Francis dropped his bags, took a quick shower and then headed off to meet Ekaterina from her office a few blocks away on Tverskoj Bul’var. Friday afternoon’s traffic in Moscow’s was more hopeless and there had been no point in her meeting him at the airport.
As he left the appartment building he marvelled at the metamorphosis of the garden square, the last time he had seen it, just four weeks earlier, it had lain under a hardened layer of grimy grey snow. It was magic, the trees were decked out with bright green leaves and the flower beds bursting with colour. Francis felt good as he turned in the direction of Tverskaya, it was no doubt in anticipation of the long break he had planned with Ekaterina and not a little to do with the glorious weather he discovered on arrival, a marked contrast to the wet and wind swept streets of Dublin.
Around him everything looked normal in Moscow for that time of the year: the girls were pretty, the trees were green, the fashionable stores still fashionable, the luxury boutiques still out of reach of all but the rich, the flower sellers still babushkas and the traffic still snarled-up.
The gay spring appearance was deceptive, it belied the difficulties of many ordinary Russians struggling to cope with the changes. The class cleavages were more pronounced than ever as the wealthy continued unabashedly to flaunt their affluence, hiding their fears that bad times were ahead.
The middle classes who had bought new homes with foreign currency loans were desperate: with the fall of the rouble they owed twice as much as they had borrowed in euros. For the working classes the transformation from socialism to capitalism had been brutal, leaving many stranded in a world they had not had time to understand.
It seemed to many post-Soviet society had favoured a privileged few, those who had cheated the people of their collective assets: natural resources, industries, banks, properties and institutions. Corruption was rampant as those close to power rode roughshod over the people’s rights.
To Ekaterina, who like many young ambitious outward looking Russians had embraced the changes offered by the early Putin years, her hope had been transformed into enormous disappointment. She was a patriot, but not blind to the calamity of Putin’s leadership, who by his ambitions was leading Russia into a useless confrontation with the West. Her country’s future was not with Iran, Syria and North Korea. A sad turn of affairs because Russia had so much to offer to Europe and the West.
In the light of the changes brought about by the Kremlin, the success of China was a bitter pill to swallow. From an agrarian based society China had succeeded in its transformation, overtaking Russia in every sense, even if it was still ruled by the Communist Party, whilst Russia after abandoning Communism had slipped back into its bad old ways of despotism at a alarming pace.
Like all Russian mothers who wanted a better future their children, Ekaterina feared the misery of the dark days her parents and grandparents had known under the Soviet Union and its tyrants. There was of course a nostalgia for a state that had offered work, health and education to its sons and daughters, pride in its accomplishments in space, science and the arts. Her disappointment was intense, would she like so many progressive young Russians be forced to seek a new life abroad?
Ekaterina was one of those who had taken out a mortgage in dollars. Her salary at Christie’s, where she was an expert in contemporary art, had been sufficient to buy a modern two bedroom flat, but with the collapse of the rouble her mortgage payments had doubled.
She like millions of Russians found herself trapped by a crisis not of her making. Her optimism had been cut short by Putin’s Ukrainian adventure and buried by the collapse of oil and the imposition of sanctions. Of course most Russians were unaffected by their government’s counter measures against the West, but many Muscovites and Petersburgers worked for foreign companies or those that imported food and goods from France, Germany or the USA. For them life had become difficult as they cut back on discretionary purchases and foreign holidays out of fear of losing their jobs.
S
pringtime in Moscow
Some Russians had lost faith in the rouble, others had even invented a parallel currency, the kolion. The lucky ones, those who owned a family home in the countryside, gave up the unequal race and left Moscow or Petersburg. Ekaterina had even contemplated moving to her grandmother’s old family home, now a weekend dacha, in a small village sixty kilometres from the capital, where people lived without the state thanks to home grown food: chickens, geese and firewood from the forest. There they turned to the Orthodox Church for guidance, as in the more distant past, and counted on help from their neighbours.
Ekaterina with her flaming red hair and independence reminded Francis of a girl he had once known in Dublin. She did not give in easily. But she had little choice, Moscow offered work. Like a magnet it emptied towns and villages in the surrounding regions, where industries and jobs had disappeared as had schools, hospitals and services. Hapless distant villages fell into ruin for lack of resources. Old folk who saw their pensions shrink to a pittance, bitterly regretted the good old days of the Soviet Union, when unlimited access to medical services and hospitals was there for all.
For many like Ekaterina the idea of her country spending money on foreign adventures, nostalgic of the Soviet era, was incomprehensible when there was so much lacking at home.
*
Putin’s neo-imperialist policies had resulted in a surge of capital flight. What investor in his right mind would put his money into a land without impartial courts, where an absolute ruler could throw his enemy into prison and seize his goods? Where trust was eroded and property rights were ridden over rough shod by a state at the boot of the Kremlin’s autocrat. Oil and gas were not enough to reassure investors. Long-term political stability was a sine qua non requirement, especially when it required billions to explore and put new oil fields on stream and where, given the uncertainty of market conditions, the breakeven point was years off.
