2. !Morgan
Stanley’s
Ukrainian
Misadventure
November 2011 bloomberg markets 73
TheNewYorkbank
envisionedgold
intheblacksoilof
theformerSoviet
republic’sgrain
farms.Itsforayinto
agriculturecame
upfallow.
By Alan Katz and Peter Robison
ILLUSTRATION BY ALEXI NABAUM

3. simoncrofts
IowanativeJustinBruch
marveledattheopportunitywhenMor-
ganStanleycalledinlate2007torecruit
him for an unusual assignment. The
NewYorkbank,flushwith$7.5billionin
fiscal 2006 profit—the biggest in its his-
tory—was going to be farming 11 parcels
on the steppes of Ukraine. The com-
moditiesteamwantedBruch,aredhead
with meaty hands who’d been farming
all his life, to manage one of them.
Bruch saw a chance to dig into some
famousdirt.TheformerSovietrepublic
has 30 percent of the world’s black soil,
earth so fertile Adolf Hitler had troops
cart some back to Germany during
World War II. Wheat, corn, rapeseed
and sunflowers thrive there. “It’s like
the prairie land that was broken in the
Midwest 100 years ago,” says Bruch, 34,
who grew up on his family’s 2,500-acre
(1,012-hectare) corn and soybean farm.
“The soil and potential for crops that
Ukraine has is the best in the world.”
Morgan Stanley was primed for the
investment. It was then the second-
largest U.S. securities firm by market
value, after Goldman Sachs Group Inc.
Chief Executive Officer John Mack was
pushing managers to take more risks.
The year Morgan Stanley called Bruch
about running a farm in the Mykolayiv
region near Odessa on the Black Sea,
the bank spent $6.5 billion for Crescent
Real Estate Equities Co., which had 54
officebuildingsinDallas,LasVegas,Mi-
ami and elsewhere. The bank also fi-
nanced an Atlantic City casino resort
after buying the land for it in 2006. The
commodities division, which had ac-
quired operators of fuel terminals and
oil tankers, recruited for its European
agriculture desk, anticipating rising
food prices. The increases would spark
riots in several countries in 2008.
Enselco Ltd., the company Morgan
Stanley funded that owned the Ukrai-
nian farms, bought satellite-guided
John Deere tractors to plow its weed-
strewn Ukrainian acres and imported
mold-preventing grain bags as long as
football fields. Bruch picked up enough
Russian to joke with his tractor drivers
and order a meal in his adopted home.
Things began to fall apart within
months. The locals stole fertilizer and
insecticide, Bruch says, and he sus-
pected that harvested wheat was dis-
appearing too. He wound up fighting
with tax, immigration, fire and police
inspectorsandtryingtosatisfyofficials
who wanted him to build roads, not
just till fields. He left the farm, called
Golden Fields, in June 2009 to man-
ageaUkrainianfarmownedbyanother
foreign investor.
“I worked my tail off for a year on
that, trying to do a good job, produce a
good crop,” Bruch says in a Lviv beer
garden over a meal of spit-roasted pig.
“It was pretty stressful and pretty
much a headache, so I’m really happy
not ever to deal with any of it again.”
Morgan Stanley gave up on farming
in Ukraine in July 2009, abandoning
the initiative in the middle of a harvest.
It bought out its local partner, Alek-
sandr Mamontenko, then sold Enselco
toaninvestmentfirmbasedinJerseyin
74 bloomberg markets November 2011
Aleksandr Mamontenko
served as Morgan Stanley’s
local partner in Ukraine.
‘thesoilandpotentialforcropsthatukraine
hasisthebestintheworld,’saysbruch,who
farmedthereformorganStanley.

4. alankatz
the Channel Islands, at what people
familiar with the situation say was a
loss. All told, Morgan Stanley put
about $30 million into Enselco
through loans, according to Igor
­Bobrov, who was hired in 2008 to be
Enselco’s chief financial officer and
later became its CEO. Hugh Fraser, a
London–based Morgan Stanley
spokesman, says bank officials de-
clined to comment for this story.
