by Peter Kysel
My father was proved right. The red wolves escaped justice, but selected vultures were hunted down to appease public anger. The municipal court in Prague sentenced Viktor to ten years and Boris to nine years. International arrest warrants were issued, but Viktor Kožený has never been extradited. He lives in the Lyford Cay club in the Bahamas. Boris Vostrý lives elsewhere.
#
Czech Crisis
Two years after my unanswered letters to Dr Salzman and Mr Tošovský, the country was thrown into a full-scale banking crisis. The original Exco at KB was replaced by less competent people and the banks edged further towards bankruptcy. Dr Salzman became a senator for the ODS, which had been funded by KB. Senatorial privileges offered him greater protection from prosecution. The government of prime minister Klaus collapsed amidst accusations of corrupt financing of the political parties and specifically the ODS.
“You know that Salzman, Tošovský and Klaus were close colleagues at the central bank, under the communists?” Pavel mentioned casually. I did not.
“They will protect each other you’ll see and will never take responsibility for the crisis.” He added
“Presumably they won’t go to prison either,” I speculated
“No, they won’t. Your description of the ruling packs of red wolves, fits banking perfectly,” Pavel concluded
The KB saga began four years earlier, with the creation of a suspect Exco structure. Florisse’s epitaph was harsh. She had never warmed to the KB’s directors when she met them in London in 1994.
“They looked like a group of shady crooks. You made the right decision to leave and you kept your reputation intact.” My father echoed her comments, confirming, “You’ll see, the KB directors will escape justice. They will be protected by the red wolf judges, but they will be remembered with contempt.”
#
Fifty-three Years
Having detached myself from the turmoil of post-communist Europe, my personal life calmed down. During the second half of the decade, my professional life and my family life coexisted comfortably, by working in Hay’s Galleria and living in an attractive area of London.
Tamara went to Channing School in Highgate and then on to study mathematics at Bristol University. Florisse loved her work in education. After such a long separation, we treasured our holidays and formed a group of close friends who shared our sporting interests. Our group went skiing, played tennis and, in later years, golf.
At fifty-three, I was reminded daily that my competitors in the investment business were all much younger. Publicly, I maintained they were not as good at their jobs and that their youthful aggression and slack risk control would shorten their lives. Privately, I had doubts about how much longer I could compete with them. In response, I continued to enhance our quaint models and my disciplined approach was paying off by producing consistent portfolio performance. I managed to keep my job.
#
Mossad
My business trip began in Singapore, where I was to meet prospective clients. Two days later, I flew to Athens, to catch a connecting flight to Tel Aviv, for presentations by Israeli companies to international investors.
The check-in girl at the El Al desk queried my ticket and ushered me into a back office for a chat with Israeli secret service agents. It turned out to be a degrading experience. The Mossad agent, holding my ticket, asked me to strip. He interrogated me, in my underpants, about my job. I was sent to wait in an adjacent room, where a twenty-year-old girl was sitting, stripped to her bra and knickers, clearly in distress. I tried to think of something appropriate to say, to defuse our mutual embarrassment.
“Please, don’t worry about me, I am an investment banker, not an exhibitionist. I think the Mossad agent likes my clothes and my watch. He’s probably trying them on. Let me introduce myself. I am Peter.” She relaxed a bit and said,
“I am Sara. I am an archaeology student from California. This is my second time in this room. So, you think that the Mossad agents are trying on our clothes? They made me miss my flight yesterday, by keeping me here for more than an hour.”
“What reason did they give you?” I asked cautiously
“They said that my name should be spelled, Sarah, with an ‘h’ and wanted to know why I was given my name, if I am not Jewish. What about you?”
“They thought it odd that I was flying to Tel Aviv from London, via Singapore and Athens. They are suspicious about my business meetings.”
“Why suspicious? It’s your job.”
“They asked me three questions. Why did the Israeli businessmen want to see me? How did I know that they would meet me? Why am I meeting people I don’t know?”
“I don’t get it” admitted Sara.
“I don’t either. I think I may give up and catch a flight back to London.” At that moment the door opened and the Mossad agent came in.
“You can both go.” They must have been listening to our conversation. The agent pointed to our clothes.
“Get dressed and run, to catch your flight.” I flew in business class. Sara was in economy. I met her again by the luggage carrousel in the arrival hall of Ben-Gurion airport. Sara came up to me and whispered, “I found out why they made me miss the flight yesterday. The guy from Mossad came and sat next to me and tried to chat me up. He wanted to join me on the flight after his shift finished today.” I didn’t react, assuming that they were filming us. My mobile telephone appeared on the conveyor belt, broken into individual pieces. El Al had taken it for safekeeping. I sighed. Sara was watching and asked, “How can I shake off that creep?”
“Take a taxi to the Hilton and run through the hotel. Then grab another taxi at the back entrance. Good luck.” Sara went to pick up her bag, waved me goodbye and dashed out. I collected the bits of my phone and tried to assemble them. To my relief, my suitcase arrived in one piece. It reminded me how arriving passengers were treated in the Soviet Union. I clenched my fists, but I wasn’t going to be provoked.
