Rise of an Oligarch: The Way It Is: Book One

by Carlito Sofer

  Chechnya, 2005

  Russia always attracted me as a very similar country to Ukraine but with much bigger opportunities. I first tried to break Russia in 1999 through the purchase of a small distressed bank there. The deal almost closed, when the Russians put a stop to it in rather mysterious circumstances and the bank went to some unannounced acquirers. In 2005 a new opportunity to pierce Russia’s iron shield presented itself as a spin off from a hostile takeover. The plan was to penetrate mother Russia through its back-door. The point of entry would be from Chechnya.

  The economic department of Chechnya formed a joint venture with Ukraine Metallum, one of Ukraine’s largest metal producers. The JV produced and processed metals in Ukraine and sold them in Chechnya, therefore controlling the entire supply chain. Given the endless source of top-quality Ukrainian metals and the endless demand for metals in Chechnya, I thought that the JV had a superb business model and therefore a lucrative investment. I decided to take it over.

  The plan for seizing the JV spanned two stages. In the first stage, Neplokho Commodities assumed control over the Ukrainian holdings in the JV, belonging to Ukraine Metallum Corporation. Although the Ukrainian government sold it to some foreign investors, we used our legal raiders to claim the deal was rigged and nullify the sale. We then re-bought the stake at the convenient price on the new rigged privatisation tender.

  Ukraine Metallum owned some profitable metal production facilities in Odessa, Mariupol and Nikolayev. They could be a perfect supplement to the capabilities of Lugansk Steel. Once we assumed control over the company, we had control over its share in the JV. That was easy.

  Having the Ukrainian part, the second stage of seizing the JV was to tip the overall balance in the JV to my favour. We held 50% of the JV through our control of Ukraine Metallum, so we just needed to take a few percents from Chechnya to get over the 50% threshold for control of the JV.

  When two shareholders own equal proportional amounts of shares in a corporation, then dead-lock situations are inevitable. So, we called for an extraordinary general meeting of shareholders with an agenda item proposing to stop metal supplies to Chechnya and redirect them to China. The demand for metals was huge in China as it was initiating a series of gigantic construction projects in preparation for the 2008 Beijing Summer Olympics, and China was paying much higher prices than those that we got in Chechnya.

  At the EGM we put forward our intentions.

  “We’re a commercial entity, after all,” we argued. “If the Chinese pay more, we should sell to them instead of the Chechens. We earn more and share more profits, partners. This is business, nothing personal.”

  I knew that the Chechens would never agree. For me it wasn’t even a bluff. By going against the Chechen partners and trying to take over their holdings in the JV, we risked losing some of the Chechen customers of the JV’s produce. The Chinese prospect was a realistic alternative to the Chechens.

  My humble deductive reasoning brought us the desired outcome. We reached a deadlock at the EGM, since as expected, our Chechen partners strongly opposed stoppage of supplies to Chechnya.

  Although dead-lock situations and disputes under the JV agreement were to be referred to an international arbitration, it wasn’t difficult to convince a local Ukrainian court to assume jurisdiction. Once that happened, I knew that I would achieve my goal.

  Eventually, the court ruled that the dead-lock was to be resolved through my purchase of 25% of the shares from the Chechens at the court’s expert evaluation price and the court’s expert was instructed by my experts how much it should be.

  Since I controlled the process, I could’ve gone for the entire 50% holding of the Chechens in the JV. However, I wanted to keep them in as partners. The big picture was that I still wanted a foothold in Russia, using Chechnya as a springboard, so I wanted to keep the Chechen business. I believed that after the initial resistance I would find a way to cooperate with my new partners and retain Chechnya as a customer.

  I expected that Chechen bureaucrats wouldn’t be much different from their Ukrainian colleagues. I didn’t take over their private shares, only those of the Chechen autonomy. So it wasn’t personal, right? I knew how to appease officials of any nation. I couldn’t estimate, however, the blow that this takeover inflicted to their pride.

