The Siberia Job | A Book Event

>> Condoleezza Rice: Good evening. Well, welcome to the Hoover Institution. It is my great pleasure to welcome you to what is a really unique and entertaining conversation for us. Usually we're talking about problems in the Straits of Taiwan. So this will be, I think, quite a bit more entertaining, and I really myself am excited about it.

To celebrate the publication of a new book, The Siberia Job, and we're going to learn more about the true story behind it. Now, when a book is embossed with the words based on a true story, the immediate question that every reader has is what's fact and what's fiction?

Today, we're going to get it from the source, what's fact and what's fiction. So, John, we're expecting to really know by the time that we leave. John Kleinheinz is a person of great importance here at Hoover. He is, in fact, the chair of the Hoover board of overseers and a great supporter of the institution.

He graduated from Stanford in 1984 with a degree in economics, and John began his career as an investment banker. He worked in Tokyo and New York and London, and then he moved to Texas in 1993. And he was a partner in an investment firm where he managed the Russia Value Fund, one of the earliest funds to invest in Russia, and formed at the inception of the Russian stock market following the voucher privatization program in 1994.

A lot more to come on this. John is the CEO today of Kleinheinz Capital Partners, based in Fort Worth. His investment activity spans a variety of areas, including Japan, US energy and technology markets, and private equity. Now, he's in conversation with Hoover senior fellow Steve Kotkin. Steve is a foremost historian, and especially a scholar on the Soviet Union.

In fact, Steve has written the most highly regarded biographies of Joseph Stalin, and he is well suited to this task. Now, to tee up Steve and John's conversation and to entice you to purchase your own copy of the book after this event, I want to read part of the forehead, written by the author, Josh Haven.

Our last disclaimer as regards this book being fiction based on a true story, I don't want to be too specific about what's real and what isn't. Don't assume it's the crazier parts, the Caspian Sea fishing trip, for instance, or the club feud kidnapping that are made up. It was mostly the banal, technical stuff that seemed most likely to get people into trouble.

Those bits of borderline absurdism and many others really happened. Post Soviet Russia was, he says, the wild, wild west of the east. Well, I can tell you that I spent a lot of time in post Soviet Russia and the wild, Wild west never thought of being that wild.

And so let me turn it to John and Steve.

>> Steve Kotkin: Welcome, everybody. It's nice to see so many familiar faces, including familiar faces from Russia in the 1990s. We have two people who joined the Hoover Institution relatively recently, one of whom has published the book, and it's not me.

 

>> Steve Kotkin: It's our chair of the board of overseers. So I'm going to guess that your annual performance review is going to be better than mine this year, and I'm going to have to do better next year.

>> John Kleinheinz: I'm not sure the P and L on this book is going to be any good.

 

>> Steve Kotkin: We'll wait, the jury's out on that, and we have the possibility to increase it right here as we sit. So let's start from the beginning. How does an upstanding family man from Texas with a beautiful young wife end up in Russia in the 1990s, of all places?

 

>> John Kleinheinz: That's an excellent question. Before I answer, I just want to thank you, Stephen and Condi, for offering to host this event. I know there's been dozens and hundreds of really impressive fellows and folks on this stage who've written fabulous books and well researched books. I just want to assure you that this isn't one of them.

This is fiction.

>> John Kleinheinz: This is entertainment. This is a three hour read. It's maybe the only fictional book that's ever been up here. How did we get to Russia? How did I get to Russia? I was running. I was a junior partner in an emerging market fund, and I got calls from a number of people that said, you have to look at Russia.

It's as interesting a market as we've ever seen. The Berlin Wall had fallen a few years earlier. The command economy had spun out of control and had basically frozen. By 1992, the place was just distraught throughout. Go to Moscow, there were no cars on the street. There's no goods in the shops.

Everybody walked around with their head held low. And then in 94, I went back and I saw a whole different picture. The green shoots of the free market system had started. People were excited. Everybody had a deal. Investors were showing up from all around the world to look at the assets.

Assets in Russia were trading at one 2% of the value they'd be trading at if they were trading on a western exchange or the US. And it was just a very exciting time, and it was a really unique opportunity to make money.

>> Steve Kotkin: Okay, I was there, too, and there were some issues that would not have inspired a lot of confidence.

Not that I had any money to invest, but I'm not sure I would have had the confidence to think that this is a good deal investment opportunity, as opposed to, my God, what's going on here? This is a bit wild. So what gave you the confidence that the investment opportunity was greater than the risks, that the upside was greater than the risks?

 

>> John Kleinheinz: Good question. So Marcia and I actually, my beautiful young wife, who's not quite as young anymore, but we were there in 92.

>> Steve Kotkin: She looks pretty young to me there, dude.

>> John Kleinheinz: She looks great. We were there in 92, and we saw such a bleak picture. Then I was there 18 months later.

To see the same streets and the same places in 18 months, to be completely transformed, you just knew something was up. Remember, Russia had vast pools of human capital. They beat us into space in the space race. They gave us a good run in the arms race. My view was that Russia, they had tons of oil.

They were one of the largest owners of oil in the world. My view is that Russia just had a bad system. If they used the free market system and rule of law, that these investments that were trading at 1 to 2% of intrinsic value would close the gap with western oil companies and western telecommunications companies.

