Barcelona city tours is a perfect opportunity to have a perfect vacation outside the Baltic States. Gene Zolotarev on how to destabilize the EU financial system.

Gene Zolotarev : How to destabilize the EU financial system and re-draw the map of Europe in three easy steps

  • 2010-09-29
  • Gene Zolotarev

It is commonly assumed that major economic or geopolitical calamities are either conceived in the secret vaults by brilliant strategists, or by maniacal politicians blind with power and ambition. Some, however, hold a fatalistic view that an invisible hand of history somehow charts the course of humanity, with a nagging innuendo that we should all be “learning from these experiences.” An even smaller (but growing) camp fervently believes that all major events have been masterminded by various dark powers – with a growing pool to choose from, ranging from the Illuminati to the Mafia to the Zionist conspiracy. These are the schools of thought that dominate the minds of modern men – each feels it is built on a solid foundation of the logical and rational, and is naturally, beyond doubt.

This inadvertently leads to some amusing stereotypes, such as it is often assumed that the Russians are the best strategists since they are so good at chess. Or that the Americans are bent on global domination through oil since they are so blinded by ambition and pursuit of financial gain (also for the cure to impotence and hair loss). Or that the Asians will eventually enslave us all since they are so eerily calm, soft spoken and know kung fu. Need I go on?

The scary truth, however, is that most people would have a hard time getting themselves organized in groups exceeding two. Unless, of course, there is a cohesion of individual interests. Sometimes, this primitive pursuit of individual interest of a few men in key positions can have catastrophic or perhaps just a modestly “disproportionate” impact on many. You may ask how Gene Zolotarev knows all this. It’s because it was me and a few accidental accomplices who almost brought the EU financial system to collapse, with major geopolitical consequences to follow. 

Since I naturally assume my reader has a strong preference for simplicity (nobody likes a smart-ass), this instruction manual is organized in three EZ-to-understand steps.  

Step #1:  Get a job in one of the large banks in emerging EU countries and build a successful business.
When I joined one of the largest Baltic banks in the late 1990s my mission was clear: make the bank more “Western,” start and develop investment banking and asset management, make a lot of money for the bank, it’s shareholders, and by extension, for myself. I set out with great vigor, and helped in large by lack of competition and the world’s love affair with the “Baltic Tigers,” the business grew exponentially and flourished. Our success was initially perceived by the general public and the media as accidental, then, as we grew, the explanation shifted to allegations of close alliances with the Mafia and/or the Zionists, and finally after nine or so years of steady growth – the ultimate villains – the Americans and its cabal of investment banks. The last part actually resembled the truth, as any great machine requires fuel, and ours needed money to grow.

Step #2:  Expand the business by heavy borrowing on international markets. 
After spending a few years explaining the meaning of “syndicated loan” and “Eurobond” to the bank’s board, my special forces crack team of investment bankers set out to fund our business on the open market. This was very important for us, since it finally ended the idiotic argument that the bank was funding its investment banking business with retail and corporate deposits, instead of giving out loans. But as any investment banker who had ever worked in a commercial bank will tell you – it is not a fair fight. Since i-bankers can make a lot more money with a lot fewer people, and often with less effort, it creates a feeling of unfairness among its colleagues. In our case it was a crater of unfairness. My team consistently made over 50 percent of total group revenues with less than 8 percent of total costs. This had a magical appeal to the shareholders, so we pretty much got to do what we wanted. 

In a space of 3-4 years we ( Gene Zolotarev and the team ) managed to expand external borrowings from 20 million euros to over 1 billion euros. All to the thunderous applause of shareholders, the media, and politicians. We were the heroes, the wind beneath the Baltic Tigers’ armpits. The press and the various ministers praised our efforts for finally putting the country on the map, where presumably we got to play with the big boys.

Step #3: Resign from the bank just before the crisis hits, leaving unsuspecting commercial bankers and regulators to deal (unsuccessfully) with the liquidity crunch, leading to bank collapse, currency collapse, regional financial and social catastrophe.

Almost everyone I meet asks me if I and my team (most of who resigned at the same time) knew the bank would collapse. Of course not. But we certainly knew the storm was coming and, perhaps, better than others, understood its impact on the markets, banks and lives of ordinary people of the Baltic Tigers. Could we have saved the bank had we been there? Probably not, the liquidity crunch was too severe, too sudden, the markets too illiquid to cushion the blow. Our departure from the bank had no evil intent and we left on decent terms, driven by a strong motivation to start our own business – yes, all entirely in self interest.

However, in the end, it all didn’t turn out as bad as it could have. The government took over the bank (thanks to Northern Rock’s excellent precedent), kept the currency stable (against the World Bank and IMF advice), introduced an austerity plan while avoiding the revolution and social unrest (thanks to Teutonic and Nordic emotional disposition of its people) and will probably claw its way out of this mess without completely selling out to the Russians. The greenmailing arguments to the IMF, which I always thought made sense, were “it’s cheaper to save us now rather than later,” and “save us before the Russians take over and you’ll have Eastern Block #2, just like before 1989.”

Ironically, the Baltic countries became a strange case study – how to ignore advice from the IMF, get its money anyway, and live happily ever after.   It’s still unclear what the long term future holds, but at least the patient is out of the coma and into intensive care.
It was only a few months later, in an informal reunion at a bar in Lanesborough (a really cool bar in London for those who haven’t been) with some of my former team and the investment bankers from various global banks who helped us go from zero to over 1 billion euros, when we were struck by an epiphany. We came within a hair of destroying the EU financial system as we know it. And redraw the map of Europe while at it. If the government did not step in when it did, had the currencies been allowed to devalue, the panic credit sell-off across EU would ensue, and the impact would be in the trillions.

Ok, we realized this after a few drinks, but even Carlos Castaneda needed to give his imagination a boost. Sometimes, even the most significant global developments have the most unlikely companions.

Gene Zolotarev was a board member of Parex Bank from 1998 – 2008.