To achieve a majority stake, I bought some debt from the factory’s creditors. After their repayment was artificially defaulted, again with Stepan’s help, we initiated a bankruptcy procedure. I wasn’t afraid that the court would liquidate the factory, as no one was insane enough to send seventy thousand angry workers on to the street, so the court didn’t have a choice but to agree with my reorganisation plan. It provided for issuance of additional 20% stock against my modest investment availing some cash to the factory to remain solvent. I even paid the judge to order a write-off on some real debt to the non-influential creditors that couldn’t fight back.
It cost me over a hundred million dollars to purchase a 40% stake at the tender. It cost me less than ten million to get another 20% and write-off debt on the way.
We arranged for Oldman Sucks to convert some of its convertible bonds to shares as well, as the bank wanted in as a shareholder. In return, some of our loan was written-off and we gained a powerful strategic partner.
At this stage I started to admit to myself that I was corrupt too and not just simply adapting to the corruption around me. There was no denying it anymore. At a meeting with David, I shared my unease.
“We’re corrupt, aren’t we? After everything we studied at law school about ethics, we aren’t any better than all the other low-lives here.”
“That may be true, but who can blame us? You have two choices. You can be honest and not do business here or you can be corrupt and make money. There isn’t a third choice.”
“Yes, I guess you’re right,” I answered. “At least we’re good corrupt people. We’re modernising the factory and helping its employees to keep their jobs. They should thank us.”
Once again, everyone involved was happy, except for those creditors whose debt was erased. Eventually, I thought, I would raise the salaries of employees or at least pay them on time and thus sweeten for them the past few months of hardship. I was corrupt, but I was also decent.
After all the dust settled, I decided to keep Stepan on the payroll with a formal position of a director. We made his job purely nominal, as my own man, who was appointed as his deputy was to actually run the business. Although just a middle-age drunkard, Stepan saved me a fortune by playing along with our plan. Having been the manager of a factory that was of national importance for fifteen years, it meant that everyone in the region knew him and he knew everyone, from the police and security services to the biggest mafioso. Now, Stepan had enough money for a jacuzzi every day, filled with vodka instead of water.
***
As a side kick of overtaking Lugansk Steel, we acquired a variety of assets without any business orientation or clear connection with the factory. It came with a sanatorium on the shores of the Black Sea in Crimea, a hospital, a cinema and most interestingly, a football team - Metallurg Lugansk.
It was in the First Ukrainian league, just under Premier. While it wasn’t as popular as the Premier league team that represented Lugansk, it did have its devoted fan base. It was an underdog, and I liked underdogs.
As I was a fervent Dynamo Kiev supporter, I didn’t immediately warm to the idea of sponsoring a Lugansk football club. However, I couldn’t simply throw it away or disband it. This would turn seventy thousand heavy industry workers against me, as football and vodka were their main passions in life. Against such a number of angry hard core, steel factory workers even Gigo with all his thugs couldn’t prevail.
I decided to keep the club and see whether I could improve its positioning in the league and its finances. I suspected that the manager of the club and probably some of the players found a way to monetise the sport. Our team sometimes strangely lost games to supposedly inferior rivals. Own goals, goalkeeper’s silly mistakes, such as bird watching during attacks by the rivals, and players intentionally hitting other players and getting stupid red cards, were some of the ways we lost matches. Someone was making money from gambling on fixed games.
While I didn’t have high hopes for the club, I didn’t like what was happening. I assembled the entire club’s personnel in an auditorium. I took Gigo and the head of Lugansk Steel labour union with me and told the guys, “You see Gigo here. If I see that someone is throwing one more game, you won’t need to deal with me. You won’t need to deal with Gigo, either. But we’ll tell all the workers at Lugansk Steel that you’re throwing games. You’ll need to deal with seventy thousand angry workers. And we’ll pay the police not to intervene when they decide to show you what justice means for people who throw games of their beloved team.”
The union chief slammed his fist on the table to demonstrate the union’s preferred way of tackling such situations. Silence fell in the room after I finished with my little motivational speech. It was possible to hear the mice squeaking in the boiler room at the corner of the auditorium. Hell, it was possible to hear a mouse farting.
“Now you bastards better start winning games and make your mamas and me proud,” I carried on. “I saw you play and you’re not bad. If you finish the season without relegation I promise that each one will get a thousand dollars and the best scorer will marry my daughter.”
They were so dumb or dumbfounded that no one even smiled.
“That was a joke; I don’t have a daughter,” I continued. Some smiles finally appeared, although most were still unsure whether smiling was appropriate. This was a tough crowd.
“But seriously, the best scorer will get a brand new BMW. If you manage to finish top three, I promise I’ll distribute one hundred thousand dollars among those who deserve it.”
Once I showed them the stick, it was time to show them a carrot so they actually made an effort. I knew that the money was safe with me since there was no way for the team to finish in the top three. Spending a few tens of thousands seemed a small price to pay to make seventy thousand workers happy.
A roaring: “Misha! Misha!” filled the room. Perhaps all these guys needed was someone to motivate them. It felt good to be loved by the crowd. Perhaps I should’ve been a football player, a rock star or a politician.