So it wasn't a bet that Russia was going to become like the US or Europe. It was just a bet that they would make progress toward that goal. Because, remember, if a stock goes from being trading at a 1 or 2% of value to trading at a 20% of value, you've made ten times your money, and so that's what gave me the confidence.

 

>> Steve Kotkin: Yeah, ten times your money. That would give me confidence, too. It's just the murders and other things that would be complex.

>> Steve Kotkin: But okay, let's accept that you saw a lot of upside because the valuation, the opening valuation, was so low that it couldn't really go any lower, and there were a lot of possibilities inherent in the people.

 

>> John Kleinheinz: We were betting on the system to develop. That's all we were doing.

>> Steve Kotkin: So we have this thing called vouchers, privatization through vouchers. Not everybody knows exactly what that might entail. So give us a small tutorial here about what the vouchers were and how the privatization and vouchers worked in that 1994 year where they privatized 11 time zones through a voucher system.

 

>> John Kleinheinz: Sure, sure, so they gave vouchers to every single man, woman and child in Russia, and they were freely tradable. And what you could do with those vouchers is you could submit them into any voucher auction. And remember, at the time, Russia was auctioning off 80 to 90% of all of their corporations, all the oil and gas companies, the fertilizer, steel, aluminum, tobacco, food companies, utilities, everything was put up for auction.

And what happened is a lot of people took those vouchers and just sold them into the market. And so investors like our fund could just go out and buy them, and then we could submit them into the various company voucher auctions that we were interested in. So it was chaotic, they did it all at once.

There's a lot of debate on whether they should have drawn it out and done it a different way. But for whatever reason, 1994 was year that they auctioned off everything.

>> Steve Kotkin: So they have all these state owned companies. There are no private companies per se, at scale in the Soviet period, and they're all state-owned, and so all the state-owned property, with some exceptions, is being sold.

And so this is vast transfer of property, some of it nominal, because it's not really worth much, but some of it has a lot of value in your mind and other investors minds. So they're transferring this to private markets, and they do it through these pieces of paper that every individual gets, or several pieces of paper.

And so people are sitting there with this thing called a voucher, and they're living in Yoshkar-Ola, and they're living in Yaroslavl, and they're living in Magadan, and it's very dispersed. It's a gigantic country, and individuals are holding these vouchers. And to extract any value from something like this, you need a lot of these pieces of paper, right?

If you have two vouchers in a company that's worth substantial value, it's not gonna.

>> John Kleinheinz: It's not gonna move the needle for these people.

>> Steve Kotkin: Yeah, so how is it that you and your partners manage somehow to get your hands on these vouchers that are held in small numbers by massive numbers of individuals across this gigantic space whose communications and transportation and the logistics, or maybe not.

 

>> John Kleinheinz: That's an excellent point, because a lot of people wouldn't even bother to find out how to submit the voucher into the auction for the company that they may have worked for. They would just go down, usually in most of these towns, there was a street corner where everybody knew you could sell your voucher, and there were those street corners in Moscow.

And so what we would do is we would, before I would go over there, we would wire money to a bank that was run by a friend of mine who's in the book, guy named Bernie Sucher. And the money would get there three or four days before us, and then he would turn it all into $100 bills.

And his people, and sometimes our people, sometimes me, would go down to street corners with that money and just buy vouchers, and we'd take those vouchers, and then.

>> Steve Kotkin: Right, so there you are with rolls and rolls of $100 bills on street corners in Russian places.

>> John Kleinheinz: I did that once, I did that once.

 

>> Steve Kotkin: Whose names are hard to pronounce. I mean, it's just sort of like how capitalism works over here, right?

>> Steve Kotkin: I go to the bank, or I go to my friend, and I get a suitcase of hundreds all rolled up with a rubber band. And then I go down to the corner there of University Avenue and Ramona, and I start asking people if they want to sell their vouchers, and I buy 5 million of them, 8 million of them.

And then I own Russia. That's kind of how it worked?

>> John Kleinheinz: I mean-

>> Attendees: LAUGH].

>> Steve Kotkin: I'm not an investor.

>> John Kleinheinz: I mean, your characterization is a fair characterization. Remember, though, the Russian government kept ownership of a lot of the bigger companies, they kept some portion, 50%, 60%.

So they were really just trying to get the market moving. They were trying to create a stock market with these vouchers. The real wealth transfer happened in the loans for shares scheme that happened post 1998 after Putin got in. That's where the real wealth was transferred away from the.

 

>> Steve Kotkin: So not a voucher privatization but

>> John Kleinheinz: The voucher privatization just sort of started the market going, that's how I'd characterize it.

>> Steve Kotkin: Right, okay, I don't know if you can reveal this, but what was your best investment in Russia? Where did you do your biggest killing?

>> John Kleinheinz: So that's a poor choice of words.

 

>> Steve Kotkin: We're not accusing you of being involved in activities that your partners were involved in.

>> John Kleinheinz: Thank you for-

>> Steve Kotkin: I'm sorry that the other people were involved in the competitors, not your partners. So what was your best deal, your best investment at the time?

>> John Kleinheinz: So the investment I thought that worked out the best for us was a company called LUKOIL.