  After the court ruling, I was walking down the broad stairs outside the courthouse. One of the Chechen directors approached me and whispered in my ear.

  “You won today, Vorotavich. But winning the battle means losing the war for you. You wait, just wait. You’ll experience the wrath of Chechnya.”

  Further legal appeals by my Chechen partners were quickly rejected by the superior courts. Political pressure from Russia on Chechnya’s behalf was averted too. The JV was under our control.

  The Chechen government didn’t like it. It could’ve looked for recourse in international courts and tribunals, but the legal proceedings to potentially overrule the Ukrainian courts’ decision would take years.

  We had invaded Russia. In particular, we had successfully penetrated mother Russia in the winter. We succeeded where Napoleon and Hitler failed. Following the formation of a landing bridge, I opened and staffed a luxurious trade house in Moscow for the needs of both the JV and other branches of Neplokho. I hoped to improve my relations or more correctly to create relations with the Russian establishment. I was happy. However, I should’ve known that upsetting the Chechens wasn’t the wisest move. I didn’t realise it back then, but I had created a powerful adversary for myself.

  Chechens are like elephants. They never forget.

  25 Wedding Bells

  Kiev, 2005

  I bought my mother a nice apartment in a modern building on the Carmel Mountain in Haifa, Israel. Mama had been living in Haifa since she made Aliyah to Israel. She had some friends who spoke Russian and she settled down nicely. She enjoyed the Israeli weather and didn’t want to move again, especially now that she was fifty years old.

  Every time I came to Israel I visited her. All she wanted now was to see me get married and produce some grandchildren for her. Sasha had already delivered her first grandson in 1992. His wife was carrying their third child. Now it was my turn.

  “What about you, Mishenka? When are you going to get married with a nice Jewish girl?” she asked. “I’m not getting any younger, you know. I want some naches from you. I want to see your children before I die.”

  “Mama, you’re fifty years old. Nobody is going to die.”

  “You say so, Mishenka. But you don’t know. I’m worried. Seeing you like that, lonely without a good Jewish woman to take care of you gets me closer to the grave every day.”

  No matter how old I was or how successful, she always treated me as her baby. Like every Jewish mother it was impossible to keep my mother satisfied for too long. First I had to become a lawyer to make her proud. Then I had to make lots of money. Now I had to get married to a Jewish woman. Next I had to bring her grandchildren. No wonder so many Jewish men have an Oedipus complex.

  I had been dating Masha for almost eight years. That was a long time. She was everything that I wanted in a woman. She was pretty, smart, witty and funny. Pretty is an understatement; she was stunning. Most surprising of all, her mother was Jewish, which meant that she was Jewish as well. In Judaism the mother counts since who knows who the real father was. And in Masha’s case she actually didn’t know anything about her father.

  Masha ticked all the boxes for being a trophy wife. But while it was easy for me to take business risks, risking millions without a robust due diligence, in my personal life I was risk averse, conducting a long and thorough due diligence before taking any risk. On the other hand, I was probably suffering from a youngest child syndrome - always looking for ways to please my mother. If mama wanted me to get married, getting married I had to do.

  So, I proposed to Masha. Ukrainian and Russian men were expected to be chivalrous, so I took her to a romantic botanical garden on a hill overlooking
the Dnieper’s left bank during a beautiful sunset. I looked around to make sure nobody I knew could see me, dropped to one knee, pulled out a two carat diamond ring from my pocket, and looked into my beautiful girlfriend’s eyes.

  “Masha, you are the love of my life. My life is incomplete without you. I want to spend the rest of my life with you. Will you marry me?”

  This was a rhetorical question. I knew she wouldn’t have wasted her time with me unless she knew that I was eventually going to marry her. Masha put her hand to her mouth and gasped.

  “It’s so beautiful,” she gushed. “Of course I will marry you,” she added, as tears began to run softly down her cheeks.

  I stood up, held Masha’s hands in mine, and recited a poem by Alexander Pushkin.

  “A magic moment I remember:

  I raised my eyes and you were there.

