On receiving the news, he was, as he later put it, gobsmacked. The call came on his personal mobile at eight in the morning, Hong Kong time, as he drank his morning coffee and admired the extraordinary view from his penthouse apartment. With a stuck-up English voice the caller pompously announced himself as James Smythe, head of HR at City & Colonial in London.
At first Pat was curious, it was nothing unusual to be called on his very private number at that hour, but at that time of the day, given the time difference, he rarely received calls from London, it was midnight in the UK. As for City & Colonial he had never spoken to anyone of any consequence from that bank and could not for the life of him imagine why their HR department would call him.
Smythe beat about the bush before casually asking if he had been informed of the changes.
“What changes?” Pat asked.
Smythe seemed embarrassed.
“The bank …”
“What bank?”
“I see.” There was a silence. “As of today INI Banking Corporation PLC is effectively under the control of City & Colonial.”
“Sorry,” said Pat as if he had not heard Smythe’s words.
“I said ...”
Pat cut in, “I heard what you said. I don’t understand what you mean.”
“This morning, that is Sunday in London, City & Colonial took control of Europa and your Chairman, Michael Fitzwilliams has resigned.”
“Look,” Pat replied angrily, “if this is some kind joke it’s not funny.”
“Mr Kennedy, I’m sorry to be the one to break the news, but this is a decision of the government in London and the Bank of England .... If you doubt my words you can check on the TV, Bloomberg.”
H
ong Kong
Pat put down the phone and looked around for the remote then zapped the TV to Bloomberg. Beneath the anchor man the Breaking News line flashed Bank of England announces City & Colonial takeover of INI Banking Corp.
“Hello, hello,” Smythe’s disembodied voice echoed into the breakfast area.
Pat stared at the screen trying to make sense of the news. Then, slowly he became aware of the voice behind him and picked up the phone.
“I sorry,” said Smythe. “Listen old chap, I’ve been instructed to ask you to stay at home for the moment. You’ll be contacted later in the day with instructions.”
“Instructions ...”
There was a click as Smythe hung up.
At that instant Lili walked in. “Something wrong?” she said looking at Pat.
He looked dazed, in a state of shock.
“What’s up Pat?”
“I think I’ve been fired.”
*
They had survived the Lehman crisis and a long succession of aftershocks shocks to emerge stronger than ever; a powerful bank with operations spanning Europe, Russia and China. Why then did things go wrong?
It was not difficult to pinpoint the precise moment in time when the bank’s Russian stratagem started to unravel. It was Friday, 21 November 2013. However, if the same question had been put to Michael Fitzwilliams, he would have pointed to the day he meet Tarasov at the 2009 All England Lawn Tennis Club Championships in Wimbledon, but that was another story.1
Going back to that fatal Friday in November 2013, the then Ukrainian President, Viktor Yanukovych, had ordered the suspension of negotiations with the EU on a trade pact.
At that precise moment in time, John Francis, personal advisor on economic matters to INI’s Chairman, Michael Fitzwilliam, had been in Moscow as the news was announced on RT television, Russia’s 24 hour English-language news channel. The Ukrainian parliament had rejected legislation concerning negotiations for an EU-Ukraine Association Agreement, abruptly ditching its plans to sign a historic pact with the European Union, preferring a deal with Moscow instead.
It sounded an alarm to all those who followed Ukrainian politics in as much as it put an end to European hopes that Ukraine would distance itself from Moscow, by joining the nations of the ex-Soviet block that had already adhered to the West.
Putin was jubilant, it was a great victory, however the majority of Ukrainians did not see it with the same enthusiasm.
As Francis stared across the square from the window of his room at the National hotel, he was overcome by a deep foreboding. The walls of the Kremlin reminded him of more sinister times, it was if he had been projected backwards to the days of the Cold War.
1. See The Plan by the author published in 2011
MOSCOW
Two weeks earlier as Russians were about to celebrate their Orthodox Christmas, John Francis arrived in Moscow. It was not for academic reasons or some economic mission. He was there for Ekaterina Tuomanova.
As a respected economist and historian he had always been careful with his personal relationships, steering clear of starry-eyed students and young women attracted by academics of his kind. Men of his age and profession who strayed always seemed to end up in some kind of scandal that inevitably turned up on the pages of the Daily Mail or some other tabloid.
That he had stuck to the less exotic kind of women that were often found in his own somewhat cloistered world was no surprise.
Of course as a personality in the field of economic history he travelled extensively and from time to time had had sexual encounters when he felt sufficiently far from home to be able to avoid prying eyes.
That was before he met Ekaterina.
Up until the moment Michael Fitzwilliams invited him to form an ad hoc think tank to analyse economic and geopolitical events and their impact on his bank, his dealings with the financial world had been at arms length. He to a certain extent had disdained the professionals, and they in turn the theoreticians.
With Fitzwilliams and his associates, John Francis discovered another world, particularly that of the Russian oligarchy and the omnipresence of the wealth that surrounded it.