Morgan Stanley’s failed gamble in
Ukraine shows how Wall Street firms,
in the last gasp of a debt-fueled bull
market, strayed further from their tra-
ditional business of advising compa-
nies and underwriting stock sales to
embracediverseprojectswithunfamil-
iar risks. By 2007, banks were investing
ineverythingfromcasinodevelopment
to mortgage lending in Russia. That
year, the five major U.S. investment
banks had only $1 in capital for every
$40 of assets, meaning a 3 percent drop
in asset value could wipe out a firm, ac-
cording to a January report by a con-
gressionally appointed panel probing
the 2008 credit crisis.
“You don’t buy farms if you’re a bro-
kerage,” says Richard Bove, an ana-
lyst who follows Morgan Stanley for
Stamford, Connecticut–based Roch-
dale Securities LLC and has covered
Wall Street for 30 years. “It’s an ex-
ample of stretching too hard to make
a killing without thinking about the
core responsibility.”
After credit and equity markets col-
lapsed in the wake of Lehman Brothers
Holdings Inc.’s failure in September
2008, Morgan Stanley borrowed
$107.3 billion from the Federal Reserve
to survive, according to a Bloomberg
News compilation of data obtained
throughFreedomofInformationActre-
quests, litigation and an act of Congress.
It also got a $10 billion capital infusion
in October as part of a $700 billion
­governmentbailoutoftheindustry.
Morgan Stanley’s misadventure in
Ukraine points up risks for current-
day investors lured by statistics that
may seem to paint agriculture as a no-
brainer. Rising wealth is changing the
diets of 2.5 billion people in China and
India, requiring more grain to feed
cattle and pigs just as soil erosion and
urbanization are limiting available
farmland. To keep food inflation under
control,atleast185millionnewacres—
twicetheareaofGermany—willhaveto
be cultivated by 2015, says Philippe de
Laperouse, the St. Louis–based direc-
tor of the agribusiness practice at con-
sulting firm HighQuest Partners LLC.
Less than 60 million acres were added
during the 10 years through 2005,
he says. Global food prices spiked to
records in 2008 and again this year,
according to a United Nations food in-
dex. Prices in August were 26 percent
higher than a year earlier, after having
peaked in February.
Hedge funds, mutual funds, univer-
sity endowments and others with little
experience in agriculture are buying
farms at an unprecedented pace, pour-
ing at least $13 billion since the end of
2007 into land or funds that involve ag-
riculture, according to London-based
Hardman & Co. “These investments
are driven by people who put invest-
ments together; they aren’t farmers,”
says Howard Buffett, the son of Berk-
shire Hathaway Inc. Chairman Warren
Buffett. The younger Buffett runs a
farm in Illinois and is a former director
of agricultural behemoths ConAgra
FoodsInc.andArcherDanielsMidland
Co. in addition to sitting on Berkshire’s
board. “It’s a very difficult business,
and people really underestimate that.”
Some foreign investors have had a
tough time in Ukraine, even with the
humus-laced black earth—called cher-
nozem in Russian—that once made the
76 bloomberg markets November 2011
‘it’saverydifficultbusiness,andpeoplereally
underestimatethat,’sayswarrenbuffett’sson
Howard,whofarmsinillinois.
Justin Bruch, who ran
Golden Fields, says he’s
happy to be working in
Ukraine for new
employer Alpcot Agro.

5. region Europe’s breadbasket. Outsid-
ers often struggle to appreciate the
mind-set of Ukrainian workers, says
Yuriy Kosyuk, CEO of Myronivsky
Hliboproduct SA, a Kiev poultry and
grain producer. “We still have Soviet
brains,” the shirt-sleeved Kosyuk says
in a room adorned with porcelain
chickens at company headquarters. “A
lot of people here don’t want a job for
the salary. They want it to be able to
steal something, or for some prefer-
ence or way to get ahead.”
