1982 Started from Hong Kong

Chapter 530 Leaving No Loose Handles or Giving Anyone a Pretext
For ordinary Soviet citizens, the Far Eastern Bank, in addition to the rationed supplies, also symbolized their yearning for freedom and openness.

Just like people who are used to drinking kvass, even if McDonald's Coca-Cola tastes strange, they still rush to try it.

All for that taste of freedom.

Compared to ordinary people, Soviet entrepreneurs, having seen more of the world, yearned for freedom even more intensely.

"With Lenin sitting in the Kremlin, I called for Sldlov to come forward and listen carefully. I ordered Navasil to get the grain, but it's this late and he hasn't returned yet... mmm mmm mmm mmm~"

A bank VIP lounge in Moscow at night.

The chandelier cast a cold white light as Zhai Yuan leaned back in his chair, humming a Pingju opera tune, flipping through the loan list compiled by Secretary Li.

In the VIP room, several accountants transferred from Hong Kong were busy organizing documents, forced to admire Boss Zhai's art.

"Manager Xu, what's the situation with this metallurgical plant?"

With that, Zhai Yuan tapped the table and pointed to a spot on the list, asking the audit team around him, "Have you sent anyone to investigate?"

The team leader this time is a bald man surnamed Xu, Xu Wenhai, who has a PhD in economics from Hong Kong University and previously worked as an executive at a bank in Minnesota.

At the time, the American banking crisis broke out, and thousands of banks collapsed. Xu Wenhai and his team were rehired by Zhai Yuan to handle business in the Far East.

“Mr. Zhai, we have sent someone there.”

Xu Wenhai adjusted his thick-rimmed glasses and said, "This metallurgical plant is located in Tula State. It used to produce ten million tons of crude steel annually, but since 1979, its production capacity has plummeted to less than a third. Now, worker attendance is extremely low, and management is completely out of control..."

Xu Wenhai briefly explained the current situation of the metallurgical plant.
Since the late 1970s, this metallurgical plant has been operating at a loss. It has managed to survive until now by falsely reporting its annual targets and then scrapping the robots in the plant to ask its superiors for funds to replace them with new ones. Once the money is in hand, it is divided up cleanly from management to workers. The following year, the same method is used to line their own pockets under the guise of replacing new machines.

This pattern continued for several years, with the Ministry of Finance allocating funds to the factories every year until higher-level officials came to audit the accounts and the scandal broke.

Xu Wenhai continued, "In recent years, the old model has become unsustainable. The metallurgical plant has returned to normal operations, and although production has barely recovered, the workers who were passively resisting are still there, and the management has no intention of running the business. The factory's capacity is already very low, and it is in a stage of continuous losses."

Zhai Yuan nodded slightly: "If that's the case, this metallurgical plant has no future and lacks cash flow, so what is its value?"

Xu Wenhai glanced at the documents and then reported, "Its factory covers an area of ​​over 2,000 acres and is close to a railway line, which is a relatively advantageous location. In addition to the warehouse, there is also an unexploited iron ore mine nearby. As for anything else, I can't see any value in it."

Zhai Yuan stroked the cigarette in his hand, pondered for a moment, and asked, "How much money does the other party plan to borrow from the Far East?"

"The metallurgical plant reported a figure of 35 million rubles, citing the need to replace a new furnace and resolve the issue of unpaid wages for workers as the reason," Xu Wenhai said carefully, then added, "However, in our judgment, even if all of this money is approved, it will not be enough to fill the metallurgical plant's hole, let alone its future development."

So, does that mean you're definitely going to breach the contract?

Zhai Yuan nodded, looked at the professionals, and slowly said, "I'm not interested in the factory, but the land and warehouses are somewhat valuable. However, they dare to ask for more than 30 million rubles for a state-owned factory on the verge of bankruptcy. Do they think our Far East is a charity? So, could you all help me analyze how to turn this metallurgical plant into a collateralized asset for the Far East at the lowest possible price?"

“Thirty-five million rubles is indeed too high. In fact, even ten million rubles would not be enough for the metallurgical plant to repay.”

Xu Wenhai chatted briefly with a few colleagues, then turned to Zhai Yuan and said, "If the bank wants to lend money, say ten million rubles, then this money can be split into two transactions. Half can be used as an operating loan, and the other half can be used to cover the cost of replacing the machinery. The condition is that the factory land and warehouse must be used as collateral. In addition, a clause should be added to the contract that if the loan is overdue, it will automatically be converted into equity in the metallurgical plant."

