*
Though Pat Kennedy, like many visitors, found Hainan Island a tropical paradise, it had not always been so. In the past it had been a place of exile, a tropical hell, reputed to have been filled with poisonous snakes and savages. Lili had insisted on spending the Spring Festival, known to Westerners as the Chinese New Year, in Sanya, on the south coast of the island, where other Wu family members were gathered for China’s most important annual holiday.
Flying into Sanya on a scheduled flight from Hong Kong, Pat commented on the fine weather as Lili gave him a I-told-you-so look. Hong Kong had been cold and windy in contrast to the semi-tropical warmth of the colourful modern city that overlooked the South China Sea.
Shamian Island – Canton
Passing by Dadonghai beach they were dropped off at the Mandarin Oriental, one of the best on the island, which to Pat’s regret resembled so many others he had seen elsewhere. After getting out of his city attire and leaving Lili to find her family, Pat set off to explore. It was a ten minute walk to the main beach in the centre of the bay where he saw a steady flow of expensive cars, some chauffeur driven, dropping guests and visitors at beach front hotels, which he figured catered for wealthy upper middle class Chinese tourists.
The sea front was lined with restaurants, their terraces prepared for diner, large round tables elegantly set out for groups of ten or twelve diners. He was surprised to see stages with musical instruments and microphones ready for an evening’s entertainment at many of the restaurants
The idea that it resembled Biarritz or a Mediterranean beach resort on a bright summer’s day struck him. It was stylish with crowds of well dressed tourists out for a late afternoon stroll. With few exceptions they were all Chinese and prosperous at that. It stood to reason, the resort was way beyond the means of ninety nine percent of all Chinese families, especially for the New Year Festival when traditionally prices went sky high.
His mobile buzzed. It was Lili. Glancing at his watch Pat turned back. They had a diner date at the hotel with Lili’s cousins.
THE FOUR HORSEMEN
In the early summer of 2013, Michael Fitzwilliams secretly met with a group of lawyers, headed by James Herring, at the offices of a Luxembourg bank. Their task was to monitor the transfer in real time of nearly six billion dollars from a bank account owned by Rosneft, the state-owned Russian oil and gas company, to one owned by Sergei Tarasov, in payment for his twenty percent share in Yakutneft, one of Russia’s major oil producers.
It was part of Vladimir Putin’s plan to concentrate the control of the Russian oil and gas industry in the hands of the Kremlin and at the same time reduce the power of certain oligarchs in a vital industry, one that supplied the lifeblood of Russia.
Luxembourg, one of Europe’s centres for offshore banking, had been selected as a neutral location where the electronic transfer of funds into an escrow account could be verified in real time.
The transaction was a follow-on of a deal made three months earlier with four other oligarchs: Fridman, Vekselberg, Blavatnik and Khan, in which Rosneft acquired their fifty percent holding in TNK-BP for twenty eight billion dollars. The timing could not have been better for the oligarchs as the price of oil approached the one hundred dollar mark.
The story began in 1995 and 1996, when Russia found itself in dire economic straits and many large state-owned industrial businesses were privatized in a ‘Loans for shares’ programme in which the shares of major state owned enterprises were offered as guarantees.
The sales were carried out in public auctions organised by Russian banks during which bidding was rigged in favour of the banks and business controlled by powerful men with strong political connections.
These were members of Russia’s post-Communist nouveaux-riches who had appeared in the late eighties, making their fortunes in banking and commodity exports as Mikhail Gorbachev pursued his policy of perestroika. In this way state enterprises fell into the hands of these influential men, soon known as oligarchs, at prices far below than their real market value. These oligarchs held immense power and dominated the Russian business and political scene until the arrival of Vladimir Putin.
The most conspicuous example was that of Mikhail Khodorkovsky, who grabbed control of Yukos, a company created in 1993, when the Russian government of the time ordered the break up of the oil and gas industry for privatisation. Khodorkovsky, then only thirty two years old, acquired through his bank, Menatep, nearly eighty percent of the ownership in Yukos in 1995, then worth an estimated five billion dollars, for a mere three hundred million.
Another was that of Sibneft, acquired by Boris Berezovsky, for about one hundred million dollars, when its real value was estimated at three billion.
As Khodorkovsky himself explained: ‘In those days everyone in Russia was engaged in the primary accumulation of capital. Even when laws existed, they were not very rigorously followed. Therefore, if you conducted yourself too much in a Western manner, you were simply torn to pieces and forgotten.’
In a similar manner Sergei Tarasov, through loans put together by InterBank, acquired together with Aquitania, a controlling share of Yakutneft, a major East Siberian producer of oil and gas.
When Vladimir Putin came to power in 1999, almost all of the country’s oil production lay in private hands. In the eight years since the dissolution of the Soviet Union the country’s energy sector had been sold off at knockdown prices to a handful of oligarchs.
Putin’s plan was to rebuild Russia into a powerful state, an ambition impossible to realize while the country was run by a gang of oligarchs that pulled the Kremlin’s strings. At the end of 2000, the newly elected president commenced by issuing a warning to the oligarchs: Stay out of politics and business is yours.
It was his first move to stabilise the nation and end the Robber Barons’ reign of anarchy by retaking control of Russia’s vital raw material resources.
His plan included new investment in the energy industry bringing new oil and gas fields in eastern Siberia into production and in February 2003, and under his impulsion a group of oligarchs joined with British oil company BP to form TNK-BP, a fifty-fifty joint venture formed to develop resources in the region.
However, soon after that deal, Mikhail Khodorkovsky, the CEO of Yukos Oil, the country’s richest man, publicly criticized Putin for the state owned oil company Rosneft’s opaque dealings, worse still, he openly displayed his personal political ambitions by funding the opposition.
Khodorkovsky was arrested on charges of fraud and tax evasion said to total twenty seven billion dollars. His assets, principally Yukos Oil, were seized and its different divisions were auctioned off in a forced sale to a front company owned by Rosneft, and the hapless Khodorkovsky sentenced to eight years in a Siberian prison.
Then trouble trouble between BP and its partners in TNK-BP, who considered that BP treated TNK-BP as a foreign subsidiary, investing rather than paying better dividends. The result was BP decided to cut its losses and sell its stake in the joint venture to Rosneft, which borrowed forty billion dollars in cash from a group of leading international banks; one of which was INI Moscow, for the acquisition.
Rosneft, thus became one of Russia’s largest oil companies, acquiring TNK-BP in a transaction worth fifty five billion dollars, where BP for its fifty percent received twenty percent of Rosneft shares plus more than twelve billion dollars in cash. The other fifty percent owned by the oligarchs: Mikhail Fridman, German Khan, Viktor Vekselberg and Len Blavatnik was acquired for near twenty eight billion in cash in a cloak and dagger deal that took place in Frankfurt in March 2013, where the sellers were able to verify the transfer of cash and stock certificates into an escrow account they controlled.
INI’s problems started a little more than a year later, in the wake of Putin’s invasion of Crimea. The billions of foreign currency-denominated loans accorded to Rosneft and Gazprom, due by at the end of 2014, could not be rolled-over due to the sanctions imposed by the US and EU.
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