Editorial
The Russian Connection in Iceland's Collapse
By Dr. Gary K. Busch 16/2/09
Feb 17, 2009 - 11:36:17 AM

On Friday the 13th of February the exiled Russian billionaire Boris Berezovsky alleged to Sky News that Vladimir Putin and his cronies had used "dirty money" to control British companies through investments in Iceland. [i] At the time he made these accusations I was in Iceland discussing the matter with some Icelandic observers.

The Icelanders said they had just come from the Parliament (‘Althing’) where a number of Russians were in discussion with the new Icelandic Government on this very issue. The Russians claimed they had investigated the claims and discovered that they were largely true.

Iceland’s descent into financial bankruptcy began when the new Central Bank Governor, David Oddson former Foreign Minister of Iceland and former Prime Minister resigned from office in 2005 and became the President of the Icelandic Central Bank. One of his key acts in the 1990's was to privatise Icelandic banking. This came at a good time.

One of the reasons for the privatisation of the banks was the growing international involvement of Icelandic entrepreneurs in the international market. The first, and the biggest, was Björgólfur Thor Björgólfsson (‘Thor’). According to a recent report “Bjorgolfsson is the son of a prominent Icelandic family. He chose to go to the United States in 1986 rather than join the family firm, Hafskip, which was at the time embroiled in a financial scandal involving fraud and embezzlement. In 1991, he graduated from New York University's Leonard N. Stern School of Business. “[ii] Thor was making a lot of money and he wanted to use this money to buy up large swaths of Icelandic business.

Bjorgolfsson began his business with his partner, fellow Icelander Magnus Thorsteinsson, by settling up a soft drinks firm in Iceland and then expanding into beer.  They then took this beer business to St. Petersburg, Russia where they teamed up with some Russian businessmen through the Russian’s Cyprus company, Bravo Holdings. The new company received financing from the IFC and a US investment firm, Capital International. The business boomed. One of the primary reasons for the boom was that, as a Russian company, it was exempt from the very high Russian duties on beer.

“Initial beer production capacity was one million hectolitres per annum. In 2001, Bravo reported sales of 2.5 million hectolitres of beer and 400,000 hectolitres of mixed alcoholic drinks. Within three years, Bravo International, Russia's fastest-growing brewer, was heading for a volume of four million hectolitres in 2002. It quickly secured a 17% market share in the St. Petersburg region and 7% in the Moscow area.  After less than a decade of expansion, Bravo International was acquired in early 2002 by Heineken NV of The Netherlands, making the brewing multinational the fourth-largest brewer in Russia in terms of production volume and the country's fastest-growing brewer. [iii]

The money this sale generated, and similar sales by other entrepreneurs, were brought back to Iceland and placed in the newly privatised Icelandic banks, Kaupthing, Landsbanki and Glitnir. These banks were awash with cash. Indeed, the Russians meeting last week in the Althing admitted that the Icelandic investors would bring back to Iceland large amounts of cash which they would deposit in the three banks and the three top institutional investment houses Exista, Straumur and SPRON.

The problem, if not the opportunity, arose from the fact that Iceland’s economy, based on cod fishing, did not have the absorptive capacity to use this tsunami of money in the Icelandic economy. The newly rich looked elsewhere. They took certificates of deposit from the Icelandic banks and borrowed multiples of the cash holdings in banks in Luxembourg, the Cayman Islands and the great centre of piracy, the Tortugas. With this cash they began to buy up the shares of real assets in the UK (major shops, etc.) and took a majority interest in companies around the globe. At the same time, the asset base of the Icelandic private banks was growing exponentially. They were able to offer a very high rate of interest in parallel to their very high rate of notional capital acquisition. The share holdings were highly leveraged so the cash drain on the investment pool was minimised.

With the opening round of the credit crunch the Icelandic banks suddenly found that their liabilities were enormous in comparison to their real assets. “Iceland’s banks had been under pressure for most of the year, struggling with rampant inflation, the collapsing value of the currency and the general fallout from an overheated economy. In an attempt to curb inflation, the country’s central bank raised interest rates to 15.5 per cent, making it even more difficult for the banks to fund themselves. The banks expanded rapidly after the deregulation of domestic financial market in the 1990s and now have combined foreign liabilities in excess of $100 billion, dwarfing the country’s gross domestic product of $14 billion.” [iv]

The decline in the share prices triggered margin calls and the lack of a credit market bankrupt the economy. The currency dropped thirty percent against the Euro overnight. Unemployment has soared; depositors overseas have lost most of the value of their deposits; and the Icelandic people are suffering with no end in sight. They succeeded in forcing out the Prime Minister but the President of the Central Bank refuses to leave. Most important for the Icelandic population is the fact that most of the rich people who concocted and perfected these schemes have retained their money overseas and have successfully hidden their funds from their fellow citizens.

The resentment felt is fuelled by the growing awareness that this whole financial crisis was created by Russian billionaires, close to Putin or acting for him, who used Iceland to wash their money. The ‘siloviki’, with the blessing from the top, took their cash to Iceland and turned it into cash from the Icelandic ‘Masters of the Universe’. These Masters, having paid the Russians their money back overseas, then used the borrowed balances to buy up everything they could see for their own accounts and for their Russian partners. When the crunch came the whole house of cards collapsed.

Icelandic authorities say in private that the reason they were able to get a loan from Russia of 5.4 billion Euros was the threat that this whole money laundering business would be washed in public. It is a sad tale and the Icelanders are very worried how it will end. House foreclosures are starting; the currency is diminished; savings are gone; and the institutions are no longer trusted. People are deeply worried.