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The Kremlin at sunset.
John Kleinheinz’s prospecting in post-Soviet Russia in the early 1990s in short order assembled quite a sizeable nugget: A huge position in the country’s chief exporter of natural gas.
“The company went ballistic and, and they literally said, ‘We're gonna kill you.’ That was their opening bargaining position,” Kleinheinz says by phone this week.
Kleinheinz, who, with his wife Marsha, makes Fort Worth his hometown, was comfortable knowing that proposition was the agitated bear merely striking a pose. The investment fund he was part of included Bob Strauss, prominent attorney and businessman, as well as President George H.W. Bush’s ambassador to the dying Bolsheviks — sent to its destiny, the ash heap of history — and the new Russia that emerged. Among others part of the fund was the vice chairman of Merrill Lynch.
Eric Draper
John Kleinheinz
“We had enough people in our deal and Russia, frankly, they were trying to jumpstart their capital market and create a market. There was no way they were gonna kill foreign investors,” Kleinheinz says.
The newest incarnation of Russia? Well, who knows. Whatever the case, it’s not a good place to do business today. Actually, you can’t do business there at the moment.
The anecdote, however, is a taste of Kleinheinz’s story of adventure striking it rich in the Russian Federation. He is the co-author of The Siberia Job, a novel based on the true, daring story of Kleinheinz’s bold excursion into the “Wild West of the East” that required uncommon chutzpah.
Kleinheinz, an economics graduate from Stanford, is the founder and president of Kleinheinz Capital in Fort Worth. He continues to run the Global Undervalued Securities Fund, which is active in a variety of areas including Japan, U.S. energy and technology markets and private equity. After moving to Fort Worth in 1993, he was a partner in an investment firm where he managed the Russia Value Fund.
He is also the lead investor in efforts to develop high-speed rail between Dallas and Houston using the Japanese Shinkansen N700 technology.
The Siberia Job was actually written by Josh Haven. That is a pseudonym, just like Kleinheinz’s character, “John Mills,” the book’s protagonist.
The book is a novel, Kleinheinz says, for a variety of reasons, namely to protect people.
The company involved said it wanted no publicity at all, Kleinheinz says.
“There’s still enough people around [who were involved] who could get in trouble and [the company] has got their own private security, much like the Wagner group.
“So, you know, there was just no reason to be overly factual.”
The Wagner Group is the mercenary outfit that recently quit its fight in Ukraine in order to march back to Russia seeking recompense from the military hierarchy and perhaps Vladimir Putin himself. It’s difficult to tell exactly what they were up to, but they ultimately backed off, its leader shipped off to exile.
The book details Russia’s privatization efforts in the aftermath of the fall of the Soviet Union. In 1994, the government privatized its industry by issuing vouchers to all of its citizens, allowing them to be shareholders in the country’s burgeoning economy. The vouchers were administered by the International Monetary Fund and European Bank for Reconstruction and Development. The slips were distributed among the population and auctions were arranged where they could be exchanged for actual shares.
The vouchers were little more than pieces of paper for the country’s rural populations who were living in abject poverty. And, indeed, one voucher had little value. However, a collection of vouchers had potential for a lucrative windfall.
In fact, Kleinheinz and his partner on the ground in Russia, Petr Kellner, were acquiring shares in companies for 1% to 2% of intrinsic value.
Kleinheinz, then in his early 30s, was an investment banker in London while observing the voucher system successfully work in the Czech Republic, Hungary, and Poland in the year or two leading up to Russia’s attempted transition.
In the book, “John Mills” and his partner Petr travel to the outreaches of Siberia to acquire vouchers for the country’s national oil company, Gazneft, going from town to town with suitcases full of cash. When the Russian mafia and oligarchs in charge of the company catch wind of their successes, the stakes become suddenly deadly.
In reality, Kleinheinz says, he faced little danger despite the “threat” to kill him.
National leaders intentionally made it difficult for someone like Kleinheinz's group from accruing large interests in companies by hosting auctions in the remotest parts of the country.
And sure enough there were plenty of complications, the last one the threat to use lethal force to get the shares back. Ultimately, the gas company took back about 80% of the stock of the Kleinheinz group. It required Strauss to work his diplomatic channels through Russian Prime Minister Viktor Chernomyrdin, the former minister of the gas industry in the Soviet Union and first chairman of the fictionally-named Gazneft.
“We went at it in such a business manner … so well-organized manner,” Kleinheinz says. “I called up Bob [Strauss] when I got the results, I said, ‘Bob, we're gonna make $2.5 billion, $3 billion on this deal. Bob said, ‘No, you're not. They’re only gonna let you make about 500 million bucks.
“Just off the top of his head, he said ‘You’re gonna make about 500 million bucks.' Three months later, after all the negotiations, that’s exactly how much we made.”
Strauss wrote missives to Chernomyrdin that Kleinheinz helped compose. They said in effect that this was an important time for Russia with the nascent beginnings of a capital market and that the country needed to treat investors well. And, finally, the company needed to arrive at an agreement with these guys.
“I assume he sent those to the CEO,” Kleinheinz says.
In the end, the fund was given Global Depositary Receipts “that were freely tradable in London that were worth much, much more. It was actually a win-win deal.”
What is to become of Russia today, God only knows. Putin, though at first embracing free-market reform, has turned his back on it and led his country back into a totalitarian (and outlaw) state corrupted by security forces. The best and brightest of its sons and daughters go make a life where they are free to think and innovate.
Kleinheinz, though, expects there will come another day like those days in 1994, which will forever be among his most fulfilling.
“I'd been an investment banker for 10 years and I had just gone into the money management business, and it was my first opportunity to really deploy capital on my own,” Kleinheinz says. “It was hugely successful for me. [The success] allowed me to go out and start my own business. And I made such good friends.
“It has an important spot in my heart.”