  A fleeting vision, the quintessence

  Of all that’s beautiful and rare.

  I pray to mute despair and anguish

  To vain pursuits the world esteems,

  Long did I hear your soothing accent,

  Long did your features haunt my dreams.

  Time passed – A rebel storm-blast scattered

  The reveries that once were mine

  And I forgot your soothing accents,

  Your features gracefully divine.

  In dark days of enforced retirement

  I gazed upon grey skies above

  With no ideals to inspire me,

  No one to cry for, live for, love.

  Then came a moment of renaissance,

  I looked up - you again are there,

  A fleeting vision, the quintessence

  Of all that’s beautiful and rare.”

  Masha’s jaw dropped with astonishment that I was reciting poetry. After she recovered from the shock, we sealed our love with a long, lingering kiss.

  We were married in the spring. I was thirty two years old now, and it was time to settle down and start thinking about children. I needed someone to get all my money after I died or more likely, after I was killed.

  I wanted a modest, private wedding. However, as every good man should do, I let Masha make all the decisions and plan everything. Women dream about their wedding from an early age. Men don’t dream about their wedding, ever.

  I told her: “You have an unlimited budget. All I want to do is to show up on the day and marry you.”

  “You may regret saying that,” Masha teased. “I have very expensive tastes.”

  “I know that already, my love. You chose me, didn’t you? Do what you want.”

  And that concluded my part of the wedding plans.

  We got married in Israel in a beautiful location next to the beach, with five hundred guests in attendance. Since Masha organised the event, it was civilised, without any wild partying. Even my mother was pleased with everything. And that was a big achievement.

  I stood with Masha under the chuppah and said the blessing.

  “Behold, you are consecrated to me with this ring according to the Law of Moses and Israel.”

  I put a bride ring on her finger, and then I broke the glass.

  A roaring mazal tov from the crowd signalled that Masha and I were a married couple. She made a respectable man out of me, and now I had to live up to her expectations.

  26 Revolution

  In 2004 the Orange Revolution reshuffled the Ukrainian political scenery. It was the second revolution in just over a decade if you view the USSR’s big bang as the first, when Ukraine shifted from communism to democracy. Now, following the revolution, Ukraine’s state of an autocratic democracy slipped into what looked like a perfect anarchy.

  Kiev, 2008

  The Orange Revolution put Ukraine under the world’s spotlight for a few glorious moments. The new regime was portrayed as open-minded and pro-Western, meaning foreign investors licked their lips in anticipation of a huge score for those who got on board early.

  Ukraine’s poverty seemed to be replaced by a decadent, unbridled richness. In the aftermath of the Orange Revolution, once-grey Kiev gave way to flamboyant colours of expensive boutiques, cars and whatever the rich freak culture could offer. Walking in Kiev’s central parts, one could get an impression of a wealthy country. The quantity of expensive cars dwarfed even that of Monaco’s renowned luxury. Rolls Royces, Maybachs, Maseratis, Ferraris, Lamborghinis and Bentleys weren’t exotic anymore. Kiev seemed more glamorous than Hollywood.

  Material goods were supported by the corresponding capitalist ideology and ambitions. This new wave gave Kiev a fresher look and to the ladies a whole rainbow of teasing aspirations. I wasn’t that distinguished anymore. Even my armoured Rolls Royce looked nothing special amongst the ocean of wealth.

  A sense of euphoria was in the air, as if the tyrannical past was over and a bright future waited ahead.

  Between 2004 and 2008 Ukraine experienced a boom in real estate prices, which somewhat disguised a lack of reform, corrupt government, small elite controlling the economy, weak judiciary system, absence of some of the basic citizens’ liberties and rights and so on. The country basically lived off its massive metal industry and sheer speculations about its economic prospects.

  One factor fuelling the property market was that all transactions in the primary housing market had been denominated in local hryvnia, but pegged to US dollars. Transactions in the secondary market had been quoted and paid in dollars. Therefore, purchasing Ukrainian real estate always required access to dollars.

