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Posted September 2015

 

How an Icelandic brewer lost it all and came back from the brink: Russia’s Wild East Nineties with Thor and Bill

For fifteen years now, ever since the former Financial Times correspondent Chrystia Freeland published her book “Sale of the Century: Russia's Wild Ride from Communism to Capitalism” (2000), the Western journalists and academics who observed and described the post-Soviet evolution of Russia have almost all kept to the Medieval morality tale: good and evil, right and wrong, promise and betrayal. In these accounts, the question of “cui bono” – who had benefitted from Russia’s tumultuous first decade after the Fall of the Iron Curtain -, was easily answered: those villainous oligarchs.

However, this by now all-too-common finger pointing tends to distract from the fact that quite a few Western gold diggers found Russia in those days a veritable Klondike too. For wholly understandable reasons these businessmen decided to remain shtoom and the rest of us Nosy Parkers would have never learnt about their adventures if different circumstances had not forced some of them to reveal it all (or most of it) to the world.

I admit, the one book I have eagerly been waiting to come out is Thor Bjorgolfsson’s “Billions to Bust – and Back” (2014). Mr Bjorgolfsson – or Thor – was a young guy from Iceland who went to St Petersburg in the early 1990s to make a fortune, first in alcopops and then in beer. The fact that he stems from Iceland was intriguing in itself. I mean, how many Icelanders have you come across in the global brewing industry? When I visited his brewery in Russia sometime in the early Noughties I was amazed, not only by its size (4 million hl), but also by the fact that he had built it from scratch in the course of a few years, which retrospectively shows how buoyant the Russian beer market was in those days.

Thor’s early story is the story of the Bravo brewery in St Petersburg, which was sold to Heineken in 2002 for USD 400 million – a deal which personally netted him a cool USD 100 million. The reason I had impatiently anticipated the publication of his book is that Thor was already out of the St Petersburg picture when I came visiting and his lieutenants would not talk. Besides, when I contacted him a few years later, he refused to be interviewed. This would have been in 2005 when Thor had made it on to the Forbes rich list as Iceland’s first billionaire at the tender age of 37.

Since leaving Russia Thor had become a really major investor in telecoms, pharmaceuticals and banking, which made him the media’s darling. It seemed he spoke to everybody, but not to me. Fine, I consoled myself, if he does not want to tell me what it was like to do business in Russia in the 1990s, why should I bother writing about things long gone by? But the refusal grated. My interest was piqued again in 2009 when Thor was down on his luck, having lost several billion dollars in a few months in Iceland’s financial collapse.

 

Recording the big chill in Iceland and Russia

Embittered by the scorn Iceland poured on him, Thor went underground for several years and I would have lost sight of him altogether had not his former business partner in Russia, another Icelander by the name of Ingimar Ingimarsson, published a book in late 2011 (alas in Icelandic) in which he accuses Thor and his father of having dishonestly appropriated an entire bottling factory from him in Russia. I had a long interview with Ingimar to hear his side of the story, which is fascinating in itself, even without the contested ownership issue. But I left the write-up lying around in the depths of my computer until Thor announced he would put the record straight in a book of his own. After several postponements it finally came out at the end of last year – when another book launch was publicised: Bill Browder’s “Red Notice”, which hit the shelves in spring.

An outsider like Thor, the American-born Bill Browder was once the biggest portfolio investor in Russia before he was expelled from Russia in 2005. In its heyday, his firm Heritage Capital had USD 4.5 billion of assets under management. These days he is a leading campaigner against Mr Putin.

I decided that two insider accounts were better than one to review alongside each other, although their tales could not be any more different. Both Thor and Bill are fascinating characters with colourful family backgrounds. Bill’s grandfather Earl was the leader of the American Communist Party who lived in Russia from 1926 until 1932 and after his return to the U.S. twice ran for U.S. president in 1936 and 1940.

 

Riding the wild, wild East

Born in 1964 to left-leaning academic parents, Bill enters Eastern Europe in 1990, first as a consultant, then as a banker out of the 1980s playbook. Knowing next to nothing about Eastern Europe, but relying on his wits and chutzpa, he talks himself up as an expert and pretty soon he is. He makes huge profits for his bank Salomon Brothers from Russia’s first privatisations, then strikes out on his own, initially surfing Russia’s boom, then weathering its massive bust during the Rouble Crisis of 1998, which wipes out 90 percent of his fund’s value. Others would have walked away with their tails between their legs. Not Bill. He stays on to make his clients’ money back, which he does in the slower but eventually even bigger boom of the early Putin years.