Debt-to-equity swaps, a common form of debt capitalization in later generations, are now a new form of corruption in the financial sector.

For Far Eastern Bank, the principal of the loans it issued was like bait; once the state-owned factory could not repay, the debt would naturally be converted into equity.

In this way, Far Eastern Bank could acquire a metallurgical plant's factory area, land, and even associated resources legitimately, without having to openly acquire state-owned enterprises or invest large sums of money, as long as it followed the contract terms. Compared to directly investing huge sums of money in mergers and acquisitions and cooperating with a loss-making enterprise, this approach was much cheaper and more efficient in establishing control over physical assets.

Within the massive and crumbling Soviet system, apart from oil exports, almost no state-owned enterprises were truly profitable.

The moment the state-owned enterprise came to Far East to apply for a loan, it was as if everyone knew that they wanted to use the factory to make one last profit.

"However, we must also consider the risks."

Xu Wenhai glanced at Zhai Yuan and couldn't help but remind him, "Even though the Soviet Union had just introduced market-based credit principles, these state-owned enterprises are still nominally state assets, and the political factors involved are no less significant. If problems arise, it won't just be a simple financial contract risk, but rather accusations from a political perspective..."

The atmosphere in the hall tensed slightly.

Zhai Yuan gave a soft "hmm," lit a cigarette, and walked to the safe next to him.

"Let me show you something."

Zhai Yuan took a document from the safe, tossed it onto the table, and began to explain: "One of the Far East's shareholders, Lieutenant General Orlov, sent over a business deal yesterday: the Valdai food processing plant on the Volga River. Built in 1982, the plant covers 500 acres and uses the latest production lines and brand-new machinery imported from East Germany. Combined with the factory buildings, warehouses, and the Volga River's natural transportation advantages, it can theoretically supply food to the entire city of Moscow..."

Zhai Yuan smiled as he said this: "However, it seems that the food factory has not achieved its original plan. The Moscow Social Development Bank conducted a simple valuation of the Valdai food processing plant last year, and its assets were conservatively estimated at around 50 million rubles. After all, it is a new enterprise, and its value is higher than that metallurgical plant."

Several professionals, including Xu Wenhai, listened quietly to Zhai Yuan's presentation.
After Zhai Yuan signaled that he had finished speaking and pointed to the documents on the table, everyone crowded forward to look at them. After flipping through just a few pages, everyone looked at each other in surprise, and then they all looked up at Zhai Yuan at the same time.

Xu Wenhai asked hesitantly, "Mr. Zhai, did you take the wrong documents?"

“I don’t think so.” Zhai Yuan smiled and shrugged, saying, “The Valdai food processing plant, if you’re interested, you can go and check it out on the banks of the Volga River tomorrow.”

Xu Wenhai and the others shifted their gaze back to the document on the table. After confirming that it was correct, their breathing became heavy.

Bright red stamps were affixed to the title page of the document.
State Planning Committee, Central Audit Committee, Moscow Property Fund and Economic Committee, Finance Department of the Soviet Socialist Union...

Along with the seal, the text appearing on the paper is an audit report on the assets of the Valdai state-owned food processing plant:

The Valdai Food Processing Plant, established in 1960, occupies approximately 60 acres. An inspection revealed that multiple production lines were not functioning properly, equipment was outdated and severely damaged, factory buildings and warehouses were over 30 years old and in dire need of renovation, and there were safety hazards in the piping, electrical, and mechanical systems…

A few thin pages of documents transformed what Zhai Yuan called a high-quality enterprise worth 50 million rubles into a dilapidated and outdated factory.

After the various departments stamped their seals in bright red, they conducted another round of valuation for the Valdai state-owned food processing plant.
"Two, two million rubles?"

An auditor swallowed hard, uttering incredulous words, feeling that the figure was far from the 50 million valuation mentioned by Zhai Yuan.

"Nominally it's two million rubles, but this food processing plant only accepts US dollars to get a loan from the Far Eastern Bank."

Zhai Yuan sat back down casually, flicked off his cigarette ash, and held up one finger, saying, "One million US dollars. Valdai Food Processing Plant will declare bankruptcy a month later, and all its assets will be mortgaged to Far East Bank for debt repayment."

Hissing sounds echoed throughout the VIP room.
Xu Wenhai and several professionals exchanged glances, all of them seeing the shock and fear in each other's eyes.