Landkom International Plc, based
on the Isle of Man, leases 74,000 hec­
tares, mainly in western Ukraine. It
raised 54 million pounds ($111 million)
in a 2007 U.K. public offering and has
since lost a similar amount, according
to its financial reports. Richard Spinks,
thecompany’sformerCEO,recallsput-
ting 96 people on his payroll for secu-
rity. They caught workers with plastic
bottles of diesel fuel stuffed in their
boots, he says. Landkom said on Sept. 7
that it doesn’t expect to report a pre-
tax profit this fiscal year because of a
poor rapeseed harvest.
Ukraine—which ties with Nigeria,
­Sierra Leone and Azerbaijan for 134th
place in Transparency International’s
2010 corruption perceptions index—
wasn’tMorganStanley’sfirsttryatpro-
ducing food. The bank also invested in
U.S. pig farms, says Brad Hintz, a for-
mer Morgan Stanley treasurer who left
the company in 1996 and is now an an-
alyst at Sanford C. Bernstein & Co. in
New York. Morgan Stanley’s merchant
banking funds had a controlling stake
inPrinceton,Missouri–basedPremium
Standard Farms Inc., founded in 1988,
according to a filing with the U.S. Se-
curities and Exchange Commission.
The pork producer ran up
$461 million in debt as it in-
vested in new hog barns and
packing plants while hog
prices fell to the lowest levels
since the ­mid-1970s, the fil-
ing says. ­Premium Standard
sought bankruptcy protection
in 1996.
“Itwassoclearthatthiswasa
troubledinvestmentthatwhen
you would sit in the merchant
bankingreviewcommittees,in
the back of the room there
would always be an associate
who would do ‘snort, snort,
snort,’” Hintz says, making a
noise like a pig.
With Ukraine, Morgan
Stanley saw a first step into a poten-
tial multibillion-dollar crop-growing
business, according to people with
knowledge of the discussions. Rec­
ord profits from advising on mergers,
under­writing stock offers and selling
mortgage-backed securities tied to
U.S. housing prices had transformed
Wall Street. Banks were opening the
throttle on risk taking.
Mack, hired in 2005 after execu­-
tive defections and lagging profits
weakened predecessor Philip Purcell,
wantedmanagerstoemulateNewYork
rivalGoldmanSachsandwagermoreof
thefirm’sowncapital,Hintzsays.Mack
set aside $2.5 billion for principal
­investments and encouraged em­
ployees to come to him with ideas.
Mikhail Chernyy, who worked in the
bank’s Moscow office, helped propose
the investment in Ukraine, according
totwopeoplefamiliarwiththecreation
of Enselco. Mamontenko, a member of
the supervisory board of AKB Finbank
in Odessa, says Chernyy called him to
suggest a partnership. The company
was registered in Kiev on Jan. 11, 2007,
amid a two-year surge in food prices
thatpeakedinmid-2008.Chernyy,now
deputy director of strategy and energy
markets at OAO Bashkirenergo, a util-
ity in Russia’s Bashkortostan region,
declined to comment.
Mamontenko led a search for suit-
able property for Enselco, of which he
was CEO. After the Soviet Union was
dismantled in 1991, most of Ukraine’s
landwasgiventoitspeopleinplotsthat
average 3 hectares and that can’t be
sold or used as collateral. Enselco ac-
quired 11 operating farms that leased
land from thousands of peasants in the
Mykolayiv region, where Bruch was a
manager, and in the Khmelnytsky re-
gion of western Ukraine. The farms
produced wheat, rapeseed and other
grains and oilseed.
“I can imagine the visions of sugar-
plums,” says Bove, the Rochdale ana-
lyst. He says the bank may have wanted
to grow grain to give its traders in fu-
turesmarketsanedge,asithasincrude
oil by chartering tankers.
Bruch, the farmer from Iowa, was
finishing a Master of Business Ad­
ministration at California State Uni-
versityinFresnoin2007whenMorgan
78 bloomberg markets November 2011
Goldengrain
An index of wheat, corn and rice prices approached
its 2008 high this year.
