HSBC Holdings Plc (HSBA) is closing Hermitage Capital Management Ltd.’s flagship Russia fund just as its co-founder, William Browder, is being sued for libel in London and tried in absentia for tax evasion in Moscow.
“It was too small to continue as a viable concern,” Browder, 48, said by phone yesterday from London, where he’s based. Browder said the closing is “completely” in the hands of HSBC, which is the trustee and manager of the fund.
The Hermitage Fund, which Browder started in 1996 with the late billionaire Edmond Safra, was the largest foreign owner of Russian shares when it peaked at more than $4 billion in 2005, according to Browder. Russia that year barred Browder from the country without explanation, triggering years of legal conflict, including over the 2009 death of Hermitage adviser Sergei Magnitsky while he was in pretrial detention in Moscow.
“HSBC has decided to jettison him because Browder is considered radioactive in Russia,” Eric Kraus, a fixed-income manager at Rolnes Ltd. in Moscow, which oversees about $150 million, said in e-mailed comments. “He had one great competitive advance: he knew how to trade Russia like a Russian during the Yeltsin years -- a time when it was one of the world’s least transparent markets.”
The decision to shutter the fund has angered at least one investor, Tim Enneking of Altima Asset Management in Moscow, who said HSBC units provoked the closing by freezing the fund in August to assess how much money to set aside for Hermitage’s legal battles. A former Russian investigator, Pavel Karpov, filed a libel suit against Browder and Hermitage Capital in the U.K. over allegations Karpov was involved in Magnitsky’s death.
In January, after redemption requests reached 65 percent of the frozen fund’s $45.6 million value, HSBC and Browder agreed to wind up the fund, Enneking said, citing a Jan. 24 letter from HSBC, which he provided to Bloomberg.
Enneking said HSBC vowed to update investors on the status of their assets by Feb. 28 and he’s still waiting for answers. Hermitage has achieved an annualized return of more than 17 percent since its inception in 1996, according to a performance factsheet issued in June. The fund has invested in companies such as OAO Gazprom, Russia’s gas monopoly, OAO Lukoil, the second-biggest oil producer and Evraz Group SA, the steelmaker part-owned by billionaire Roman Abramovich.
Browder continues to invest through his global emerging markets fund, set up after he was exiled from Russia. He declined to say how much assets it had under management.
HSBC, Europe’s largest bank by market value, won’t comment on the fund’s closing, said Julia Molchanova, a spokeswoman for the bank in Moscow. Browder declined to comment on the libel case against him, citing his lawyers’ advice.
HSBC is one of 23 foreign and domestic banks Russia chose in 2010 to advise the government on its 1 trillion-ruble ($32 billion) privatization program. Since then, HSBC and other foreign lenders including Barclays Plc (BARC) and Banco Santander SA have abandoned consumer banking in Russia as state-run OAO Sberbank (SBER) and VTB Group gained market share.
The British lender is now focusing its Russian operations on debt sales, loan financing and export credits, Mark Stadler, HSBC’s country chief, said in an interview in October.
Browder, a U.S. native and British citizen, has been battling the Russian government with a campaign for legislation in the U.S., Europe and Canada to punish 60 Russian officials he says are responsible for Magnitsky’s death.
Magnitsky, who died at 37, was arrested on tax-evasion charges after he and Browder accused Russian officials of using Hermitage documents to swindle $230 million from the national treasury, a charge the government denies. The case sparked a diplomatic row, with the U.S. imposing sanctions on the Russian officials and Russia retaliating by barring American citizens from adopting Russian orphans.
On March 22, a Moscow court put Browder and the deceased Magnitsky on trial, represented by court-appointed attorneys. They are accused of evading 522 million rubles of taxes. Browder has denied any wrongdoing by either him or Magnitsky, saying March 19 that Russia is “officially defending Magnitsky’s torturers and killers.”
The Interior Ministry this month opened a case against Browder for another alleged crime -- buying shares of state-run Gazprom before restrictions on foreign ownership of the world’s largest gas producer were lifted. Browder and “structures” he created caused at least 3 billion rubles of damage to the state by buying local Gazprom shares and seeking to influence the company in 1999 to 2004, the Interior Ministry said.
Browder said buying Gazprom shares through “derivative structures” was “perfectly legal” during that time.
Hermitage’s relationship with HSBC continues to cause headaches for the U.K. lender, according to Browder. Russian investigators are threatening to seize documents from HSBC’s Moscow offices unless HSBC hands over financial and other information about Hermitage dating back to 1996, Browder said in an e-mailed statement Feb. 15.
Andrei Pilipchuk, a spokesman for the Interior Ministry, declined to comment.
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