And I was friends with a gentleman by the name of Robert Strauss, who was the US ambassador to Russia, and he was a partner at Akin Gump, and I was very close to Bob. He gave me a lot of advice, told me, helped us get out of some trouble we had in Russia a couple of times.

LUKOIL was a customer of Akin Gump of their law firm, and he told me that LUKOIL wanted to become a major international oil company, just like Exxon. And so when all these companies are available, you don't know what to look for, and you hear something like that from somebody you respect.

That company automatically went to the top of my list, and we bought the stock with the vouchers at a $300 million valuation. This is a company that at the time, did almost 2 million barrels of oil of production a day, which that might not mean much to many of you, but that's about the size of Exxon, that's how much Exxon produces, so $300 million.

I think that when the stock market stopped trading, when Russia invaded the Ukraine, it had a $60 billion market cap, so it's 200 tons.

>> Steve Kotkin: So you bought the equivalent of Exxon for $300 million?

>> John Kleinheinz: That's right.

>> Steve Kotkin: That's standing on those street corners.

>> Steve Kotkin: This guy is a lot smarter than I thought.

Let's just-

>> John Kleinheinz: Like many things, if I had held onto it, it would have been great. I sold it after way too soon.

>> Steve Kotkin: You're still alive to talk about it. So selling sometimes can have advantage beyond the monetary one. All right, so we're now heavily invested in Russia.

We're making serious money because things are undervalued, and you and your partners are perceiving value, and that value is coming into being over the course of the 90s. And you manage the logistics of mastering this voucher privatization. So here we are 30 years later, and now we have a book.

So where'd the book come from? What motivated you to do the book, and why now do we have the book, since these are events from 30 years ago?

>> John Kleinheinz: Excellent question. So I have always wanted to write this book. It's really other than what I was doing in Russia, everything in my life has been relatively boring and routine, but it's the one thing I constantly go back to and think, wow, I can't believe that that really happened.

And so everybody has a book in them. Just about a little over two years ago, I was sitting in front of my Bloomberg machine and I saw a title go across the thing that my partner in the book, Peter Kellner, had been killed in a helicopter ski accident.

And it sort of, when your friends die, and Peter and I weren't close. We stayed close for a few years after I left Russia, but when people like that who are important in your life die, changes you a little bit. And I said, okay, I'm gonna write that book.

So I do what? When I don't know how to do something, the first thing I do is I go call somebody, and I call somebody who's done it. And I don't know if Tom Jenks or Carol are here. Back there, there they are, there. So I called my good friends Tom and Carol.

Tom ran a publishing company, and I said, I've got this story, Tom. How do I do it? And he put me in touch with a great literary agent in New York named Warren Frazier. And Warren helped me look for authors to help write it, because doing creative writing is not in my wheelhouse.

It's not my skill set. So Warren helped me find a great young author. And then a guy named Josh Gelertnere. And Josh and I started interviewing people who had been involved with this project. And we called around, and to our surprise, literally everybody we talked to about it said, yeah, I want to help.

And so we set up shop in the Bahamas and brought people in and did interviews and came up with this somewhat true story.

>> Steve Kotkin: My writing process is different.

>> Steve Kotkin: I'll just say that I've never even been to the Bahamas.

>> Steve Kotkin: But I'm thinking, what kind of book maybe could come out of a trip like that.

I'll be talking to the director after this about that. Okay, all right, so we launched the project. Josh Gelertner helps you tell the story. I mean, it's your story. You relate the story. It's captured, it's transmitted. Why did we choose fiction as opposed to nonfiction, or fiction that's close to reality but is not nonfiction all the same?

 

>> John Kleinheinz: Yeah, good question. I mean, it happened so long ago, it was just difficult to remember the specifics and the sequencing and who was involved. And then when you really look at what we did going out, we talk a little bit about the gazprom auction, because that's what the story's about.

I don't think it would have been as interesting if it was told as a nonfiction work. I think it would have bogged down in the details. And, Josh, almost everything in the book is true. What's not true is how everything fits together. And Josh just did a very good and creative job taking all these different anecdotes and all these stories that he heard from the people we interviewed.

And he was true to the storyline, but the way everything fit together was made up, and made up in a way that makes it a very readable book.

>> Steve Kotkin: So you're in the book, and the characterization of you struck me as close to who you are and what you did.

Your friend Peter Kellner, the Czech businessman who did the voucher privatization in Czech Republic before the Russian one, he's in the book. And there are a bunch of characters that seem to be based on Bernie Suture or Bob Strauss that would have been a good person for me to know as well.

And so you have a cast of characters that's all based on real people who did the story. What about some of the other characters? There's this endearing prostitute character. I'm sorry, it's Russia in the 90s. I don't mean to cast aspersions, but there's this very endearing prostitute character who ends up being the wife of your partner.

What about stuff like that?

>> John Kleinheinz: So first of all, the characters, some of them are compilations. My character is not entirely me. I had a partner in Texas, and I had a friend at Merrill lynch who was involved, but it was mostly me. The Peter character is actually two different Peters, and one of them is still alive, and one of them participated.

Both Peters were close friends, but there were two people. Anna, the wife of Peter, that's the one character in the book that's completely fictional.