It wasn’t surprising the rich were rushing to get their money out of a country that appeared to be sliding backwards to a form of authoritarianism worst than Communism, where corruption reigned, where government ministers owned offshore companies to hide their ill gotten wealth, where officials flaunted their fabulous bling-bling life styles. Francis saw the hope of a new prosperous Russia fade, and under Putin’s progressively authoritarian rule it had started to resemble a banana republic of the worst kind … backed by a terrifying nuclear arsenal.
*
Alexander Litvinenko, a double agent who spied for both the FSB and MI6, was an example of the fate that awaited Putin’s enemies. He died in London in 2006 after drinking tea laced with polonium-210, a deadly isotope, of which a quantity no larger than a speck of dust was sufficient to kill a healthy man.
Litvinenko started out in the KGB counter intelligence service and then a lieutenant colonel in an FSB unit specialised in fighting organised crime.
In 1994, Litvinenko got to know Boris Berezovsky, Russia’s first oligarch, friend and kingmaker of Russia’s post-Soviet president Boris Yeltsin. He had led an FSB investigation into Berezovsky’s attempted murder: a car bombing in which the oligarch’s driver was killed and he was injured.
Then in 1998, the former FSB officer claimed he was asked whether he could get close enough to Berezovsky, who had since fled to London after having fallen afoul of Putin, to murder him. However, rather than kill Berezovsky he went to him and revealed the plot, thus saving the oligarch’s life, temporarily as it turned out as Berezovsky died in 2013 under mysterious circumstances at his Berkshire mansion.
Berezovsky had criticised constitutional reforms proposed by the Putin soon after the latter was elected. In an open letter to Putin, Berezovsky, then a Duma deputy, said that he would vote against the president’s project. Shortly after Berezovsky resigned from the Duma in the direction of London.
The Russian elite was little concerned about the well-being of the proletariat and if proof was needed it was in the hundreds of billions of dollars stas
hed overseas by men like Berezovsky. One hundred and fifty billion dollars left the country in 2014 alone, slowly draining the nation’s life blood.
Putin’s power was underpinned by oil, which after rising to more than one hundred dollars a barrel, permitted him to gain absolute power and take control of the media.
In the decade and a half since he had been elected, complaisant oligarchs became staggeringly wealthy, and even though certain were hard hit by the Great Recession, most rebuilt their fortunes under Putin’s system of crony capitalism, transforming Moscow into the world’s leading billionaire capital.
SHANGHAI
His fifteen day China book tour started in Hong Kong and was scheduled to end in Beijing. It was part of a successful writers obligations, and O’Connelly, like all successful writers, travelled to promote his books. His editors required his presence at book fairs, for press and television interviews, readings and book signings. Between was a stop in Shanghai, where he would attend one of its many literary festivals and carry out research for his new book. The megapolis situated at the mouth of the Yangtze River was not only the country’s business and financial centre, but also a focal point of modern Chinese literature and arts.
The main goal, at least as far as his publisher was concerned, was the launch of the Chinese translation of his latest book, which involved a series of readings and book signing events. His own specific interest was less mercenary, namely the research for his next book, set in part in China and more specifically Shanghai, for which he wanted to get a feel for the atmosphere, notably the French quarter, the Bund and Hongkou, the latter being celebrated as the home of the League of Left-wing Writers and revolutionaries in the twenties and thirties.
O’Connelly’s new book was a novel based on an idea of Michael Fitzwilliams and set around the history of three banking families: the Fitzwilliams in Ireland, the Smeatons in Asia and the Hiltermans in Amsterdam. Fate and market shocks had brought them together: first the dot-com bubble, followed by the Lehman Brothers collapse and the financial crisis that ensued. It was an intergenerational story, a trilogy, that opened in the nineteen twenties when the families struggled to survive the Wall Street crash and depression, followed by the traumas of WWII and decolonisation.
O’Connelly’s programme had been arranged by his New York publisher Bernstein Press. Jason Hertzfeld had been pushing him to get more Asia content, because that’s where it was happening he had told him.
T
he Bund – Shanghai
“Look at your Irish pals Pat, Fitzwilliams and Kennedy, that’s where they are today,” Hertzfeld had insisted, “even Tarasov.”
O’Connelly had to agree, but he was a writer and did not write to order, though it sometimes seemed like that given Hertzfeld’s pushy New York style. He had to admit the idea did fit in with his plans.
“The Wall Street Journal’s running a story about a deal signed in Vladivostok with Tarasov’s bank …,something about financing a pipeline … for China,” Hertzfeld argued.
*
O’Connelly insisted on a suite at the Astor House, for a starter, three nights. It was one of Shanghai’s iconic hotels, not in the same class of luxury as the Peace Hotel on the Bund, where he was booked once his official programme got under way.
Smeatons grandfather had been a regular visitor to the Astor House during the period prior to the Japanese occupation of Shanghai in December 1941. His family had founded the Anglo-Dutch Commercial Bank, which had served the interests of British and Dutch businesses in their respective country’s colonies in the East Indies.
At that time Shanghai was one of the world’s greatest cities with a population of three million, a vast metropolis at the mouth of the Yangtze River, the gateway to the heart of China, a booming industrial and commercial centre. The Bund, in the International Settlement, was the symbol of the wealth and success of Shanghai. It was an extraterritorial treaty port and governed by the Shanghai Municipal Council which was effectively controlled by the British.
