Underflow | 6

In this episode: Over an informal dinner with bankers in Tallinn, the Kremlin-connected Russian billionaire Pavel Gudichev shares his plan to make Estonia the new hub of his commodity-trading business. The bankers take the bait. Within days, Gudichev is a valued client of Bank Livonia, Estonia's leading bank. The decision is one from which the European banking system will never quite recover.

Previous episodes

January 2012 — Tallinn, Estonia

"TERVISEKS", said Klaas Kalne, raising his glass. 

Pavel Gudichev gave him a quizzical look.

"To your health", explained Kalne. "An Estonian toast. Or, if you prefer, za zdorovye."

Gudichev raised his glass and clinked it against Kalne's glass. "Terviseks", he repeated, with a disconcerting accuracy that probably only Lars Lipp noticed.

Kalne had succeeded Lipp as head of private banking at Bank Livonia, when Lipp left the bank to work for Gudichev. Sitting next to Kalne was Kaja Andele, Kalne's senior account officer. Lipp had arranged the dinner at Gudichev's request and had chosen a private room in the cellars of the Gloria Restaurant in the Old Town of Tallinn — not so much for the food, which was fussy and French, but for the medieval walls, which were ten feet thick. 

Everything was going as planned. Lipp had introduced Gudichev as a prospective private client — at which Kalne affected a pleasant surprise, although in fact Lipp had briefed him the previous day about who Gudichev was, how much prospective business Gudichev represented, what Kalne should say if he wanted some of that business, and how Gudichev would probably respond.

Kalne replied that the bank would be delighted to welcome Mr Gudichev as a client, they were at his service, nothing could please them more, and of course there would be certain formalities and certain liquidity requirements, but those would be a matter of moments, perhaps Ms Andele might call on Mr Gudichev at his office the following day to deal with the practicalities. Gudichev smiled and nodded approvingly.

"And might Mr Gudichev by any chance be planning to move any of his business interests to Estonia?", Kalne continued. "If so might Bank Livonia also be of service to him in that regard?" 

Gudichev replied that he was indeed favourably impressed with the business climate in Estonia, and that, since Mr Kalne had been so kind as to ask, and although this was not meant as public information, he was intending to locate a new office in Tallinn which would engage in the trading of metals and minerals, and it was to oversee the development of this business, together with various treasury functions, for which he had hired Mr Lipp.

Over time the new business would be trading on quite a large scale, said Gudichev. It would require accounts with several international banks. And whereas he had, obviously, the highest regard for Bank Livonia — at this point he raised his glass as if in a toast — he was not aware that Bank Livonia had any very significant international profile, nor any particular track record in the commodities sector, where speed and scale were essential factors. Was he in error here?

Lipp had rehearsed this exact point with Kalne the previous day, so Kalne was prompt to reply that Estonia might be a relatively small country, but Livonia was a full-service European bank, a flexible and fast-growing bank. He was highly confident that his colleagues in the corporate banking division could not only provide Mr Gudichev's companies with all necessary banking services, but that they would do so with the personal attention that an Estonian bank would naturally extend to a customer who had shown confidence in Estonia as Mr Gudichev had done. Could Mr Gudichev expand just a little more on his plans, so that Mr Kalne would be able to brief his colleagues more precisely?  

Gudichev held Kalne's eyes, then began to speak in his gravelly, affectless voice, as though he were reciting a memorised text.

His group, Vantor, acted for corporations in the Russian Federation that exported oil, he said. Now it proposed to act for corporations in the Russian Federation which exported other commodities, such as coal and base metals, perhaps also gold. This was not always easy. For one thing, business in Russia was largely a matter of very personal connections. For another, the Russian economy was still in the process of normalising. Corporations and business were still suspicious of Russian banks and even of the Russian government. They wanted to hold their capital overseas, in foreign banks, wherever possible. This was an acquired instinct arising from historical experience which would take time to correct. The Vantor Group therefore assisted them in this. But Vantor always observed and respected Russian law within Russia, just as it observed and respected the laws of every other jurisdiction within which it operated, notably Switzerland.

Indeed — and here a certain animation entered Gudichev's voice, as though he had concluded his prepared remarks and was voicing thoughts which were only now occurring to him — he could see that one advantage of a banking relationship with Bank Livonia would be that Bank Livonia could then ensure, as a matter of course, that Vantor was in perfect conformity with Estonian laws and regulations. The reputation of the Russian business community had not been especially high in the Baltic countries, one had to admit as much, continued Gudichev with an wry smile, so if Vantor was to develop its business in Estonia then it would do well to have as its partner an Estonian bank of impeccable judgement and reputation whose word would be sufficient to silence any doubts in any quarters about who Vantor was and what it was doing.

"We are not generally in the business of silencing people", said Kalne indulgently, "but there again such a thing is rarely necessary. Estonians prefer silence as their natural condition. Sometimes we have to talk, and even then we leave long spaces between our words. There is a joke about Estonians: An Estonian extrovert is someone who looks at your shoes while he is talking to you".  