The first half of Bill’s “Red Notice” (named for the type of warrant the Russian government has sought from Interpol for him) is a gripping yarn of how Russia’s most precious assets are sold off to insiders for almost nothing and how those insiders exploit everyone else to get even richer. The second half depicts Bill’s transformation from a financier to an unlikely human rights activist following the death of his Russian lawyer Sergei Magnitsky in 2009. After uncovering a scam involving corrupt officials who steal Bill’s companies and illegally claim back USD 230 million in taxes he paid, the officials arrest Mr Magnitsky, keep him in detention, beat him, deny him medical treatment and do nothing while he dies in agony.

Reviewers have likened Bill’s “Red Notice” to Michael Lewis’ 1989 book “Liar’s Poker” (covering his experiences as a bond salesman on Wall Street) welded on to a thriller by John le Carré. This is to say, it reads like a crime novel but it’s all true. Although it is to serve Bill’s campaign to expose Mr Magnitsky’s perpetrators and bring them to justice, it’s a highly recommendable book, not least because of Bill’s humility and empathy which shine through.

 

Hammering out an Icelandic entrepreneurial saga

Thor says that he was born into one of Iceland’s most famous capitalist families, which must mean something on an island on the edge of the world with about 320,000 inhabitants, a few ponies, and an inbred elite of politicians who extol socialist virtues but who are forever scratching each other’s backs. His great grandfather, Thor Jensen, was an entrepreneur who survived two bankruptcies and ended up as one of Iceland’s largest landowners, while his father Bjorgolfur Gudmundsson overcame his working class background to run Iceland’s second-largest shipping firm, Hafskip, which sank under a load of debt in 1985. As his son sees it, his father became the victim of a political conspiracy because in 1986 he and few other executives were charged with 450 criminal counts, from embezzlement to fraud. The investigation dragged on for five years. In the end Thor’s father was only found guilty of a few minor charges and was sentenced to 12 months’ probation. He was, says his son, also an alcoholic.

Thor’s book also falls into two halves. The first half covers his ascent to fame and fortune while the second half tells us how he, a fallen Phoenix after Iceland’s crash of 2008, rises from the ashes again to repay his creditors EUR 650 million which he and his father had personally guaranteed when they made their deals. Hence the book’s sub-title “How I made, lost and rebuilt a fortune, and what I learned on the way”. This should clearly be a hint that this book is basically a self-help manual. No doubt, the best self-help manuals come from those who speak from experience and Thor should know: his empire melted down in spectacular fashion as did a whole country: Iceland. But if this book is supposedly “motivational” – “do as I did should you suddenly find yourself out on your ear” – why does it grate so much?

Is it because it reads like a public confession in the style of Alcoholics Anonymous – Thor‘s opening sentence “My name is Bjorgulfur Thor Bjorgolfsson and I am a deal junkie” echoes the introductions at an AA meeting – whose cloying intimacy makes the involuntary confessor squirm? Or is it because underneath the confessional there is a barely concealed boisterousness, an “up yours” to Iceland’s elite that has treated him and his father like pariahs and to whom he wants to prove that he is a man of dignity and pride who honours his debts?

It does not help that Thor’s book is not his own. He wrote it with Andrew Cave. What Mr Cave did in terms of editing is really hard to fathom because after more than 200 pages, Thor has succeeded in coming across as a vindictive snob, whose pearls of wisdom range from the banal to the clichéd: “everything is temporary” reads one; “Life’s not fair. Accept it and move on”, another.

Anyway, there is no need for the reader to like Thor, or sympathise with him or even take any advice from him. If readers skip the inspirational mottos and ignore the second half of the book, his Russian adventure tale will be more than rewarding.

 

A flâneur in St Petersburg

When writing economic histories, academics usually tend to focus on hard data, like GDP, inflation rates, trade figures and the like. Personal narratives may be symptomatic of general developments but don’t enjoy the same validity. In my view, however, the decline of the Soviet Union and the rise of modern Russia need to be viewed from the bottom so that we foreigners can begin to fathom the enormous social upheaval that came with this “transition”. Few will remember that Russian politics resembled a violent roller coaster ride between 1991, when communist hardliners attempted a putsch against Mr Gorbachev and 1994, when the privatisation vouchers expired, causing GDP to contract, inflation to soar and the rouble to tumble against the dollar. Only if we adopt a grassroots perspective, can we see how chaotic Russia was in those days, with everybody scrambling to make a living, while violence or the threat of it never being far beneath the surface of everyday Russian life.

Statues of Tsar Peter, Stalin and Lenin for those hankering after Russia’s glorious past.