300
250
200
150
100
2006 2007 2008 2009 2010 2011*
*ThroughAug.31.
Source: United Nations Food and Agriculture Organization
FAO Cereal Index
‘Alotofpeopleheredon’twantajobforthe
salary,’theceoofakievgrainproducersays.
‘theywanttobeabletostealsomething.’

6. simoncrofts;MapSbyDavidFoster
Stanley called. He’d gotten a taste for
international farming in Brazil, where
he worked with his brother running a
1,250-acrefarminthestateofBahia.In
Ukraine, Bruch says, he was struck by
the timelessness of a place where on
some plots women still drop seeds by
hand behind horse-drawn plows.
“When you come from Iowa, you’re
­naive,” Bruch says on a rainy afternoon
by a wheat field owned by his current
employer, Stockholm-based farm in-
vestment company Alpcot Agro AB. He
soon learned that the ancient land-
scape hid a bureaucracy little changed
from Soviet days.
The red tape begins with bringing
equipment into Ukraine. Most coun-
tries require one piece of paper for im-
ports, says Joseph Gooch, an Indiana
farm equipment broker. He loaded five
containers for Morgan Stanley’s
Ukraine operations in 2008. Included
were a 500-horsepower John Deere
9620 tractor, a 300-hp John Deere
8430, a self-propelled sprayer and two
grain-bagging systems. He says that in
Ukraine, importers need a “certificate
of quality,” a “certificate of origin,” a
packing list and a “pro forma” invoice.
“The Communist mentality just hasn’t
died,” Gooch says.
On the farm, Bruch was facing a rash
of thefts. “It’s mind-boggling what peo-
ple will steal from you,” he says. “The
chemicals don’t go in the sprayer, they
go in the back of someone’s Lada and
are sold to a neighbor down the road.”
Bruch says he didn’t mind losing a
few gallons of insecticide; what con-
cerned him was the wheat that might
notgrowbecausehedidn’thaveenough
to cover the last few acres. After the
2008 harvest, his doubts increased.
Bruch wondered whether whole truck-
loads of wheat had been pilfered.
“I would look at a wheat field and
know that it was about a 4½-ton field,
that I had a good crop,” he says, point-
ing to a steel grate where trucks pour in
grain after it has been weighed. “Then
it comes across the scale at 3¼ tons,
and I would lie awake
at night and wonder
was I way off or did
that wheat get stolen?
I’ll never know.”
Still, yields weren’t bad; some wheat
fields came in at 5.2 tons a hectare and
somerapeseedat3tonsahectare,above
the average in Ukraine, Bruch says. The
larger concern was the bank’s dispute
with its partner, he says. “I didn’t have
the brains to see what a problem that
80 bloomberg markets November 2011
Golden Fields in the
Mykolayiv region was one
of 11 parcels in Morgan
Stanley’s farm venture.
Sea of
Azov
RUSSIA
ROMANIA
POLAND
BELARUS
MOLDOVA
UKRAINE
Mykolayiv
Khmelnytsky
Black Sea
unhappyharvest
Golden Fields farm was part of Morgan Stanley’s failed plan to cultivate agricultural
profits in two Ukrainian regions, where the soil is among the richest on Earth.
Golden
Fields farm
Kiev
Odessa

7. would be,” says Bruch, declining to be
more specific.
By 2008, Morgan Stanley was spar-
ring with Mamontenko, according to
two people familiar with the situation.
Enselco was owned by Venusaur Hold-
ings Ltd., a Cyprus–based firm whose
sole shareholder was Mamontenko, ac-
cording to documents in the Depart-
ment of the Registrar of Companies in
Nicosia. Venusaur pledged 100 percent
of the equity in Enselco as collateral to
Morgan Stanley, the documents show.