>> Steve Kotkin: I identified with her.

>> John Kleinheinz: She's a great character, but she's completely fictional.

>> Steve Kotkin: I thought I could meet her now that I've, but, all right.

 

>> John Kleinheinz: You need a female character to connect, and-

>> Steve Kotkin: Not just in books.

>> Steve Kotkin: Okay, all right. So we got this incredible story, it reads in one sitting.

>> John Kleinheinz: Yeah.

>> Steve Kotkin: I know, because that's how I read it, in a single sitting. And it's gripping. It's true to the 90s experienced.

Some things happen that seem improbable, but those are the things that are true. And the stuff that's less probable, those are the things that you guys made up.

>> John Kleinheinz: That's right.

>> Steve Kotkin: But let's get a little taste of it, if you wouldn't mind.

>> John Kleinheinz: Okay.

>> Steve Kotkin: Let's have a reading of a passage.

Go ahead and set it up.

>> John Kleinheinz: I'm gonna read a chapter, a whole chapter, but it's a short chapter, chapter eight. And just to set it up, we'd submitted a lot of vouchers in various voucher auctions, and we were starting to get results. And remember, with the vouchers, there's a game theory here.

You want other people not to submit vouchers. So the more vouchers that are submitted, the higher price everybody gets. If few people submit, you do really well, and you can get a big percentage of the company with fewer vouchers. So we just learned that we got a big percentage of a company called Kursk Tobacco, and we were going in to get our shares placed on the company register, which is something that you need to do after the voucher auctions in these smaller companies.

The boardroom of cursed tobacco looked like every other nice office John had seen so far in Russia. Wood veneer and Soviet deco wall clock. It was in a nice office building not far from the Kremlin. John and Peter were sitting on one side of a long table. On the other side was a solemn looking, slightly overweight Russian man.

Gentlemen, he said in English, I understand you wish to exert some control over the operations of the company. Yes, said Peter. That is, of course, your right as majority shareholders. We weren't majority shareholders, or at least it will be your right as majority shareholders once you sign our investiture documents.

But the minority shareholders wish to make something clear to you before you do. Who are the minority shareholders? Said Peter. They wish to remain anonymous, said the man. But you may think of them as Bratja. Bratja, said John. Literally it means brothers, said Peter, who was looking slightly uncomfortable.

What does it mean? Not literally, said John. It means mafia, said Peter. John nodded, and for a moment no one said anything. Are you trying to keep us from registering our shares in the company? Said John finally. No, said the man. In fact, we can see many advantages to your being a majority shareholder of Kursk.

But they wish first for you to understand the responsibilities that will go with your ownership. Which are, said John after a pause. Well, Kursk is an unusual business model. You will be legally liable for it. Not that there is any cause for concern. What is the business model, said Peter.

It's generally understood that Kursk manufactures and distributes cigarettes. He paused, and after a moment Peter said, okay, but it does not only manufacture Kursk cigarettes. I don't follow, said John. Kursk also manufactures Marlboros, Camels, Lucky Strikes, Parliament, Pall Mall, Newport, Winston. Kursk manufactures maybe one in three of the western cigarettes sold in Eastern Russia and Central Asia.

You make counterfeit cigarettes, said John. And now you do too, said the cursed man.

>> John Kleinheinz: Jesus, said John. Are you saying that's how you generate your revenue? Fake name brand cigarettes? No, said the Kursk man. Not at all. Kursk is legitimately a very profitable business, and illegitimately a much, much more profitable business.

 

>> John Kleinheinz: But here's the issue, we do not intend to modify our business plan with westerners, whether they're checked, if that counts, too, nominally running the business. Your partners believe it could help to expand these operations to new markets. Mutually beneficial. Everyone earns, you see. But as I said, you will be liable to Russian courts.

If you do not wish to participate in this business model, your partners will then buy you out, the choice is yours. John and Peter looked at each other. Each saw the other was at a loss. Peter turned back to the cursed man. Buy us out for how much?

The cursed man produced a bill fold, from which he removed a bank check. He slid it across the table. Peter picked it up. $1,000? Yes, said the cursed man. As I say, your new partners feel either choice will be satisfactory to them. But assuming you do not wish to remain their partners, they do not wish to overpay.

Uh-huh, said John. And if we offer to sell to a third party, as a lawyer for Kursk, I can tell you that we will handle these matters of stock strictly in accordance with Russian law. The stock is not publicly negotiable, so if you attempt to sell it to a third party, it would simply remand to the company.

Uh-huh, said John. So what shall I say, gentlemen, said the cursed man, holding up his hands. Welcome or farewell? John and Peter looked at each other. Then John turned back to the cursed man. Obviously, we're gonna need a little time to think about this. Of course, said the cursed man.

Take 24 hours.

>> Steve Kotkin: Yeah, so that was my impression of privatization in the 90s.

>> Steve Kotkin: And just to let you know, every chapter is like that in the book. There are what we would call ethical dilemmas that arise here in addition to calculations that normal investors would have to make.

So you're an owner of substantial assets in Russia, along with partners who are your co-investors. Do you get out? Do you stay in? Do you transition? What happens? So 94, 95, then what's next after that?