I visited St Petersburg in early autumn 2001, when Russia’s Wild West years were seemingly a distant memory. The plan was to spend some time in Russia’s second largest city to look at museums and several breweries. My travel agent had booked me into the Hotel Sovetskaya, which in those days was officially owned, if I remember correctly, by some union of athletes. The location seemed ideal for wandering around the city centre. Little did I know that the Sovetskaya was Soviet gigantism cast in concrete. The name should have alerted me to what I would get. I had thought that by then, most things “Soviet” would have disappeared, certainly from names. Not in this case. The Sovetskaya Hotel was a huge living-machine. It laid claim to being the city’s first highrise when it was built in the 1960s. With its 18 floors and over 1,000 rooms it had been plonked right into an old neighbourhood. The good thing was, since it towered over all the surrounding buildings, it could not be missed and served me well as a landmark.

My room was on the sixth floor. Right next to the stairs, an elderly woman sat behind a desk at all times, whose job I never fathomed. In Soviet times, she would have been called a “deschurnaja” (“floor keeper”) and her job would have been officially to hand out the keys to the rooms on her floor. Unofficially, she acted as the purveyor of women and booze while keeping an eye on things, reporting anything and anybody back to the authorities each evening. The floor keepers’ job was officially abolished in the 1980s. But here she sat. What she could have gleaned from the motley crew of western tourists on our floor, I have no idea. Half-way through my stay, the hot water stopped running and would not return while I was there. When I tried to point this inconvenience out to her, she merely shrugged. I complained at reception, which was staffed by very tall, very thin and very ill-tempered young women. No luck there either. So I decided, sod this.

Bizarrely, breakfast at the Sovetskaya was served in a hall that doubled as the hotel’s disco, judging from the black wallpaper and the mirror balls that hung from the ceiling. Even at breakfast time it was near pitch-dark in there so that I had trouble working out what kind of food I was loading onto my plate from the sumptuous buffet. What I noticed was that all the surly buffet ladies, who gave off an air of such superiority that there was no mistaking them for waitresses, underlined by the fact that they were dressed like lab workers in starched white coats, helped themselves to copious amounts of food from the buffet. This they stashed away in the servers’ desk right next to several rolls of toilet paper. I knew they were paid a pittance and probably not even regularly so their families had to survive on the food they purloined. But why they piled savoury and sweet foods on top of each other without putting a napkin in between, I never understood.

Spruced up palatial buildings alongside St Petersburg’s canals.

 

Strange by design

Even as a tourist, I sensed that St Petersburg was a strange place. It was basically divided into two different spheres, architecturally and socially. There were those imposing palaces which date back to the early 18th century when Tsar Peter declared it his pet project to have an imperial city built upon the swamps of the river Neva that would be second to none, albeit at the tremendous human cost of 300,000 lives. Many of these palaces had already been tarted up. Surrounding the old city were the ghastly Soviet-time prefab apartment blocks, those “workers’ lockers”, in various stages of decay. In terms of social stratification, you had the nouveau riche, who could only be glimpsed through their big car windows. You did not see them walking in the streets. Those who walked were the “sovoks”, mostly of an older generation with a Soviet mentality, who had not made the “transition” to the new Russia.

I decided not to take dinner at the hotel as I did not want to be privy to the vesper time live show of prostitutes haggling with their johns. I chose to eat out at Tinkoff’s brewpub. It was a swish place. Spacious, all steel and wood. How Mr Tinkoff, often dubbed Russia’s Richard Branson because of his young age (born 1967) and diversified businesses, had managed to obtain this venue on the ground floor of an old palace – real estate for restaurants and shops was and is extremely scarce – I could only guess. The thing that immediately struck me as unusual was the metal detector in the entrance hall. In Western Europe in those days there were metal detectors only at airports and in high security areas. Next to it was a line of lockers and a sign, saying that patrons should please relinquish their weapons as the brewery equipment would not take well to bullets flying around. Me neither, I thought at the time. But the no-weapons sign was there for a purpose. A friend of mine, who had been to dinner with a client around this time elsewhere, had told me that throughout the meal one of his client’s bodyguards was fiddling with his gun. Suddenly a shot was fired and the bodyguard had shot himself in the leg. My friend was shocked. Not so the other members of his party. The injured bodyguard was taken away and an unflappable waitress came along with a mop to wipe the puddle of blood off the floor. No words were lost on this and the party continued as if nothing had happened.