Control your anger. Smile at the CCTV. You are in their hands. Don’t provoke them. They’ ll find another victim.
I was free for the rest of the day. Goldman Sachs had arranged meetings from the following day. Assuming that Mossad was interested in the contents of my suitcase, I left it open in my hotel room and rented a car and guide for a sightseeing tour around Israel. The country made a powerful impression on me.
My colleague, coincidentally also called Sarah, flew into Tel Aviv separately and joined me for the investment meetings.
“I wasn’t stripped. I obviously wasn’t their type,” she reported, when I asked.
At dinner, a Russian–Israeli businessman asked us about the CAIC (Central Asia Investment Company) which had been launched by our firm. It was a secretive entity, kept away from Sarah and me. The businessmen explained,
“Just when everyone is trying to get money out of the former USSR, you are making investments there. I wonder why. What’s your secret?” We mumbled some platitudes in response.
At Ben-Gurion airport we were separated and questioned about our visit.
“Who did you see?” Asked the passport official. I handed over a stack of business cards which I had collected at the various meetings.
“How can I be sure you that you actually saw these people?” he asked, and I handed over my meeting notes. He took them into a separate room. I assumed, he copied them. Sarah was given the same treatment. We did not speak until the aircraft took off and I ordered champagne.
We arranged more investment meetings in Istanbul and Florisse joined us for an extended weekend. At a meeting with a large conglomerate, the managing director commented,
“Our construction company is developing business in Uzbekistan. We came across your CAIC company. You must find it tough doing business in the region.” It was the second time we were receiving unsolicited comments about Govett’s investment fund.
“I was wondering why you were excluded from managing the CAIC,” said Sarah on the flight bac
k to London. I nodded.
“I don’t know either. The CAIC was set up without my knowledge,” I replied, showing my irritation at being excluded.
“Why did Kevin (our CEO) and Charles (the deputy chairman) keep it a secret from you?” pushed Sarah
“I recommended that funds invested in the former Soviet Union should be managed by a Moscow office. As we don’t have an office there, we should not create these funds.” Sarah noticed that I was becoming annoyed and turned to Florisse to chat. That night, I couldn’t sleep. The conversation had upset me, and my pride was hurt.
#
Gazprom Warrants
Bill, the American banker called.
“Did you avoid taking a taxi?” I asked when he arrived. He smiled sheepishly.
“I have a great arbitrage offer between domestic and foreign shares of Gazprom,” he announced confidently. The two classes of shares were not exchangeable. Gazprom had recently been privatised and its top management were asset stripping the company. The affairs of the world’s largest producer of gas were in a mess.
“We buy domestic Gazprom shares through a locally registered company, and issue warrants, based on our shareholdings. When the domestic and foreign shares are merged, you’ll make a fortune out of these warrants.”
Foreign shares, held outside Russia, were limited to 4.4% of Gazprom’s capital. They traded at five times the prices of domestic shares. Warrants were a speculation, that limits on foreign ownership would be lifted. The proposed arbitrage was illegal in Russia and we refused to participate.
Other investors were greedy and bought these warrants. They were locked in for a decade, until foreign ownership limits were lifted. By that time their arbitrage profits had vanished.
Vulture investors, who tried to circumvent the law, were caught by Russian tax demands and cried foul. Their losses were self-inflicted, and they faced jail. Investing in Russia was rough.
Chapter 16
Takeover
Govett was unexpectedly bought by Allied Irish Banks (AIB). Noel McEvoy came from Dublin to replace Kevin Pakenham as our CEO. AIB’s rationale for the acquisition was unclear. As the bank ended up with two investment teams, competing with each other, there was no business synergy. Our performance in London was better, but an element of instability had crept in.
Soon after the acquisition Noel McEvoy called me into his office. He offered me a chair and went to close the door behind me.
“Charles created the CAIC to bring Western technology to the former USSR, but the project has been beset by problems.” Charles was our deputy chairman. I considered him a close colleague until he launched the CAIC fund behind my back. Geographically, he had encroached on my territory.
“The CAIC is a clandestine fund which Charles has kept separate from our investment process.” I said noncommittally
“What’s your general view?” Noel asked. I was dismissive, but non-specific.
“Investing in the region is tricky because Western rules don’t apply, and foreign managers can easily be outwitted. Their arrogance and ignorance don’t survive reality tests.”
Privately I thought Charles had gambled that the CAIC venture would turn him into an investment superstar. That’s why he kept it secret, but his ploy failed. Noel was getting agitated
“The CAIC is a risk to the reputation of the bank. It’s bleeding cash. We have been totally screwed. Charles is leaving.” I was taken aback and had a bad premonition about what was to come. He went on.
“I am asking you to step in to try and rescue whatever possible. I have made a promise to the shareholders.” Noel was offering me a poisoned chalice, but also a huge challenge. I nodded but kept quiet. Noel muttered to himself
“It was a daft idea to manage a Russian private equity fund from London.” After a pause, he went on.
“We have resource constraints, so Elena will work for you, as we don’t have any other suitable staff. It’s pointless to use Westerners, and we can’t trust the locals. Have a look at the portfolio and then advise me what to do next.” It was a perilous brief.