>> John Kleinheinz: So we had an interesting dilemma. Our global emerging markets fund put 15% to 20% of its money into the russian voucher auctions.

And in six months we made 8, 10, 12 times our money on almost everything.

>> Steve Kotkin: Normal, it's-

>> John Kleinheinz: Normal six month return. So all of a sudden, our global emerging markets fund was 80% invested in Russia.

>> Steve Kotkin: Low risk profile.

>> John Kleinheinz: Low risk profile. And a lot of our investors were saying, gosh, that's great.

The returns were outstanding, but a lot of people didn't want to have that much money invest in Russia. So what we did is we set up the Russia value fund and we took 80% of our holdings and put in the Russia value fund and went out and raised money from people who wanted to get into Russia.

So we turned this little trade into a whole new business that became a very big part of the company that I was a partner in and raised a bunch of money. Cuecause we had custody of these stocks and we knew what to own and we had a great portfolio.

And people were trying to get into Russia in late 1994 and 95, early 95. And so we had exactly the product to sell to them and the product became real big and successful. And I was a junior partner in the company and I had a 75% partner and he decided he wanted to run the Russia business and there wasn't enough room in there.

And so I went and founded my own company in 1996. So I pretty much was out of Russia by 96 and 97 and missed the big financial collapse that happened in 98.

>> Steve Kotkin: God, what a shame.

>> Steve Kotkin: You got out before the whole thing blew up.

>> John Kleinheinz: I'd rather be lucky than smart.

 

>> Steve Kotkin: I'm so sorry for you. Everyone else had new wallpaper for their offices in Wall street, known as Russian bonds.

>> John Kleinheinz: It was a terrible trade. Long term capital management got put out of business, and my former partner was put out of business. It was brutal. Cash ATM machines in Moscow didn't work.

It was tough time.

>> Steve Kotkin: Yeah, I was there. Okay, so let's ask the question that's on everybody's mind, Bill Browder. Bill is a well known investor in Russia in the 90s. Things didn't turn out so well for Bill. Let's just say he had many more issues than you had as an investor in Russia.

How does your story and your experience compare to what happened to Bill Browder? And, of course, Bill has a book also, the Red Notice, which is a remarkable read, just like yours, is give us a little bit of insight into how you and Bill align or don't align.

 

>> John Kleinheinz: So, Bill is a very close friend of mine. Bill and I were friends in London. We were both bankers in London before the Berlin Wall fell down, and then we were both there in Russia. As I said, there were hundreds of people who were showing up in Russia in 94, and Bill was one of them.

And Bill and I did business together. He was at Solomon Brothers. He's a great guy. When he set up his fund, it was all Russia. When I set up my fund, Fund, it was global macro. So the big difference is Bill committed to Russia, and I did not commit to Russia.

So that was the main difference. And then Bill stirred things up. Bill pointed out things that were being done by companies like Gazprom and that the management didn't want people to know about. And he would call attention, and he'd write these long research reports. He really upset people.

And finally, they made a number of people mad enough where they wouldn't let him into the country. At the time, he was the largest foreign investor in Russia with five or $6 billion. And they literally showed up at the airport in Moscow, and they wouldn't let him in.

Then they arrested his tax accountant, who later died in prison. His book is a wonderfully written book. It's compelling, it's nonfiction, it's tragic, and it's a great book. I think Bill told me he sold 3 million copies. So I have a great deal of respect for Bill. I didn't commit my life to Russia the way Bill did, thankfully.

 

>> Steve Kotkin: Right, he had some family ties that you didn't have.

>> John Kleinheinz: That's right.

>> Steve Kotkin: His dad and everything else. But so not everybody. Some people made money in the nineties, and some people got out with their money, and then other people made money and didn't get out. And we're not in the 90s anymore.

So give us a little bit of insight into Russia since the time that you were an investor, and whether it's gone in a direction that maybe you sensed a little bit or maybe it surprised you. Maybe the other people who didn't get out didn't know the direction Russia was going, and they were surprised because people wouldn't think today that Russia was an investment opportunity.

 

>> John Kleinheinz: Yeah, I think what really surprised me about Russia, Putin was prime minister in 1998, and then he took over for Boris Yeltsin right at the end of 99. And the first couple of years Putin was president, I thought he was an absolute Boy scout. He was a big proponent of reform.

He westernized financial markets, free markets. He was doing all the right things. He was the first world leader side of 911 with George W Bush, and the stock market responded. I mean, the stock market went up 20 times from when Putin took over as president to mid 2004, 2005.

Something happened in there, and I'm not sure what exactly it was, NATO enlargement or oil going to 120 a barrel or Russia getting back on its feet. But the security apparatus, the KGB and all those people started to insinuate themselves into all these companies, and the system just got dirtier and dirtier and less and less investable throughout the 2005, 2006, 2008.

And finally, western investors just, you know, really began to ignore it. And Russia was hit very badly in the great financial crisis, probably the worst hit market during that period.

>> Steve Kotkin: Is there a kind of alumni network of people who experienced Russia in the nineties or informal social network of people who maybe don't publish books about it but nonetheless share their war stories and you were there together and you talk about what you achieved and what went wrong or.