By comparison, the clientele at Tinkoff’s seemed to consist of few musclemen. Although I tried to spot tell-tale bulges under suits, the exclusively male crowd fitted the description of Russia’s new breed of “bisnesmeny”, all sporting ostentatious watches. No one had come to Tinkoff’s to savour the beers. As they hunkered over their plates and dug into their food, they seemed engaged in deep conversation.

Spot the tourist at Tinkoff’s: the cheap watch is the give-away.

I had heard that St Petersburg was “Russia’s Sicily”, a hot spot for mafia-type crime, especially contract killings. In the 1990s there were dozens of contract murders each year, mostly business-related. Contract killers could be found easily. There was a story going round, also mentioned in Ms Freeland’s book, that one assassin advertised his services by putting the blunt code phrase “willing to take on any dangerous work for a high fee” into a classified ad in the local paper. Thor reckons that a contract hit would have cost USD 5,000 at the time. He admits to having carried USD 50,000 in cash around with him all the time, thinking that this sort of money would allow him to negotiate his way out of a kidnapping. The threat to his life would have been real, although beer was not considered a “strategic industry” then. Nonetheless, shortly before my visit, the biggest brewer in town, Baltika, had lost two executives to hitmen: its finance director and its marketing chief. Both cases were never solved, although rumours abounded.

As a tourist, I felt totally safe walking in the streets, taking in the sights, the churches, the bridges, the statues, and the beautiful autumn sunshine, assuming that I would know how to avoid two types of Russia’s Mafia: those foot soldiers or “gopniks” (“hoodlums”) in tracksuits who hung out at kiosks and those who drove around town in big Western cars talking into their mobiles; the third type, which worked up in the bureaucracies, I thought I would never encounter anyway. Guess my surprise, when on one of my wanders along the Fontanka canal, I noticed a group of men in tracksuits, standing next to some imposing cars parked on the pavement. It would have been early afternoon so I confidently walked on towards them, wondering if these men were perhaps Caucasians. I had heard that tracksuits were the attire of choice of tough guys from this region. My gaze then fell to their feet because I had also heard that the way these tough guys did up their trainers, how they laced them and which colour shoe lace they used, was indicative of how many people they had killed. When I looked up again, I saw a man in a white T-shirt with a shaved head standing on the palace’s first floor balcony carrying a machine gun. I knew immediately that the thing was real and that I had better walk on quickly.

I recount these memories at length because none of this, the apathy, the couldn’t-care-less attitude, or even the self-righteous gangsterism, any visitor to say Poland or the Czech Republic, would have encountered in 2001, a decade after Soviet-type socialism had collapsed.

 

Hitting liquid gold

The leadenness that I felt in St Petersburg was only relieved by two things: buoyant consumerism and beer. Outdoor advertising for beer dominated the cityscape. Gone had the old Soviet posters saying something like “All power to the Soviets! The factories to the workers! The land to the peasants! Peace to nations!” Instead, huge banners promoting beer spanned the city’s boulevards.

In the early Noughties, big outdoor advertising for beer ruled St Petersburg’s air space.

However, the best testimonies to beer having become a big business during the previous decade were the small kiosks. Having sprung up during Mr Gorbachev’s final years, kiosks were scattered across the city. In the old city centre they looked rather picturesque: polygonal huts with a pointed roof. They sold whatever they could cramp into their limited space, most visibly, shampoo, cigarettes, beer, vodka. Open all hours, they also served as al fresco beer venues due to the lack of bars and restaurants. Punters would mingle outside those kiosks, chatting, with a bottle of beer in their hands. Some would even buy one for the road – in this case to literally take one bottle home with them. Because of their ubiquity, especially in provincial towns and rural areas, kiosks became the most important sales outlets for beer. Until 2013, when kiosk sales of beer were banned, they sold one in three bottles of beer.

Kiosks’ briskest business was in vodka and cigarettes.

In my mind, the rise in beer consumption in Russia is the brewing industry’s success story in the 1990s. Russia’s brewing industry lived up to the BRIC hype (Brazil, Russia, India, China), even before a banker at Goldman Sachs turned it into the flavour of the month for investors in 2001. In plain figures, beer production in Russia rose from 28 million hl in 1992 to 55 million hl in 2000 and to 116 million hl in 2007. Even before the Fall of the Iron Curtain, Russia’s beer production was highest in Central and Eastern Europe, largely thanks to its market size. Per capital consumption in 1992 was the lowest in the region, but in the course of the decade, it increased from about 20 litres in 1991 to 45 litres in 2000 and to over 80 litres in 2007. At first, beer did not do all that well. Production declined until about 1996, only to rise in the double digits each year afterwards. That means: in a mere decade, beer consumption on a per capita basis quadrupled. Hardly surprising that Russia in 2007 ranked third world-wide (behind China and the United States) in total beer production.