Charles had gone. I went through the CAIC secret files. The portfolio had rational holdings, but they were all losing money. Our local managers were working against us. Their motivation was clear – they were poised to pick up the leftovers after they had bankrupted the companies. There wasn’t much time left.
Elena was a young, sensible woman, brought up in the Soviet Union, who didn’t share the romantic Western views of the region.
“CAIC have imported valuable production equipment. Most of our companies have a natural monopoly. They could be profitable, but not under our ownership. We cannot control local managers from London,” she explained.
“Are you prepared to move from London and run the companies from Russia?” Elena laughed.
“That would be suicide.” I agreed.
“We could try to find foreign trade investors?” But neither of us was convinced. All the investments were in remote parts of the former Soviet Union.
“We’ll stand a better chance to sell if we find local investors. If local owners can make profits, we can sell the investments at good prices.” Noel approved our exit strategy
“Go ahead, before the CAIC bleeds to death. Try and be careful. It’s a very dangerous assignment.” I was fully aware of the dangers and could feel my life expectancy shrinking.
#
Baikal Airlines
A few weeks later, in the early autumn of1998, I was standing at Irkutsk airport in the middle of Russia, 2600 miles east of Moscow, facing a long row of large passenger aircraft. They were all Soviet-built Tupolevs and Ilyushins. It was mid-morning and I was inspecting our fleet of planes. Avio-kompanija Baikal (Baikal Air-company), based in Irkutsk, had been purchased by the CAIC from the government. We were now supposed to own eighty-six airworthy airplanes.
“They are all part of our Russian strategic fleet,” said my guide proudly, adding
“If Russia goes to war with China, all these aircraft would be called into service to transport the Red army to defend our borders.” He sounded impressive, but I was looking at the red engine covers on the airplanes, wondering.
“Will you bring the steps and open the lid on this engine, please?” The guide was indignant.
“Why do you want to do that? The steps are locked away, for safety.” I sensed that he was lying.
“I would like to see a Russian-built engine. They are world famous,” I responded evenly with a smile, looking him straight in the eye. A colleague tried to come to his rescue.
“The air force commander, Anatoly Kornukov, came to inspect these aircraft three weeks ago and he certified them. Here is the certificate.” I saw Kornukov’s signature. The name sounded familiar. Kornukov was the commander of the Sokol air base on Sakhalin island, who, on 1.9.1983 ordered the Korean Boeing 747, flight KAL 007 to be shot down over Kamchatka, killing 269 people. The same Kornukov was appointed by president Yeltsin, earlier in the year, to command the Air force. I was getting impatient
“Let me have a copy of this certificate. Please, bring the steps and show me the engine.” Eventually, they brought the steps and removed the engine cover. There was no engine. There were no engines behind the second and third covers either.
“Shall we go on until you find an engine?” I asked. The technicians scratched their heads and admitted,
“We do have two aircraft with engines, but they are not at this airport.” We shrugged shoulders and changed the subject. Now that we understood each other we went off to have lunch.
They stopped lying to me only when they had been caught out. Their loyalty is to their immediate boss, not to foreign owners. The management sold the engines, bribed Kornukov, to produce the certificate and the CAIC was defrauded. These aircraft are our ‘Potemkin villages’. Was Charles even aware of this fraud? I thought as we drove past the lines of parked airplanes.
I confronted the airline director Semyonov o
ver lunch. The dining room went quiet and the tension rose as everyone turned towards him. He paused before blaming the previous management for removing the engines, but we were all aware that Semyonov was lying. He had been the director all along. It was pouring with rain outside. The atmosphere inside the room became hostile and they all watched me in silence. Intuitively, I gave in, pointing at the storm.
“Clever devils, these managers. They probably used the cash from the engines to buy villas in Limassol and are enjoying the sunshine.” The Russians laughed, the lunch ended, and I was escorted to my car. At the gate, the head of security casually pointed the barrel of his AK-47, through the car window, directly at me. I froze and closed my eyes, expecting a shot. He saw my response and smirked. He slung the barrel down and shook my limp hand through the window.
“Where are you going?” he asked
“To the hotel to check out and then fly back to Moscow”
“Do svidaniya [To meet again]” we both said simultaneously, although it wasn’t my intention at all.
The CAIC bought Avio-kompanija Baikal in a privatisation auction. My analysis was straightforward. CAIC was sold a pup. It’s audited financial reports were useless. It wouldn’t take long before it was bankrupt. We couldn’t sell it on. There had to be another solution.
My visit was unexpectedly short, due to the management’s cannibalisation of the fleet. As we drove away, I gave my driver a new destination. We had time to make another investment visit to the shores of Lake Baikal some hundred kilometres away.
#
Baigal Mineral Water
Lake Baikal is the largest reservoir of drinking water in the world and the CAIC had formed a company to produce bottled mineral water from the lake. It had a sound business strategy, but Baigal never actually became operational. The plant just couldn’t be completed. Every winter, someone from the local community, stole enough plant equipment, from our guarded warehouse, to prevent its construction.