  The hryvnia exchange rate was pegged to the dollar too. Mortgage loans, once nonexistent in Ukraine, suddenly became available. Buyers borrowed relatively cheaply in dollars and bought Ukrainian real estate. This worked fine as long as the hryvnia either appreciated or didn’t depreciate against the dollar.

  The general euphoria revived not only the real estate market, but other markets as well. The approaching Beijing Olympics and China’s economic growth spurt fuelled global demand for all commodities. This and the generally favourable economic conditions led to all Ukrainian steel exports to be sold at high prices almost a year in advance.

  While Ukraine’s economic growth accelerated, the hryvnia mildly appreciated against the dollar. Light-headed from constantly increasing prices, sales and figures nobody expected that the trends may reverse.

  When the property boom started, I sold properties that I’d bought years before for silly prices, making 1000% to 2000% profits.

  It was ridiculous. In 1999 I laughed at John when he was offered to buy a villa at Pechersk Hills for four million dollars. Back then, it was unheard of. Only eight years later, and this amount wouldn’t even buy the cheapest mansion in the same district.

  Because of the prime locations that I offered, buyers were outbidding each other as if I was handing out gold for free. This was an opportunity that I couldn’t just pass over. Of course, single apartments were too small a business to waste my time on, but land plots and construction sites were sold for hundreds of millions of dollars to eager buyers.

  Since my days of working at the construction company, I had kept in touch with Sergei, who used to be Sasha’s boss and one of the deputies of the mayor of Kiev. Since Sergei took care of Sasha when he was a junior in the company, I had taken care of Sergei since then.

  I told Sergei, “You’ve been a dear and trusted friend for many years. You helped Sasha a while ago and I didn’t forget it, as you can see. I would like to ensure that you have enough money to never worry about retirement or the retirement of your children and grandchildren. The only thing that I ask is that you arrange for the city council to allocate to me lands in Kiev. Conveyer’s rate would be lovely.”

  Sergei happily cooperated. I then sold the lands to foreigners for astronomical profits. For each deal I asked John to set up a Cypriot Special Purpose Vehicle, meaning the CSPV or its Ukrainian subsidiary would own or lease the land. This meant we sold shares and not land, avoiding paying any taxes. We set up so many SPVs that we overloaded th
e Cypriot company registrar, causing it to crash.

  Within two years I had made billions in real estate only. It was funny that after so many years of being involved in a multitude of businesses, it was good old, reliable real estate that emerged as my most profitable business in Ukraine in those years. Nothing beats bricks and mortar.

  In 2006 we floated Neplokho Real Estate on the London Stock Exchange at a value of fifteen billion pounds. I was a seriously rich man.

  Like every bubble, the real estate boom would explode soon. The world was about to experience the worst financial crisis since the Great Depression of the thirties. This crisis was going to separate the men from the boys.

  ***

  In September 2008, my man on the inside of the Central Bank of Ukraine called me and asked for a meeting, stressing that it was in my best interests to arrange a get together as soon as possible. We met at a restaurant in Kiev, and what he had to tell me was shocking.

  “Misha,” he said as I joined him at a table set back in a quiet corner of the room. “Thank you for agreeing to meet me so soon. You would owe me, when you hear this out.”

  “No problem, Georgi, and don’t worry about that. When the Central Bank talks, it’s good sense to listen,” I replied with a smile, extending my hand in greeting. “So what’s the fuss?”

  “The Ukrainian economy is looking fragile, Misha. The bank will not be able to keep the hryvna pegged with the US dollar much longer. I’m very nervous about the economy and the direction towards which it’s heading. I wouldn’t be surprised if the hryvna collapsed.”

  Unpegging the currency would mean a sharp drop in the exchange rate, the consequence being a collapse in real estate’s prices because of a breaking of the carry-trade strategy. If he said that he wouldn’t be surprised then it was a done deal. I knew Georgi as a harbinger, not an analyst.

  “And what do your experts see as the immediate repercussions of such an event?”