How did Russia’s brewers manage to pull off this feat? The answer is: through improved beer quality, the introduction of high alcohol beers (which made it attractive for Russians to switch from vodka to the new lifestyle tipple), the launch of a multitude of brands, investments in advertising and marketing, and not to forget the launch of beer in multi-litre plastic bottles.

When it comes to beer, the sovoks previously had not been spoilt for choice. In the old Soviet days, they could get a beer called Zhigulievskoje, whose quality was variable. Zhigulievskoje was a commodity beer brand, a generic beer, without any links to a single brewery or geography. Any brewery could produce it. The brand is still around today. You can find it as a nostalgia brand in Russia and the Ukraine.

 

Privatisation and the thirst for beer

The first to spot the huge potential Russia represented in terms of beer consumption were the Scandinavians. In 1992, the Swedish-Norwegian brewers Pripps Ringnes and the Finnish brewer Hartwall, through their joint venture Baltic Beverages Holding (BBH), bought a St Petersburg brewery which had been privatised. Breweries were not the only businesses to change ownership. In fact, Russia’s voucher privatisation scheme, announced in 1991 and launched in the autumn of 1992, has been called the “sale of the century” (Freeland) as all the country’s assets were put on the block. When Russia’s government gave out vouchers, they became like a second currency: they bought workers their reserved shares in their enterprises; they could be used to buy shares in companies that would be sold at public auctions; or they could be traded in the streets for anything from dollars to food.

During the voucher privatisation, kiosks began a robust trade in vouchers.

The voucher privatisation was efficient but far from effective. Russia’s reformers succeeded in transferring property to private owners in little time. However their performance was far patchier as concerns their ultimate goal of improving the profitability of the privatised companies. Russia’s economic growth between 1994 and 1998 was slower than many of its neighbours’. The other drawback was that the reformers implicitly condoned and legalised the capture of state-assets by Soviet-era company directors because they were so intent on getting the assets into private hands. The role these “red directors” played in the voucher privatisation – whether they accumulated vouchers for themselves, thinking that one day a big Western multinational would want to buy them, or whether they already amassed them at the behest of a foreign investor who did not want to reveal its true colours – we shall probably never know.

In any case, Russia’s assets, including its state-owned breweries, sold for a lark. In his book Bill does the math: The government granted one privatisation certificate to every Russian citizen (roughly 150 million people). 150 million times USD 20 (the market price for the voucher) equals USD 3 billion. Since these vouchers were exchangeable for roughly 30 percent of the shares of all Russian companies, this valued the whole Russian economy at around USD 10 billion – or one sixth of the then value of the U.S. supermarket chain Wal-Mart. Even more astonishingly, there were no restrictions on who could purchase these vouchers. Anybody could. Besides, many ordinary Russians, who had their wages outstanding, were more than glad to part with their vouchers for a bottle of vodka each. It does not take much imagination to understand why Russian companies changed hands so quickly and why many red directors ended up owning significant stakes in them. The sales process that Bill describes for Russian oil and gas companies probably applies to the brewing industry too. Within a few years the Baltika Brewery became the dominant player in the market, not just in St Petersburg, but in Russia. Baltika must have done the Scandinavian investors proud. In five years (1993 – 1998) they could afford to invest an estimated USD 220 million to keep up with rising demand. By 1998 Baltika was reportedly the major taxpayer in St Petersburg.

The real story behind Baltika’s phenomenal rise, how the Scandinavians managed to conquer the market and get their beer into all the kiosks, will never be revealed. Fortunately, another story from those early wild, wild days in St Petersburg is well-documented by the Icelander Ingimar Ingimarsson, who was there and lived to tell it.

 

The Icelanders in Russia

Ingimar’s story, as told in his book “Sagan sem varð að segj” (2011), is intimately entwined with that of the other Icelanders, the father and son team Bjorgolfur Gudmundsson and Thor, and Thor’s friend Magnus Thorsteinsson.

While Ingimar’s tale may just be an episode in the life of the other Icelanders, whose further career was far more grandiose than their Russian venture and can be summed up in a headline like – “From Russian pop to Iceland’s bust” – Ingimar’s experiences nevertheless help shed a light on how foreigners did business in St Petersburg in the early 1990s. It certainly took someone well-traversed in eastern European business etiquette (ahem); moreover, it took someone who was not easily scared by barely concealed threats to his business and life. During his years in Russia, Ingimar got shot at, arrested and threatened with jail. None of these experiences would have been too pleasant, certainly not the prospect of being thrown into jail for up to 30 days without being charged officially, as was the law in those days.