In the space of his four or five years as a highly specialised advisor to Fitzwilliams’ bank, he had become a wealthy man, that is of course in relative terms. High compensation in the world of banking was nothing new to him, he had lectured and even written learned papers on the subject, but he was not alone, even his barber could hold forth on the inequalities of the bonus system.
It was not that Francis was inadequately paid in his academic profession, on the contrary he was well paid, he was even prosperous, though never rich. But what surprised him most was the banker’s generosity. At the outset, when he saw his bank account grow his reaction was one of suspicious, however his suspicions were quickly transformed into a warm glow of satisfaction, justified, as he saw it, a form of recompense for the advice and knowledge he dispensed, and so it was.
It was the same when Sergei Tarasov in turn showered him with rewards, rewards which he initially refused, but being no ascetic and realizing that international finance was awash with money, he gave in to the call of the Siren. In his more lucid moments he feared he was being transformed into a modern day version of Marlow’s Doctor Faustus, haunted by the idea he would be called upon to justify his avarice, in one way or another, at sometime in future, distant, he hoped, or not so distant he feared. He was of course closer to Thomas Mann’s Adrian Leverkühn: Tarasov his Mephistopheles and Russia his Apocalypse.
He first met Ekaterina eighteen months earlier at the Pushkin Museum in Moscow. Tarasov together with the London auction house Christies had sponsored an exhibition of mid-Twentieth Century Contemporary Art at the museum and Francis along with Pat Kennedy and Tom Barton had been invited to the inaugural reception.
A couple of hours into the evening, after the Champagne and speeches, the reception slowly wound down. Francis, in a deep discussion on the subject of Francis Bacon with Ekaterina Tuomanova, an expert on contemporary art at the auction house, had not seen the time pass by.
“It looks like I’m keeping you,” Francis said looking at his watch.
“Not at all.”
‘Well I’d better be going, if I can
find the hotel.’
‘Which one?’ she asked.
‘The National’
‘Oh. It’s not too far. I can show you the way if you like?’
A quick check informed him Kennedy and Barton had already disappeared, no doubt as Tarasov’s guests at the Metropol.
‘Why not,’ he replied accepting her invitation.
Not feeling up to yet another late vodka fuelled evening, Ekaterina’s proposal was not difficult to accept. As well as being able to show him the way home, she, in addition to being attractive and intelligent, would be pleasant company.
It was one of those pleasantly warm early summer evenings and there was no sense of hurry as they walked in the direction of the Kremlin, then following its massive red walls towards Manezhnaya ploshchad.
G
UM – Red Square – Moscow
Ekaterina told him of her home near Kaluga, a couple of hours drive to the south of the capital, and then her student days at Moscow State University where she had graduated in fine arts.
She showed him a photo of her five year old daughter, Alina. After her husband, an army officer, had been killed by a road side bomb near Grozny, she had decided to pursue her career in the world of art, returning to Moscow State University, then V. Surikov Moscow State Academy, before joining Christies at their Moscow branch.
In Red Square Ekaterina pointed out the finer details of St Basils before turning into the vast nineteenth century GUM shopping mall for a late coffee. By the time they walked to the taxi stand outside the Kremlin’s walls it was almost one in the morning before they parted. As the taxi pulled away she waved goodbye and Francis, to his surprise, felt a sudden pang. It would be a long puzzling day before they met again as she promised they would for a concert at the Tchaikovsky Theatre.
*
It was eight in the evening Moscow time and all was quite in the city, Moscovites, like all other Russians, were in the middle of their most important religious holiday. It was Sunday, 8 January 2015, the day after the Orthodox Christmas and the first day of their New Year Week.
Ekaterina was in Kaluga, one hundred and fifty kilometres to the south of Moscow, spending Christmas with her parents and would not return to the capital until midday Monday.
His flight had arrived from London in the late afternoon and the idea of eating in the hotel restaurant alone did not inspire him. It was too early to turn in, but any idea of a refreshing walk was out of the question, outside was a thick layer of fresh snow and the temperature had fallen to minus twelve degrees centigrade.
Francis picked up the copy of the Moscow Times and served himself a whisky from the well stocked bar and settled into an armchair. His suite in the National Hotel was spacious and comfortable, he appreciated its old world style. The five star hotel was situated on the corner of ulitsa Tverskaya, opposite the Kremlin. It had been built in 1903 and had been the home to Lenin for some days at the time of the Revolution. During later Soviet times it had suffered neglect, but was since restored to its past glory and had become part of the Meridien Group.
The Moscow Times reported the continued decline of the rouble and the fall in oil prices. Fewer Russians had gone abroad for the year end holidays as the cost of buying dollars and euros had become prohibitive.
THE ‘EVIL’ EMPIRE
Vladimir Putin’s dream of a new Russian Empire was as frozen as the hard snow on Moscow’s streets. The rouble was plunging in concert with the price of oil, the lowest since the Lehman debacle. Sanctions imposed following Moscow’s seizure of the Crimea were biting and foreign goods, if they had not already disappeared from shops, were unaffordable.