For a moment, unable to help themselves, all four of them looked at Gudichev's shoes, which were brown and gleaming. Then Gudichev caught Kalne's eye again and resumed talking. This, Lipp knew, was the important bit.

"As our trading business in Tallinn grows, and as we relocate to Tallinn certain treasury-management functions from our Swiss office", said Gudichev, "we will necessarily hold quite large cash balances. We would like to maximise the returns that we achieve on those balances, both for ourselves and for our clients, and this will be Mr Lipp's function. His demands may be quite" — Gudichev paused for a long moment before settling on his word — "sophisticated".  

"How large might those quite large cash balances be — if I may ask?", said Kalne.

Gudichev took a pen from his pocket, wrote something on his napkin, and gave the napkin to Kalne, who blinked, but, to his credit, showed no other reaction.

"I see your point", said Kalne. "You have my complete attention. Formally speaking, my responsibility extends only to private clients, but I will speak directly with our head of corporate banking tomorrow morning, who will doubtless want to consult with our chief operating officer. May I suggest that Ms Andele will liaise with Mr Lipp and we can open the appropriate accounts with all possible speed."

"You are very kind", said Gudichev. "Mr Lipp will supply you with the necessary information." 

Rather than waiting for Kaja Andele to attempt a personal call on Gudichev, Lipp went to Andele's office in Bank Livonia at nine the following morning. They had known one another quite well as colleagues, if not as friends, from Lipp's own time at the bank.

"What was the number on the napkin?", asked Andele.

"As an order of magnitude, probably somewhere in the nine figures", said Lipp. "Distributed around various institutions of course. I'm encouraging him to do some of that business with you, but how much business will depend on results."

"Klaas is already with Sirel in corporate banking", said Andele. "He called her last night and asked her to get in early. They're going to roll out the red carpet for you. First we will open a private-banking account for Gudichev, so then we know him as a customer. After that we will open an account for the company. What facilities we will extend to the company is, strictly speaking, a matter for corporate, but corporate will liaise closely with me, and, no doubt, with you."

All good, said Lipp, opening his attache case and pulling out the papers needed to open Gudichev's private account. The main ones were a power of attorney from Gudichev; a declaration by an Estonian notary confirming a residential address for Gudichev in Moscow; and Gudichev's Russian passport, containing an Estonian entry visa valid for ten years.

Lipp kept in reserve attestations showing that Gudichev had registered with the Estonian tax authorities, that he had no known criminal convictions, that he was not on any known stop-lists, that he was not a director of any companies within the European Union; and that he held neither high political office nor ambassadorial rank.

Gudichev would make a first deposit of €500,000, said Lipp. The money would be transferred from Bank Lugano in Switzerland where Gudichev also maintained an account. Source of funds available on request.

Andele busied herself on her computer for two minutes. "The account is open", she said. "He should move some funds into it within a week. Actually he has up to a month, but better sooner than later."

"The transfer will arrive within three days", said Lipp, noting down the details of Gudichev's new account while Andele photocopied Gudichev's documents. "Now, if I want to get the documentation moving for a corporate account, is Juta Johanna still Sirel's deputy in corporate banking?"

Juta Johanna was indeed still deputy head of corporate banking. So, two days later, when Gudichev's transfer from Bank Lugano to Bank Livonia had been received, and by which time Gudichev was back in Moscow, Lars went to see Johanna, another former colleague, whom he remembered as a stickler for compliance.

Lipp told Johanna exactly what Gudichev had told Kalne over dinner, which was easily done, since it was Lipp himself who had drafted not only Kalne's questions, but also Gudichev's answers. Lipp explained that the Vantor was a Swiss-registered trading house owned by Gudichev and a Swedish national. Vantor acted as an intermediary for Russian oil exporters. It would soon be developing a trading and treasury-management function in Tallinn through a new associated company registered in Estonia that was controlled by Gudichev and managed by Lipp himself. The new Estonian company, called Talcow Capital Partners, had no foreseeable need to raise capital or issue debt, but it would be conducting significant transactions with international customers. It would also be holding large cash balances which it would want to invest actively in various international financial markets.

Johanna replied that her boss, Sirel, had already cleared the relationship, and had also briefed the bank's COO. But for any large corporate account she needed to see an audited set of financial accounts every twelve months, starting — for a new company — eighteen months after the opening of the account.

Lipp replied that he, as chief executive of Talcow Capital Partners, would personally guarantee the timely filing of accounts. And, in the mean time, if she had any questions about the company or about particular transactions, then of course she could call him directly.

Lipp left on her desk a file containing notarised photocopies of Gudichev's identity documents and of his own identity documents, together with registration documents for Vantor in Switzerland and Talcow Capital Partners in Estonia. The account for Talcow Capital Partners was opened the next day with Gudichev and Lipp as signatories. This was the beginning of the end for Bank Livonia.

To be continued ...

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