NOVEMBER 18, 2010, 7:37 PM HEDGE FUNDS

From Russia Expert, a Gloomy Outlook (DealBook)

BY ANITA RAGHAVAN

Antonio Olmos for The New York Times“Governments won’t be able to borrow much more, and are going to be forced to print money,” William Browder, a hedge fund manager, said.

William F. Browder was speaking at Columbia Business School several weeks ago when he was asked a question he gets asked a lot: Where’s the next Russia?

Mr. Browder, the grandson of Earl Browder, a onetime leader of the American Communist Party, is uniquely qualified to answer.

From 1996 to 2005, he was on the front lines of investing in Russia, becoming one of the country’s most prominent and vocal activist investors with a fund that ballooned to $4.5 billion by the end of 2005, from $25 million a decade earlier.

Sitting in offices in Paveletskaya Square in Moscow, Mr. Browder focused on under-researched Russian companies that were trading at sharp discounts to their more widely followed peers. He had no plans to leave Russia, but at the end of 2005 he was expelled from the country after the Kremlin turned against him, possibly irked by his criticism of some of Russia’s prized companies like Gazprom.

“I was then challenged to figure out the world, which was much harder than a simple place like Moscow,” said the 46-year-old Mr. Browder, who moved to London, where he now invests in emerging markets from offices in a sedate square in the city’s West End.

Mr. Browder is looking grayer these days, but he is upbeat until he starts talking about Russia; then his smile fades and his demeanor turns serious. “I have pretty dark feelings about Russia,” he says. “I think it is a place best to avoid both for financial and moral reasons.”

In his old office in Moscow, he used to have a large painting of Lenin above his desk, but it has now been taken down and is stashed in a corner. The only visible reminder of his time there is a small painting of Red Square.

His team in London with about nine portfolio managers and analysts is bigger than the one he had in Moscow, which is not surprising since he is scouring the globe forinvestment ideas.

Mr. Browder’s schooling on the world came at a critical juncture. By 2007, when he set up Hermitage Global, his new fund, with $1 billion in assets, there were growing signs that the real estate bubble in the United States, which had spawned a lending spree by banks, was headed for a bad end. Mr. Browder and his team did some analysis and concluded that an American bank — he got the wrong one — would fail. Then, as governments spent $9.1 trillion, by his estimate, to rescue their banking systems and revive their economies, he turned his attention to them.

About a year and a half ago, he stood up at a Stanford University alumni event in London and mentioned the unthinkable: a run on the Irish banks, which he posited could occur if depositors decided over a weekend to withdraw their money. Irelandwould turn to the European Union, where dithering by fiscal hawks in Germany andFrance would precipitate a run on the banks on Monday morning.

Mr. Browder’s doomsday scene was averted in 2009 when the International Monetary Fund announced a trillion-dollar balance sheet intended to avoid the kind of crisis he laid out. But he had predicted that the move would give Ireland breathing room of only 12 to 18 months, especially since the country, in a move to bolster confidence in its banks, had guaranteed all deposits.

Ireland is a country with “tax revenue of $41 billion and total G.D.P. of $108 billion and their debt burden is about to explode from $59 billion to $459 billion in order to guarantee all bank deposits,” Mr. Browder said in an interview this week. “There is no way they can possibly guarantee everything in the end.”

He said countries like Ireland, Portugal and Greece were in an unsustainable situation. “They are going to have to default and devalue, and the only way to do that will be to remove themselves from the euro zone and print their own currency,” he says. “If they default and don’t devalue at the same time, they may never recover.”

Mr. Browder sees the emergence in developed countries of “debasement inflation” — or rising prices with no growth. In a situation where central banks of the developed world are printing money, “you want to own hard things that can’t be printed,” he said. He added that he and his fund owned a lot of gold.

Emerging markets went through more than a decade ago in the Asian financial crisis what developed markets are experiencing now, Mr. Browder said. “Their currencies aren’t going to be debased,” he says. Hard assets in emerging markets are a better store of value for investors and so he looks to own real estate developers and gold mining companies in these markets.

Mr. Browder said the world was in the second stage of the crisis, where “governments won’t be able to borrow much more, and are going to be forced to print money.” This stage will spawn a new bubble in long-term bonds. “People are going to lose their shirts owning long-term bonds,” he said.

The next — and most dangerous— stage of the crisis will be the collapse of currencies. “There will be a crisis in confidence in developed market currencies,” he said. The trouble is, “you can’t bail out currencies when they start collapsing.”

As for the new Russia, Mr. Browder said there would never be another investing opportunity like the previous one in Russia, where investors had the chance to increase their money thirtyfold. But in the high-inflation scene he is painting for the developed world, he says he thinks there could be another lucrative opportunity for Columbia Business School students much closer to home.

“If I were finishing business school right now, I would become an expert as quickly as I could on the U.S. residential real estate market,” which is 50 percent off of its peak and will become an inflation hedge as the United States and others start printing money, he says.