The collapse of oil and the vital revenues it brought to the state, coupled with the disastrous annexation of the Crimea and the pro-Russian rebellion in East Ukraine, should have moderated Putin’s exaggerated ambitions. Unfortunately for Kiev it was not the case, the ex-KGB officer had become an autocrat, surrounded by his cronies, a tight band of oligarchs, who like their Soviet predecessors harboured little or no consideration for the common people.
Before Putin launched his campaign to recreate a Greater Russia, he should have consulted his history books and more precisely heeded the words of the Hapsburg general: Count Montecuculli, Prince of the Holy Roman Empire, who once remarked that to wage war, you first of all needed money; second, you needed money; and third you also needed money. A commodity Russia sorely lacked as it headed for a severe economic contraction.
The collapse and dismantlement of the Soviet Union resulted in its successor, the Russia Federation, inheriting three quarters of its territory and barely half of its population. The later would fall to just a mere one hundred million by 2050, according to specialists, casting a sad shadow on Moscow’s dream of past glory.
*
To understand Russia’s economy today, John Francis frequently informed his listeners, you have to understand its historical relationship to oil and gas. That Russia depended on oil was a generally accepted fact in informed circles. In 2009, the president of one of Russia’s major oil companies at the time, Lukoil, Vagit Alekperov, described his country as a major player in the sector, occupying a key position in the international energy market. Russia’s annual deliveries to the EU were equivalent to more than four hundred million tons of oil, or nearly a third of the EU’s energy consumption.
What Alekperov, or anyone else for that matter, had not foreseen was the arrival of considerable quantities oil and gas from new and hitherto unimagined sources. American shale oil production propelled the US to the top of the production league, an event not seen in decades. The consequence of overproduction was a vertiginous decline of energy prices, a disaster for economies like Russia’s, where oil revenues contributed seventy percent to the budget of the state.
Alekperov had imagined the world’s fate hinged on the Russian Federation, which not only produced a large share of the world’s energy – over ten percent, but exported half of it.
At that time, so very recent, it seemed to the World Energy Agency that a large number of the world’s oil fields had passed their peak and production would fall nearly twice as fast as had been previously thought. According to their thinking, world oil production was declining rapidly, and by 2030 they had forecast a significant shortage of oil.
It was no wonder journalists dubbed oil ‘black gold’.
In the face of such thinking, Alekperov could have never imagined, in the space of just six years, world production would in fact rise, and to a such a point market prices would collapse, as new producers inundated the world in an ocean of oil.
*
Russia was not new to oil, far from it. The ancients had called it the blood of the earth. It seeped from the ground, floated on streams, its pungent aromas were carried by the wind and on occasions it spontaneously combusted. It was for this reason Russians called it neft, from the Greek word nafata, which in turn was derived from the Persian naft, meaning to seep or to ooze.
Mineral oil has been known to man since remote antiquity, it was used as early as the fifth or sixth millennium BC. The oldest known sources were situated near the Dead Sea, the Euphrates River and the Kerch Peninsula (Crimea) on the shores of the Black Sea.
According to the Bible, Noah used pitch to make his ark watertight and as mortar to build the Tower of Babel, whilst the ancient Egyptians used it for mummification and medicinal purposes.
The first reference to oil in what is now Russia was in the Bosporan Kingdom, situated on the northern shores of Black Sea, now Russian Crimea and Krasnodar Krai - at that time Greek colonies, where petroleum had long been used for lighting and other domestic purposes.
Towards the end of the first millennium AD, Russian princes seized the region, which had in the meantime become the Khazar Khanate, giving them an opening to the Black Sea region.
Later, in the sixteenth century, oil was used in Muscovy where it was imported from Astrakhan and the Absheron Peninsula (Baku, Azerbaijan) by Russian merchants who ship
ped it up the Volga to the cities of Nizhny Novgorod, Moscow and Yaroslavl.
In the seventeenth century, the czarist government formed the Siberian Office to manage its new territories to the east, where oil was discovered floating on the Yenisey River and along Lake Baikal.
Near Irkutsk, where it was said the stench from petroleum vapour was overpowering, oil could be found by simply digging in the ground, however, another three centuries were to pass before this resource was exploited commercially.
Under Peter the Great, the first practical use of petroleum was made and he took a personal interest in its scientific and commercial development.
The signing of the Treaty of Gulistan between Russia and Persia in 1813, signalled the end of the Russo-Persian War and saw the return of the Baku Khanate to the Russian Empire. At that time, there were more than one hundred wells on the Absheron Peninsula with an annual production of some twenty thousand barrels. These wells were simple pits from which oil drawn by hand. By 1834, the distillation of light oil was introduced for lighting oil that burned cleanly and brighter than candles.
Intensive drilling started on the Absheron Peninsula in 1873. It was the start of the great oil fever. Overnight, a forest of derricks sprung up and the throb of steam engines were said to have filled the air. It required four months to cap the first gusher, struck the same year, which pointed to the Baku oil field’s vast reserves. Soon refineries were springing up everywhere and the sky was filled with smoke from the crude processes, shedding a fine rain of soot that covered buildings and installations with a thick black film.
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