An industrial architect and engineer by training, Ingimar used to live in West Berlin in the 1980s. When the Berlin Wall came down, he set up an office in former East Berlin from where he ventured into Czechoslovakia and Bulgaria to work on real estate projects. In September 1991, a few weeks after Mr Yeltsin had climbed onto a tank to defy the communist putschists, Ingimar came to St Petersburg, or Leningrad as it was still called, with the plan to set up a chain of pizza restaurants. As he soon discovered Russians did not go for strange foreign foods. Undeterred he looked around for other business opportunities and founded a telephone company, Peterstar, together with his English partner, Bernard Lardner, a former London stockbroker, who had put together the financing for this. They sold the company the following year.

Seeking to repeat this success, their next project was a bottling company which would produce soft drinks. Russians may not have gone for foreign foods then, but they craved foreign beverages. The snatch was: Ingimar and his partner needed an industrial site on which to build a factory. As foreigners could not legally buy real estate, Ingimar was patched up with RMZ, a local company that serviced the catering equipment of the city’s 800 or so state-owned restaurants, by the city’s powerful Committee for External Relations. Foreigners who wanted to start a business in St Petersburg required registration with this committee, which reported to Anatoly Sobchak, the city’s flamboyant and rather opaque mayor in the tumultuous years between 1991 and 1996. This committee was chaired by none other than Mr Putin.

Thus in 1993 the company Baltic Bottling was founded. Through another company, Baltic Group, Ingimar and Mr Lardner controlled 75 percent of it, with RMZ, now privatised, owning 25 percent. RMZ’s part of the deal was an empty 13,000 sqm hall on the outskirts of St Petersburg. Although the building was supposed to have proper drainage, Ingimar discovered when lifting the sewers in the floor that the builders had “forgotten” to put in the pipes. Or perhaps the pipes had been assigned “natural losses”. Whatever the case, it meant that before they could install the packaging lines they had to rip out the floor and lay the pipes. Equipment was sourced from Iceland because Ingimar had heard that second-hand lines (for cans, plastic and glass bottles) were available there. Baltic Bottling signed a USD 1.5 million deal to purchase the equipment plus management consultancy from a company, which Thor’s father indirectly controlled.

The equipment, which in my view was probably ten times overpriced (this sort of money would have bought you brand-new kit), arrived later than agreed upon and incomplete, says Ingimar. Thor disputes this and says that Ingimar and the Russians had not delivered and the factory still had a mud floor when the equipment arrived. In any case, the project got off to a bad start. As Chairman of Baltic Bottling Ingimar was not happy with events, but as he was busy with other projects, he agreed to Thor’s father sitting on the board of Baltic Bottling. He also agreed to Thor and Magnus coming over from Iceland to manage the business as they claimed to have expertise in the soft drinks business.

Initially, Thor was responsible for sales and marketing, while Magnus was Managing Director. When Magnus turned out to be over-challenged by the task, says Ingimar, Thor took on his job too.

 

Sending wine to Siberia

In the beginning business was tough. Fortunately, in 1993 Ingimar pulled a contract to put 120 tons of Moldovan red wine into 0.5 litre plastic bottles. The wine was to be transported by train from Moldova, a former Soviet republic lodged between Romania and Ukraine and famous for its wines, to St Petersburg. Upon arrival, there were only 100 tons left. That was to be expected. The cargo had had to pass various customs posts along the way. As the wine was to be sold in Siberia, Ingimar was told to fortify it with vodka so that it would not freeze on the way. Naturally, the Siberians weren’t told that they would be buying an adulterated product. But would they have complained that they actually got more bang for their roubles than was stated on the label? Probably not.

In 1994/1995 things improved for Baltic Bottling. By then they were working in three shifts seven days a week. Not only were they contract-packaging cans for Pepsi, they also had a licence from the UK company Britvic to produce their soft drinks. When they finally created their own Bravo lines of soft drinks, they ceased packaging for Britvic, especially as Thor’s idea to move into alcopops proved massively successful. Bravo alcopops took off like a shot. Sweet alcoholic drinks were exactly to the Russians’ taste. That Ingimar had to buy the vodka for his alcopops from sources others would have called shady, did not scare him the least. And yes, soon Ingimar was paid visits by people who told him that he was entering their field and was touching on other people’s interests. Whether this was a warning or a threat, Ingimar chose to ignore it outright. After all he paid a “security company” USD 10,000 a month in cash dollars to protect his business.