No more games were ever fixed again. The club won some and lost some but it wasn’t relegated to the Second league.
Football, however, as drugs, gambling and other sticky stuff, rarely lets you off the hook. As the years passed, I found myself deeper and deeper involved in this sport.
13 The Dark Continent
Luanda, 1997
It was impossible to grow big in any business without protection from the SBU. My contact, Colonel Ivanenko, who was receiving a monthly fat envelope from me, urged me to consider helping to revive Ukrainian military exports to Africa and other third world countries through my connections abroad.
Ukraine is a big military force in Europe, second only to Russia in military strength. At the same time, Ukrainians are the fifth largest consumers of alcohol in the world. A nation of drunks controls one of the most powerful armies in the world. At least Ukraine had given up its nuclear weapons in 1996, removing the risk of an intoxicated general stumbling onto the red button.
Ukraine had a huge, cutting edge military industry with massive stores of sellable equipment. It included anything from rifles and machine guns to heavy artillery, tanks, airplanes, electronic warfare equipment, missiles, war ships, anti-aircraft weaponry, radars, communication systems and virtually everything to equip a modern army.
I met the colonel, who was in his mid-fifties and always wore a black suit and dark sunglasses, at our usual meeting place at a high-market Ukrainian restaurant in Kiev, owned by my old friend Seva. He ordered the same food every time we met: cabbage soup followed by meat grilled on a skewer with potatoes, a couple of beers to wash it all down, and a glass of vodka at the end of the meal. He always told me the same joke.
“Patient sees his doctor and complains that he suffers from insomnia, nervous breakdown and depression. Doctor says: Take this medicine for insomnia, this one for nervous breakdown and this one for depression. So patient asks the doctor: Do you have anything
else besides vodka?”
I always laughed politely. Say one thing about the colonel, he was consistent. Or perhaps he was suffering from a mild Alzheimer’s disease.
He claimed: “Colonel Ivanenko’s bosses are in charge of all military exports. Both the State Export Control Committee and the State Special Export Company have a monopoly on official military exports. They’re staffed primarily with SBU officers. Without authorisation of the committee, no military or dual-use merchandise can be sold legally. Colonel Ivanenko can get the authorisation to export anything. Colonel Ivanenko can even get an authorisation to sell nukes to Saddam Hussein, had Ukraine not given them up under fucking Budapest memorandum.”
He paused to emphasise the point and let me have a chance to admire what he just said. I was aware of the huge amount of contraband arms smuggled out of Ukraine, but that applied mainly to small items like firearms, ammunition, handheld rockets and spare parts. I already knew that if you wanted to sell a warship or a radar system, it would be practically impossible to smuggle them out of the country. Overall, the proposition sounded like a serious offer from a serious man. Perhaps a loony, but nevertheless a serious man.
“You find the buyers,” he continued, “Colonel Ivanenko arranges authorisation, supply and transportation. You then collect the payment and transfer to Swiss bank account as per Colonel Ivanenko’s instructions, minus your commission of course. You understand?”
“I understand,” I answered. I understood that the guy was a fucking psychopath, referring to himself in the third person. “Let me check what I can do and get back to you.”
With the Soviet Union’s collapse, Ukraine lost its direct military ties with most African nations. The seasoned diplomats and Soviet foreign military intelligence officers, who had connections with decision makers in third world countries, were inherited by Russia. Ukraine still didn’t know how to connect with African nations. An intermediary was needed. And I was a perfect intermediary.
David had an Israeli friend, Joshua, from his days in the military. He was involved in the defence business and natural resources trade primarily in Africa.
My plan was to use Joshua’s help to reinstate Ukraine as a substantial military exporter in some of the African countries. I knew that the Russians were still strongly present on the continent and they wouldn’t be happy with competition from Ukraine. I hoped that Joshua’s connections led to levels high enough with the clients to surpass the Russian resistance.
Being a middleman in arms deals meant being strong at both ends, convincing both buyer and seller that they needed your indispensable services. Nobody liked to pay the middleman unless the deal couldn’t be done without him. In many ways, doing business in Africa was similar to doing business in Ukraine. Officials’ personal incentives were the major part of the normal course of business. While the weather and the people were vastly different, we should’ve felt right at home doing business in the Dark Continent. Many high-ranking officers in several African countries had studied in the former Soviet Union and spoke Russian, making communications easy.
David contacted Joshua and arranged a meeting for us, and as expected, Joshua jumped at the chance of doing business together. He introduced me to several officials in the ministries of defence of a few African countries, with all meetings conveniently taking place in Geneva. Pretty soon, we agreed the terms of our “friendship and cooperation” under which any arms deal I brokered would kick back to the officials between 30% and 50% of the proceeds. Not so different from the Ukrainian style of doing business.
I felt that I was all set on the buyers’ end. The buyers had no direct connection with the sellers and I was the one who was paying them back their share. Now, I needed to sort out the sellers’ end, the Ukrainian side. I had to have the SBU pigs in the loop, but I certainly didn’t want them to pocket the majority of the profit. I paid them a huge monthly salary anyway and the African side had already pushed down my profit margin.
