing here is fundamentally a play on undervalued oil reserves and the desire by Western countries to diversify away from the Middle East and make Russia a more important oil supplier," he says.

Browder, 39, has been a pied piper for Russia for a decade. Predisposed to working in Russia or Eastern Europe because his grandfather was general secretary of the U.S. Communist Party from 1932 until 1945 and his father was born in Moscow, he became hooked on the country's potential while at Salomon Brothers in the early 1990s.

A few years later, backed by $25 million from the late, legendary banker Edmund Safra, Browder started the Hermitage fund. That $25 million, plus inflowing money, rapidly grew to $1.1 billion by the end of 1997. But Browder miscalculated by figuring the flu in the Asian markets wouldn't affect Russia. When the Russian market crashed in the summer of 1998, it brought the value of the fund down 90%.

It's unlikely that Russia is headed for a similar swoon anytime soon. The economy is solid--Moody's gives Russia an investment grade rating due to Russia's budget surplus and high foreign currency reserves. And the political landscape is stable. Putin will surely win reelection.

For those who don't have the capital--or the nerves--to invest with Browder's concentrated fund, a smart way to play Russia is through the Templeton Russia and East European closed-end fund (TRF, $35), which has five-year average returns of 31% and a more diversified portfolio.