 

>> John Kleinheinz: Yeah, it's an informal group and i'ts a big group. I mean, I don't know, is Mike McFaul here today? I thought Mike was going to come. Mike knows a lot of folks who are in that group. I'd say there's a collective sense of disappointment in that group.

Russia was off to such a good start in the mid nineties, and they were behaving, acting by the rules. They understood how the stock markets work. They were buying stocks, they were listening to their financial advisors. And then the wheels kind of came off in 98 when the banking crisis hit.

And after that, Russians reverted to their old ways, their corrupt ways, bribing, corruption, threatening force, threatening violence because their court systems don't work. And that's how you resolve business disputes, by threatening violence. But it's disappointing that Russia didn't follow that initial path that looked so good.

>> Steve Kotkin: I wrote this essay when I was younger called Trash Kanistan.

And it was not an ethnic term. It was a political term about state capture, corrupt elites, absence of a judiciary, absence of a civil service. And it was about how the institutions weren't there. And so it was an individually determined, individually run system, or patronage group run system, and it wouldn't end well.

And I was at a conference, we won't name the person who ran it, but resembles Michael Milken, down in LA. And I was on a stage like this, not with you, but with the browder types and Boris Berezovsky and the rest of them. And I described this trash canistan problem.

They were invested in Russia. Milken was at the head table. Everyone who he had created through junk bonds was right in front of him. So Rupert Murdoch was sitting there and many other really successful people. It was a ballroom in Beverly Hills, three times the size of this.

And after I gave the presentation about trash canistan, this is not going to end well, and we have some institutional issues here. They came up to me at the end and they said, my God, you're a specialist on emerging markets. Can we hire you. And I thought, but wait a minute, this is trash canister.

And they said, no, no, this is emerging markets. So I thought, okay, I'll become an expert on emerging markets. And from that day, I had a consulting business, and my consulting business was to say I'd be cautious about this person. I think this person has a lot of contract murders on his rap sheet.

And they would say, yeah, but look at the valuations.

>> Steve Kotkin: This thing is pumping 2 million barrels and it's worth nothing on the stock exchange. And even if it only, anyway, the logic that you would understand. Well, and it did, despite some setbacks. We had the Yukos stuff, as you know, with Mikhail Kharkovsky, who was here not long ago at Stanford, where his company was expropriated.

He had privatized it in the fashion that you had described the loans for shares, by the way.

>> John Kleinheinz: We had a chocolate company. He took our shares in the chocolate company.

>> Steve Kotkin: Yeah, I remember that. Well, that was a good company. And that wasn't the only chocolate that he put his hands in, I gotta say.

But, yeah, okay, so there was a bit of a disconnect in some ways between the investor class, which saw the numbers and saw the opportunity, which was real. I mean, obviously it was real. You're the board chair over over overseas right now. It was more than real. But at the same time, there were indications that there was this disconnect on the institutional, legal, political side.

And others besides me were witnesses to that. I'm looking over At our director, who had a front row seat through all of this and met the principals, Condy Rice, former national security adviser and secretary of state. So, but now if we project forward, right? And now everything that's happened and Russia is where it is, and we have this criminal aggression against Ukraine, and we have the essentially destruction of Russia's business reputation.

Not just the decline of it, not just the, let's say, scandalizing of it here and there, but really the self destruction of it. So do you see some possible way forward, some elements in Russia that you previously saw that we might focus on for a different Russia or a Russia that more resembled the hopeful Russia that you saw in the nineties?

 

>> John Kleinheinz: That's a tough question. It's not easy to see that, because what you need in a place like Russia is you need most of the people to obey the law and to do things the right way and to not use bribes and to not use threats of physical violence.

And if you have 15 or 20% of the business people that are behaving that way, then the rest of the business people are incentivized to behave that way. And so you need the courts, you need the rule of law. And it's just hard for me to see a Russia where everybody behaves again.

But and this is where you and I will probably disagree, is I think there will be an opportunity to buy the Russian stock market again at 5 to 10% of what it's worth, because they could make progress. And when you make progress, you don't have to get to 100%.

You can just make some progress, and the stock market will go up. So there may be an opportunity to invest in russian stocks again, but not for you.

>> Steve Kotkin: If I had money to invest, which is another conversation I'm going to talk to our director about.

>> Steve Kotkin: There were some other opportunities that I see where the risk profile is different in terms of physical risk, not in terms of financial risk, because I'm not the kind of analyst that you are that can see that.

Anyway, okay, on the note that there may be opportunities to invest in Russia again in the future, I think that's an important point. We'll now open it up to our audience. Many of you were there. Some of you were investors there. Please ask a question related to the book and the experience of Russia in the nineties to our board chair, John Kleinheinz.

 

>> John Kleinheinz: Please wait for a microphone before you ask the question.

>> Steve Kotkin: Thank you for being a better moderator than I am.

>> Steve Kotkin: No surprise there. By the way, I'm honorary Kleinheinz. He's a real Kleinheinz, but I'm the Kleinheinz senior fellow at the Hoover Institution. So-

>> Steve Kotkin: We have two Kleinheinzes or maybe one and a half John Kleinheinzes on the stage right now.

But who's gonna have the courage for the first question so that I don't have to call on somebody?