The bank questioned Mamontenko’s
decisions, people familiar with the
matter say. Enselco bought chemicals
from intermediary companies that
charged markups and sold crops to
middlemen at prices below market lev-
els, according to three of these people,
who declined to be quoted by name be-
cause they don’t have documents to
prove the markups.
Mamontenkosayshewasn’taffiliated
with intermediaries and coordinated
priceswithMorganStanleyofficials.He
says he had a good relationship with the
bank.Leaningoveradark-woodtablein
hisFinbankofficeinOdessa,hesaysthe
market panic following Lehman’s Sep-
tember 2008 collapse caused the bank
to bow out. “The biggest problem was
the financial crisis,” says Mamontenko,
his white shirt open to reveal a tanned
chestwithathickchainandagoldcross.
“That spoiled everything. Without that,
we’d be farming 200,000 hectares now.”
By the end of the 2008 harvest, Mor-
gan Stanley was cutting its far-flung in-
vestments as fast as it had been making
them. Mack reduced leverage—a mea-
sure of how extensively a firm is using
borrowed money to enhance returns on
shareholders’ capital—to 11 times by the
endofMarch2009fromalmost28times
a year earlier, according to bank figures.
The Ukrainian farms went out the door
in July 2009 when Enselco was sold to
JadenFinch Ltd., a firm that invests on
behalf of oil trader Robert Finch and
his family. Kernel Holding SA, Ukraine’s
largestsunfloweroilproducer,agreedon
Sept. 9 to an option to buy Enselco for
$52.3million.
The bank’s shares haven’t recovered.
So far this year, the stock has dropped
45 percent through Sept. 12, closing at
$15.05 that day—or one-fifth of its
$74.13 peak in June 2007.
James Gorman took over as Mor-
gan Stanley’s chief executive in Jan-
uary 2010. Mack, who’d stayed on as
chairman, will end that role on Jan. 1,
making Gorman both chairman and
CEO. The bank wrote down all but
$40 million of its $1.2 billion invest-
mentinahalf-builtAtlanticCitycasino
last year—another sign it’s getting back
to the business of banking.
Bruch is in his element too. Fishtail-
ing up a muddy track in a red Lada, he
points to the wheat and rapeseed
fields he’s cultivating for Alpcot. After
losing money for three years, the com-
pany, which specializes in the black-
earth belt of Russia and Ukraine, said
on Aug. 31 that it had turned its first
operating profit in Ukraine. “I just
want to raise the best crops I can for
the best value,” Bruch says. “Now I just
focus on raising crops.”
The bankers at Morgan Stanley, who
once fancied themselves farmers,
learned how hard that can be.
Alan Katz is a projects and investigations
reporter in Paris. akatz5@bloomberg.net
Peter Robison is a projects and
investigations reporter in Seattle.
robison@bloomberg.net With assistance
from Seth Lubove in Los Angeles, Bradley
Keoun, Beth Jinks and Michael J. Moore in
New York, William Davison in Addis Ababa,
Daryna Krasnolutska and Kateryna
Choursina in Kiev and Stelios Orphanides
in Nicosia.
To write a letter to the editor, send an e-mail to
bloombergmag@bloomberg.net or type MAG <Go>.
82 bloomberg markets November 2011
You can use the Global Agriculture Pricing (AGGP) function to compare
prices for crops in Ukraine with prices around the world. Type AGGP <Go>.
Click on the arrow to the right of the field in the upper-left corner and select
Sample if it’s not already selected. Next, click on the arrow to the right of
the second field and select Global Wheat Prices, for example. Scroll down to
Ukraine in the table. Click on Milling Wheat (11.5%) and select Chart Histor-
ical Spot. To chart additional prices such as the futures contract that trades
in Chicago, click on the box to the left of its name. JON ASMUNDSSON
Ukrainian
Wheat Prices
BloombergTıps
‘Thebiggestproblemwasthefinancialcrisis,’
saysaleksandrmamontenko,morganstanley’s
ukrainepartner.‘thatspoiledeverything.’