 

Business (in)security

These Russian security firms are a story in themselves. Whether this was extortion or protection depends on how you see it. The point is that ultimately, Ingimar had his “krysha” (“roof”), the Russian euphemism for a hybrid of insurance, factoring, physical security, and a friendly civil servant. More importantly, the security people also organised his distribution. Before beer and beverage companies set up their own, distribution was very much a grey area. No one really knew or wanted to know who the guys were employed by that would turn up at the breweries’ gates to ask for product. Same with Ingimar. When he started out, business was cash only. Truck drivers would appear at his gates with big sacks full of rouble bills, which they handed over in exchange for product. To deal with all that cash Ingimar had to buy a money counting machine. Later, when he had contracts to sell in bulk, his security company would run checks on the clients to make sure they made good on the contract. How that check was conducted, is best left to the readers’ imagination.

In 1995 the Baltic Bottling business was thriving, says Ingimar but relations between Ingimar and Mr Lardner on the one side and the other Icelanders on the other were deteriorating. According to Ingimar, Mr Gudmundsson insisted that he and his son should be made shareholders in Baltic Bottling because of all their efforts. This Ingimar and Mr Lardner refused.

Due to a prolonged illness, Ingimar was away from St Petersburg for most of 1995 and was surprised that, on a visit to the plant in September, he was barred entry. When he returned with 30 policemen (whom he had to pay), he and his troupe were still outnumbered by guards that carried machine guns. Ingimar and the police soon beat a retreat but not after he had learnt that a change of ownership had taken place. “This came as a bit of a surprise to [Mr Ingimarsson and Mr Lardner] since they didn’t know they had sold it. The Russians who owned 25 percent of the company didn’t seem to mind. Both Mr Ingimarsson and Mr Lardner experienced unpleasant pressure and threats”, comments the journalist Sigrun Davidsdottir, who has followed the case.

 

Ingimar’s pen versus Thor’s hammer

Apparently, and this is where accounts differ, Ingimar and his partner had sold Thor’s father their share in Baltic Bottling earlier that year with a signed contract which later became highly controversial in court. The sale price was said to have been USD 500,000 and was subject to lots of conditions. To this day, Ingimar insists that he never signed a sales contract nor received any money from Thor’s father. The sum is significant insofar as in 1995 Ingimar and his partner had decided that it was time for them to exit from Baltic Bottling and had asked the bank Société Générale to evaluate the company so that they knew how much they could demand from potential buyers. With a turnover of USD 30 million and profits of USD 6 million after tax in 1995, the bankers valued Baltic Bottling at over USD 20 million. Surely, if they had wanted to sell the company to the other Icelanders they would not have sold it at such a discount?

The Baltic Bottling shareholders’ meeting, in which the sale was approved, allegedly took place 29 September; but neither Ingimar nor his partner were present. They did not even know about the meeting. Russia’s register of companies approved of the deed nevertheless and the factory came into the ownership of Thor’s father.

Of course, Ingimar would not accept this and pursued the matter in courts, both in Russia and in Iceland, for the next three years. Although he won at each level and a Reykjavik judge ruled in 1999 that the sale was invalid because Ingimar did not have the authority to sell the company, no damages were awarded. Nor did he get his company back. In 1996, Thor’s father had sold it to the Whitman Corporation from the U.S., a Pepsi bottler, which had its own plant in St Petersburg. Whitman itself sold the whole St Petersburg business to Pepsi in 1999.

Incidentally, Thor admits that Ingimar and his father fell out and that his father bought out Ingimar. But contradicting Ingimar, Thor maintains that the business was struggling, for which only Ingimar had himself to blame. According to Thor, the company had been undercapitalised right from the start as Ingimar never got in any outside money. What is more, Ingimar did not trust that his company would ever become profitable, so he diverted the cash flow to off-shore entities through leasing payments and the like.

While I have no trouble believing for a second that Ingimar did siphon off the cash flow, which is a common enough practice to expatriate profits, I find it hard to accept that Ingimar sold the company to Thor’s father. Or why would Thor have to tell us of a meeting with Mr Putin, during which Mr Putin and Thor concur that the original venture between Ingimar and the Russians had been set up so badly that it was therefore invalid? Revealingly, Mr Putin allegedly recommended that Thor start from scratch and build a new factory “without the legacy problems”.

All photos: Verstl/Harvey

Ms Freeman writes that Russia in the 1990s was so criminalised – from small-town racketeers who terrorised traders in markets to bribe-taking officials – that the mafia was almost unexceptional, just one more matrioshka, the Russian resting doll, in the interlocking layers of lawlessness.