>> Speaker 1: We might actually have some Stanford students in the audience. And I was struck by your opportunity came from who you knew as much or more than what you knew.

And if I was to give advice to students today, beyond your basic skills as an investment banker, how much importance do you place on the relationships you established that enabled you to make those huge wins in Russia?

>> John Kleinheinz: That's an excellent observation, because what allowed us to do so well is that I showed up on the ground in Moscow with a notebook full of people that could be trusted, that had already checked out.

People had already given me their names, and so I didn't have to just use the people that were there. I immediately had trusted people on the ground. And so those relationships are absolutely vital.

>> Steve Kotkin: Do you maintain some of those relationships to this day?

>> John Kleinheinz: Yeah, yeah. I mean, they're not real active from a business standpoint, but they're friendly relationships, and I spend time with these people.

 

>> Steve Kotkin: Okay, all right, who's next?

>> Speaker 2: Thank you so much for your observations and the book discussion. I think it's awesome. So I have two questions. The first question is, who will come after Putin? That's the first question. And the second question is, so I know that you've spoken before about the Golden Bridge.

So what do you see as the Golden Bridge?

>> Steve Kotkin: That's me?

>> John Kleinheinz: Yeah.

>> Steve Kotkin: But you wrote the book.

>> John Kleinheinz: Yeah, but you're gonna answer that question.

>> Steve Kotkin: Russia is in decline and has been in decline for some time. Russia's capabilities don't match its aspirations. The Soviet Union overreached.

It imploded as a result, partly because we had the correct policy, which was to stand up to them in a cold war, not to engage them in a hot war, but to stand up to them in a cold war and to ensure that we kept pressure on that system.

That was a bipartisan policy across both democratic and republican administrations. Although Reagan gave a significant boost, I would argue, to that policy. And so Russia imploded. It couldn't match us. It wanted to match us, and it couldn't. That was what Ronald Reagan as president and George Shultz as secretary of state and many other people in that administration understood.

And then the collapse continued after 1991. It wasn't like the soviet collapse ended. And then something called reform and transition began immediately. The next day, institutionally, January 1, 1992, when Boris Yeltsin woke up as the president of independent Russia, he had 250,000 people in the KGB, and he had 7000 judges.

And so that was the stuff to build a new Russia. And it was even weaker and weaker and weaker and got weaker. Putin came along and did arrest the decline. There was a strengthening of the russian state. Coherence introduced privatization of land, which was a critical aspect. Macroeconomic stability, getting inflation under control, and being a pro business first term for Putin, which meant that Russian entrepreneurs could get rewards for their hard work and their imagination.

That process hit a wall. Part of it was the security stuff, where Putin came from, and part of it was that the gap from Russia to richer western countries didn't close. It kept getting bigger. And this resentment at the gap between Russians aspirations and capabilities, Russia's standing vis a vis the west, this resentment, roiling resentment, produced a kind of revanche in the system to try to close that gap, or at least manage that gap.

And we got the putin that we know today, but it's only gotten weaker in trying to strengthen Russia again, in trying to make Russia. Able to match western power, American power. He's only further weakened it. Everything he's done has made his strategic situation worse. And so Russia is in potentially terminal decline as a great power on the earth.

And so it's hard to say what comes after him. He may have very good doctors. You can survive a lost war even if you're unpopular, as long as you suppress all political alternatives. He could fall. There could be circumstances that we don't see now. All coups are invisible or failures until they succeed.

Kind of comes out of nowhere. So we can't preclude it. But we have to be ready for him staying a long time and furthering this russian weakness and russian decline. You have to see his actions, including the criminal aggression against Ukraine, as deriving from weakness, not from strength.

And that's a secular trend. Ukraine is paying the price in a really big way right here as we speak. Russia is also paying the price of this misrule and this attempt, this resentment at the weakness and attempt to overcome the weakness. We could well find ourselves in a situation where managing an angry, resentful, and yet still capable Russia is a global problem of very significant order.

And we could well find ourselves, ironically, asking the Chinese to help us manage this Russian problem. A lot of our government officials have been working hard to break Russia off from China, to use Russia as an instrument to manage China, because China is seen as the more difficult task, the peer, competitor.

China has a stake in the international system. It is also seeking to change the international system more to its favor. But it has a stake in a way that Russia doesn't have a stake. And when you don't have a stake and you're weak and angry, but you have capabilities like blowing up a dam, God forbid, blowing up a nuclear power plant, poisoning water supplies, cutting undersea cables.

And I could go on with the kind of spoliation that could happen because you got nothing to lose. You're out, you're going down. What was Gorbachev's great achievement? He allowed the thing to go down and didn't take the rest of the world down with it. We're gonna need to manage this in a way where we don't have Gorbachev there, we got somebody else there.

And it could be that he's replaced, and we get a person who wants to re engage and re enter and get a stake in the international order, transform Russian domestic institutions, and not threaten its neighbors. And that could happen, it can't be precluded. We're not on that pathway right now, but it could surprise us.

But we could find ourselves in a situation where we're imploring the Chinese to get the Russians to stop doing some of the nasty things they're doing, including this Ukraine situation. So it's very troubling, the path that Russia is on, very troubling. Now, let's remember that the US in the 1940s, after World War II, provided opportunity domestically to its entire population.