These documents, from the seals to the audit reports, all appear to have gone through legal procedures, but in reality, it is a plundering scheme that deceives superiors and subordinates.

Using legal pretexts, they embezzled huge amounts of Soviet state-owned assets from state-owned factories, acting with impunity.

A food processing plant, actually worth 50 million rubles, was inexplicably reduced to only 2 million rubles under the manipulation of an unknown expert. It was then repaid with a loan of 1 million US dollars and legitimately transferred to the Far Eastern Bank.

"Mr. Zhai, isn't this a bit too direct?"

Xu Wenhai, a returned overseas student with extensive knowledge, was still quite surprised by Zhai Yuan's actions.

"Who do you think stamped these red seals?"

Zhai Yuan tapped on the seals of various departments on the document and asked a question, then laughed: "A food factory that occupies the Volga River transport route and cost tens of millions of rubles to build, yet it can't even solve the problem of food and clothing for the citizens of Moscow, and it loses hundreds of thousands or millions every year. Apart from the workers who are still receiving wages, many people hope that such an enterprise will go bankrupt on the spot. And the Far Eastern Bank is just doing its job. The audit committee said it was worth two million rubles, so it is two million rubles. Even if someone checks the accounts in the future, we will be the ones who have been deceived."

All the state-owned enterprises in the Soviet Union were an unwieldy burden, whether for the reformist Gorbachev or the radical Yeltsin.

For example, this Valdai food processing plant was originally intended to solve Moscow's food problem.

As a result, the state-owned collective farms that produced grain were unable to supply raw materials for a long time, rendering the costly processing plants useless.

What about the crops? They were planted! They just rotted in the ground.

Why? The state-run transportation department wouldn't allocate trucks, so the grain couldn't be transported out.

What about the trucks? The state-owned automobile factory didn't produce any, and we don't have enough trucks in our fleet.

The car manufacturers also have something to say: Damn it, the steel mills didn't give us any quotas this year, how are we supposed to produce anything...?

Through this entire process, by today's standards, a single official document can transform a newly built, state-of-the-art, and high-potential food processing plant into a dilapidated old factory. Corruption is inevitable in the process, but it also requires the tacit approval of those at the top. Or perhaps, given the overwhelming pressure of the impending collapse, those at the top are too preoccupied to care about such trivial matters.

"Therefore, everyone, Far Eastern Bank's future lending business will follow one principle: as long as the procedures are legal and compliant, we can lend to high-quality enterprises such as metallurgical plants and Valdai processing plants. If bad debts occur, we will stop lending to them and apply for bankruptcy liquidation."

Zhai Yuan gently tapped the table and instructed Xu Wenhai and the others: "Of course, while lending money, the Ministry of Culture will also cooperate in publicity, praising foreign-funded enterprises like the Far Eastern Bank for helping Soviet enterprises reform, improve efficiency, and promote economic modernization during Gorbachev's rule."

"You, as professionals, know more about official documents, audit reports, and asset procedures than I do. Just follow the rules and do what you're supposed to do. But remember one thing: we will not operate or develop any companies that are being liquidated due to debt. If workers cause trouble, contact Alexei directly to resolve it. If he can't resolve it, contact the other shareholders. In short, Far Eastern Bank should not get involved in anything."

Zhai Yuan paused here, took a drag on his cigarette, patted Xu Wenhai on the shoulder, and laughed, "Manager Xu, I'm leaving for the Ural Mountains tomorrow to see a friend. I hope that during my absence, Far East Bank will continue to develop healthily in both its savings and lending businesses. I'll give everyone bonuses when I get back. In short, everything boils down to one sentence: strictly follow the contract, keep the procedures clear, leave no loose ends, and don't give anyone any ammunition."

"I hope everyone can recognize one thing: even when you're asleep, you should tell yourself that we are here to conduct banking business not to exploit the Soviet economy, but to genuinely contribute to the economy and use real money to help them reform and develop."

"Unfortunately, the Soviet devils themselves were incompetent, so the Far Eastern Bank had no choice but to temporarily take over and hold a portion of the burden on behalf of the country, and return it to them in its entirety in the future."

Zhai Yuan waved the valuation documents for the Valdai food processing plant in his hand, his gaze sweeping over the several professionals, a hint of a smile flashing in his eyes: "However, it seems that these valuation documents will likely expire and become invalid by then. At that time, we will need to ask the audit committee to recalculate the assets under our name, just to charge a small safekeeping fee..."

(End of this chapter)