Which Thor did. Baltic Bottling was wound down in 1996, the same year that Thor set up a new company, Bravo International, to produce alcopops. Luckily, Thor was an early mover into this category and his company flourished. Thanks to the tax break that alcopops received initially, his profit margin jumped from 40 percent to something like 80 percent and the business racked up USD 20 million in 1998 sales, as Forbes magazine has the story.

Nevertheless, while alcopops enjoyed something of a boom, beer sales exploded. For every can of alcopop sold in Russia, 40 times as much beer was consumed and the market was growing at 20 percent annually. That’s when Thor decided to enter brewing in 1998. The cash flow from alcopops went into securing the land and some equipment, but they needed an extra USD 25 million to build the brewery. In 1998, the private equity outfit Capital Group from the U.S. wanted to invest USD 25 million in Bravo in exchange for a 33 percent stake. Unluckily, things turned dicey after Russia defaulted on its debts and the Capital Group reneged on their initial contract. Instead of equity they now offered the capital as debt – a very expensive debt for that. As says Thor, it meant that they had to borrow the money at a 40 percent interest rate per year. Moreover, if the business was not sold within four years, Capital had the right to appoint an investment bank to sell the business.

Thor was in a fix but his madcap idea to produce the most expensive beer in Russia, at a 5 percent premium to the market leader Baltika, proved a winner. When they launched the beer brand Botchkarov (“barrel”) in 1999, they were still a secret. However, in the summer they took advantage of St Petersburg’s Beer Day, the local version of the Oktoberfest which attracted some one million people. They actually conquered it – call it guerrilla marketing - by selling their beer not in draught, as their competition did, but in cans off the back of their trucks.

 

Thor’s exit

Botchkarov made a splash. In next to no time Bravo had secured a 17 percent market share in the St Petersburg region and 7 percent in the Moscow area. It was selling 2.5 million hl beer in 2001 and was heading for 4 million hl when Capital wanted out. They had started discussions with potential suitors in 2000 and sent out a prospectus in 2001. All these exit manoeuvres went on in secret while at the Bravo brewery they were busily brewing and expanding at the same time. In the end, Heineken offered them the most money, USD 350 million plus USD 50 million if they met certain targets. In the end, they missed the targets because that year a lot of capacity from brewers SABMiller, Interbrew and BBH came on stream. Still, Thor says he pocketed USD 100 million from this deal and Capital tripled its investment.

For another year, Thor and Heineken remained the joint owners of the Bravo alcopops business. But Heineken never felt too comfortable with alcopos in Russia, presumable because of the vodka business’ less savoury aspects, and so the company was sold, making both of them good money.

 

Winding up and profiting out

Here the story of Thor’s adventures in Russia ends. From what has followed since, he should call himself lucky he got out at the height of the market, when foreign brewers were spending big money to buy into the beer industry, ludicrously believing that beer consumption would only go up and up and the authorities would never clamp down on it. Another investor to take advantage of foreign brewers’ desire to secure a slice of the highly profitable Russian beer business was Oleg Tinkov – he who used the -ff version of his name and claimed links to the imperial family to give his beer a more upscale clout. After opening his first St Petersburg brewpub in 1998, the one that I frequented, Tinkov’s empire grew to ten pub-restaurants and a 2 million hl brewery in St Petersburg, which he sold to brewer InBev in 2005 for EUR 167 million, while keeping the restaurants, which were valued at USD 25 million in 2007. Those he unloaded to the Scandinavian private equity firm Mint Capital in 2009 for an undisclosed sum, after having tweeted his intention to exit by saying: “My restaurant business is 11 years old now. I’m bored with it.” Those were the days.

A brewer to rue its bad timing is the Danish brewer Carlsberg. In 2008 they paid several billion dollars to buy the other half of Baltika that they did not own already, only to immediately witness Russia’s beer bubble burst, after regulatory interventions hiked taxes, curbed beer advertising and banned kiosk sales. By 2014 per capita beer consumption had dropped to under 60 litres, forcing foreign brewers to write off some of their investments and close breweries.

Thor’s later exploits are quickly told. The cash he pocketed from the Heineken deal, Thor used to multiply it 40-fold by investing in telecoms (mostly in eastern Europe), building up Activis, a generic drugs company, and then, disastrously, by becoming the biggest investor in one of Iceland’s three largest banks, Landsbanki. The bank imploded and Iceland turned against him. Although his truck with his homeland makes for riveting reading, his book spends far too much time rehashing the details of long-past business deals. But despite these reservations, anyone interested in Russia’s Wild East decade, should read “Billions to Bust – and Back” alongside “Red Notice”.

Ina Verstl

 

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