There was a middle class economic boom between the end of World War II and the 1970s. Our family was a beneficiary. My father worked in an embroidery factory and bought a house, in that time period. We provided opportunity to our allies, not just through the Marshall plan, and we provided opportunity to our enemies, to Japan and Germany.

It was an extraordinary act that we pulled off, the opportunity domestically and globally, including to those that we had just fought a war with. That remarkable history needs to be remembered now as we go forward, and we need to manage in a way that we managed before. It may be different.

There may be ways in which Russia is not recuperable. The way Germany and Japan were defeated in existential wars and willing to accept American leadership and occupation and transformation. It's not gonna be identical, but we have a big problem here to manage, and Putin is only part of that problem.

It could get better, and it could actually get worse without him, or it could get worse with him. It could become a kind of North Korea at really massive scale, which is worrisome. And so managing the relationship with China, which is very important for everything and which is not part of the book, and we're not talking about.

That piece, we'll have a Russia component, for better or for worse. So I make no predictions about the future. If I could predict the future, I would be in that seat.

>> Steve Kotkin: And I'd be an investor, and John would be in this seat, and he'd be the half Klein Heinz, and I'd be the full Klein Heinz.

 

>> John Kleinheinz: Thanks, Steve. That's exactly how I would have answered that question, too.

>> Steve Kotkin: Let's see who else we got. We got one in the front row here, on the right side, our left.

>> Speaker 3: So in every great bit of fiction, you have to, as they say, kill your darlings, right?

So if that's 100,000 words or so, there had to be some extension of it that you wish that you could have put in the book, but it had to be chopped. So I'm really curious as to what was the most compelling story that you just desperately wanted to tell, but the editor was like, not today.

 

>> Steve Kotkin: The director's cut.

>> Speaker 3: The director's cut, that's right. He hasn't even read the book yet,

>> Steve Kotkin: And he wants to direct cut.

>> John Kleinheinz: So there is, actually is a good story, a great story. There was a lot of research, a lot of talking, a lot of stories that came up.

And there's this great story about the refuseniks. And the refuseniks are these group of Russian Jews who wanted to emigrate, usually to Israel. And the Russians wouldn't let them out because they held positions of power or they did something important. A lot of times because they were very wealthy and they wanted to make sure they left with nothing on themselves so they would be followed around for long periods.

And anyway, one of these refuseniks finally got out. The KGB guy that was guarding him walked him to the airport. He was absolutely sure he was leaving with nothing. He gets to Israel, a couple years later, the wall falls down, he's back in Moscow, and he bumps into the KGB guy.

And this refusenik is obviously very wealthy and somehow managed to get the money out. And the KGB guy said, how did you do it? And he said, the night before I left Moscow, I had a big party in my large apartment and invited five people from the US embassy.

And I took them into my office that had a big wood burning fireplace. And the whole office was full of $100 bills that I had accumulated. And I showed them all the $100 bills and they looked at the serial numbers and examined them all. And then we burned all the $100 bills.

And apparently there's a regulation in US treasury code where if you destroy currency and you can prove with affidavits from US officials that it's been destroyed, they will reimburse. So he got off the plane in Israel, went to Washington, DC, and got all of his money back.

>> Steve Kotkin: Yeah, why didn't I think of that?

 

>> Steve Kotkin: I'm half Jewish, maybe I needed to be 100% in order to think that clearly. I'm sorry, that's not in the book, but thank you for asking that question. But we're gonna have a book signing. John has graciously agreed to sign books that are for sale just outside after.

So we'll take one more question, and then we'll wrap up and head for the book signing.

>> Speaker 4: Yeah, I was curious. You said Putin was a Boy scout when he first took over. Do you think he really was and he's changed? And if so, what changed him? Or do you think he's always been the Putin that we know today?

 

>> John Kleinheinz: Well, I can only answer the first part of that question. And he really was a Boy scout. When he got in there, he was handed a whole russian markets were in total disarray. The banks were insolvent. He was handed a whole list of problems, and he approached them in a very free market, reformist style.

And as I said, he was the first global leader at the 911 with George W Bush after the attack. Again, I don't know whether he was a bad guy who was pretending to be good or not. And frankly, I think this is gonna be a question for historians for the next 100 years, why Putin went so bad.

And then I'll turn it over to the half Kleinheinz.

>> Steve Kotkin: Joe Stalin was a choir boy. He went to church every day. He did acts of charity and good deeds, and wrote poetry, pretty good poetry in his native Georgian language. He then went on to murder 18 to 20 million people.

And so people can surprise you. Let's just put it at that. I don't have the same insight into President Putin that our director has, who could answer the question much better than anybody in this room about what he was like and what changed him and why. But people have different dimensions in them, and some of them recede and others rise to the fore.

There's stuff in there, it's kind of all in there. But other things bring it out or suppress certain types of behavior and values. But you can't blame this on us, we didn't do this to him. He did this. He's doing it to Ukraine, he's doing it to the russian people.

And we have to remember that nobody has done more damage to Russia and to Russian interests in our lifetimes than Vladimir Putin has done. Okay, it's time to buy some books. Let's give it up for John Kleinheim.

>> John Kleinheinz: Thank you very much. That was really appreciated.