Smeaton’s Jakarta based bank along with its branches in Singapore and Hong Kong had prospered even into the early war years. Then, December 7, 1941, after the Japanese fleet attacked Pearl Harbour, the imperial powers’ dominoes fell in rapid succession. The morning following Pearl Harbour, the foreign concessions in Shanghai were seized by Japanese forces and Hong Kong attacked early the same day. On Christmas Day 1941, Hong Kong surrendered; Manilla was occupied January 2, 1942; Kuala Lumpur January 11; Singapore February 15; and in March the Japanese conquest of Europe’s colonies in South East Asia was complete.
With the fall of Singapore the fate of Indonesia was sealed and the Smeatons took refuge in Australia. There they remained until the US unleashed its terrible revenge on Nagasaki and Hiroshima and Japan surrendered.
A
stor House Hotel – Shanghai
Smeaton returned from Australia in the autumn of 1945 and retook control of the family possessions and banking business in Singapore, and then in Jakarta, where the Dutch, with the aid of British forces, had moved back into their colony after the Japanese occupation. In 1946, the independence movement under General Sukarno had other ideas about the future of the country and a desultory war was waged by Indonesian independentist forces against their former masters. Finally, in 1949, Amsterdam was forced to accept the end of their centuries long rule in the Dutch East Indies and modern Indonesia was born.
As a wind of change swept through South East Asia, the Bandung Conference, held in Java 1955, invented the Third World. Smeaton’s father saw troubled times ahead when in 1957, Malaysia became independent along with Singapore, the latter being part of the newly created Federation. There was no future for Europeans in this new world and young Malcolm Smeaton, encouraged by his father, turned westwards.
Malcolm, who had spent his childhood in Jakarta and Melbourne, his youth in Singapore, was dispatched to London to further his studies at London University, where after two dismal years he, the scion of the old banking family, banished the idea of a career in grimy, cold, damp, foggy London with its post-war austerity - forever.
At that time Singapore was in ebullition, first race riots, then expulsion from the recently created Federation of Malaysia. After the independence from the Federation, the future of small Singapore, led by Lee Kuan Yee, with its mainly Chinese population, looked dim, inciting Malcolm to seek a new base in the hope of saving his family’s fortunes.
In Britain, as successive governments, already in dire financial straits, struggled to finance the welfare state and fulfil their engagements overseas, taxation pressures grew and the wealthy fearing for their money turned to the newly independent Caribbean territories.
It was a signal for Smeaton who headed for the Caribbean where independence and self-government was taking shape with the prospect of new opportunities for bankers and the prospect of tax shelters.
The Bahamas seemed like a good starting point; it was British and nearby to the USA, a place in the sun for the rich, where Americans could hide their money from Uncle Sam, though the Duke of Windsor had disparaged the islands as a ‘third class British colony’.
London’s cumbersome colonies in the Caribbean had been described described by V.S.Naipul as ‘part of the jetsam of an empire’, and a high level official in the British Foreign and Commonwealth Office when asked how they would survive quipped: they would turn themselves into tax havens.
After Smeaton debarked in Nassau, after his long BOAC flight had hopped across the Atlantic and North America from London, he not only found sunshine and palm trees, which reminded him of his East Indies home, he also discovered offshore banking: a potential goldmine. The Bahamas proximity to the US mainland was especially attractive to American citizens, with the English language and a British style administration to reassure visitors. Then when islands became self-governing, British law allowed ‘virtual’ residencies, which permitted companies to incorporate in Britain without paying taxes, laws that also applied in self-go
verning British territories such as those in the Caribbean.
The concept of virtual residency went back a long way. It was established as a precedence in British law in 1929, after it was successfully argued the Egyptian Delta Land and Investment Co. Ltd., though registered in London, did not have any activities in the UK and was therefore not subject to British taxation. This effectively made Britain a tax haven, as companies could incorporate in Britain without paying British tax on their activities outside the UK. The ruling was not only valid for the UK, but also the entire British Empire, which of course included the Bahamas.
Another ruling, in 1957, this time by by the Bank of England, reinforced the concept. With the emergence of the Euromarket, Threadneedle Street recognised that transactions made by UK commercial banks on behalf of non-resident clients were not considered to have taken place in the UK.
As a consequence such transactions were effectively offshore and therefore outside of the Bank of England’s jurisdiction, or for that matter, any other UK regulating authority.
The Euromarket was created following the Suez Crisis of 1956, in response to restrictions on the use of pound sterling in trade credits, allowing the use the US dollars in commercial exchanges by non-UK businesses abroad, transacted on their behalf by banks located in London.
As in earlier similar such rulings, these transactions were considered to be offshore since they were made on behalf of non-residents, in foreign currency and overseas, even if the contractual documents were drawn up in the UK.
The result was the creation of a new, non-regulated, banking environment beyond the jurisdiction of the Bank of England, or any other central bank.
Thus, it was in this legal environment offshore finance was born.
Cornucopia Page 36