Besides, as the SBU were the Ukrainian successor of the KGB, I wasn’t too fond of this organisation, although my childhood’s anger and hatred became less acute over the years. I neither forgot nor forgave what the KGB did to my father.
The SBU was just the interface. It didn’t have anything sellable, except maybe for information. Those who had arms for sale were the military and the defence industry, not the SBU. I wanted to bypass the blood-sucking leeches. I’d defied ministers already; I thought that I could defy the SBU as well.
I needed a direct connection with the military, which could sell existing arms’ stock, and the defence industry, which could manufacture new arms. I needed to have first-hand prices and not those inflated three-fold by SBU supervisors. I was sure that once they’d asked me in, they wouldn’t risk throwing me out and thus jeopardising the orders for the arms and disappointing formidable opponents, such as the military and defence industry chiefs. I was walking on eggshells and had to tread carefully.
Through Boris, I had my connections with Ukrainian government officials. They introduced me, for a small fee, to General Milkovenko, as well as a few directors of arms manufacturing plants.
At the beginning I thought that my job would be easy. First, agree astronomical prices with the buyers. Since the buyers’ representatives were paid back a good chunk of it, there was no conflict of interests. Second, get the lowest possible quotes from the Ukrainian sellers for the merchandise, whether in stock from the military, or to be produced to order from the plant. A chunk of the proceeds would go to the SBU, so Colonel Ivanenko and his associates wouldn’t be too pissed off that I was working directly with the suppliers.
Of course, I had to take care of the appropriate payments in Ukraine, to ensure that the agreed merchandise left Ukraine at all. I didn’t need to manufacture anything, buy the inventory or pay for insurance. I was the perfect middleman who took his cut when the money and merchandise exchanged hands between the parties.
What a perfect plan. What could possibly go wrong?
Well, almost everything. All the pre-payments were made to the factory on our first radar deal, which should’ve brought me a fifteen million dollar net profit. The supply time was nearing, but then the client’s inspection team reported to its superiors that the radars were far from ready. The Africans called me and they weren’t happy.
“No radar on time we eat your left leg. No radar at all, we eat both your legs.”
I didn’t think that they were using metaphors, but seriously threatening me with cannibalism.
As my contacts in Africa were getting agitated, I urgently sent my own inspection team to the factory. I was furious to find out that most of the prepayment had been blown by the factory, which was in dire financial straits, to cover salary arrears and other pressing debts. That was what they claimed anyway. I wouldn’t be surprised if a large part of it was stolen by the factory’s management. Some essential radar parts hadn’t even been ordered from third party manufacturers, as the plant had run out of money.
It was a huge setback. Both the deal and my reputation were in serious danger, as well as my legs. There was no other choice but to bridge the financing from my pocket and to send my people to literally live at the plant to make sure that the radar was completed without further delays. On top of that, I couldn’t escape penalties on late delivery. My profit from the deal was wiped out and I didn’t even break even. I had to pay two million dollars to compensate the Africans.
But it was valuable lesson, because now I understood how the business worked. To make a deal happen, I couldn’t just wait for each party to perform its contractual obligations. Trusting the Ukrainians or the Africans to just fulfil their roles had been a mistake. I needed to have an active hand in each stage of the deal, keeping tight control over the payments so they wouldn’t be stolen or wasted. I had to have my own people ensuring that every stage of each transaction progressed according to schedule. And I had to have levers in place to pressure parties to do their parts in the agreed way. Once I lea
rned how to operate in this industry, and I built my reputation, the deals started to flow.
On certain occasions, if my Israeli partner, Joshua, was strong enough at the buyer’s end, we made shit loads of money. We were able to squeeze the lowest price from the Ukrainian exporter, and then sold the goods to the buyer for five or six times more than their cost. We ensured that the quotes were never exchanged directly between the seller and the buyer. If direct contact was established, we had measures in place to prevent any direct or government to government sale. Slowly but surely we progressed in this closed market, where only a few can survive and succeed as intermediaries.
While it sounds simple after our initial hardships, it wasn’t so. Arms dealing required a special attention to security, espionage and counter espionage activities of the countries involved. Different secret service agencies were carefully observing every step we made. Big brother was watching big time.
Ukraine, Russia, the United States, the United Kingdom, Israel and probably several other countries relentlessly follow every movement in the global arms trade business. I asked myself whether it was worth it. The risk was that once the agencies had their eyes on you they would never let you out of their sights. Nevertheless, the answer was clearly affirmative. We had prospects of nine digit deals and intended to leave a fat margin in our pockets. This area was so exciting. I wanted to feel like James Bond or a Lord of War.
Colonel Ivanenko’s role in my business was almost symbolic. He grudgingly accepted pay-offs from me, but I was sure that he wasn’t happy with how it all turned out. He probably planned to either replace me with a more loyal arms dealer or have a bigger chunk of the pie. I was paying him so he wouldn’t kill the hen that laid the golden eggs. But as soon as he found a goose as replacement, the hen was going to the BBQ.
Rise of an Oligarch: The Way It Is: Book One Page 14