Non-standard situations often arise when fulfilling major contracts. One of the most difficult situations in my career came up in November of 1996, in the course of financing a contract between Haden, the factory equipment supplier where I was a Vice-President, and Gorky Auto Plant (GAZ). GAZ’s financing depended on credit from the European Bank for Reconstruction and Development (EBRD).
The contract work began in May of 1995 and was to be completed in one year. Twenty-three million dollars of credit from EBRD was expected to come in the fall of 1995, but after several delays, it only came through a year later, in November of 1996. By that time the contract had been completely fulfilled and Haden had been paid in full. To make the payments on time according to contract, GAZ had had to take out a number of short-term loans from other banks.
When EBRD opened the line of credit, GAZ faced the problem of how to use the money. The EBRD funds were approved only for direct payments to Haden.
At the end of November of 1996, the head of GAZ’s hard currency department, Alexander Maryin, flew to Detroit to explain the details of a scheme. Nobody knew the purpose of his visit ahead of time. The day before his flight, I received a call from GAZ’s Vice-President for Finance, Anatoly Gornev, who said that a man was flying over with a delicate proposition. We would hear the details in person.
Maryin arrived the next day and told me about the idea. Financial specialists at GAZ Had come up with the following scheme. Haden would transfer a payment of 7-8 million dollars to Russia. GAZ would then return the sum to Haden, taking the same amount from the EBRD credit line. After that, the operation would repeat itself, Haden transferring the same sum again and GAZ once more returning it. In this way, after three payments, they could use the entire EBRD line of credit.
GAZ was asking Haden to make three payments that would be immediately returned. I was shocked at the proposal. First, how was I supposed to explain this scheme to Haden’s president or financial director? Second, why should Haden make the first payments and take on all the risk? If it was that important to GAZ, they could just as well take on the risk themselves and make the payments first. We’d give it all back. Third, what would happen if GAZ couldn’t pay the money back?
I reported the situation to the company president. He put together a meeting with the financial director, me and Maryin. Maryin explained the scheme again and named the sums involved. The first payment was to be $7 million, the second—$8 million, and the third—$8 million. The president and CFO asked him questions. Why did Haden have to pay first? What guarantee could GAZ give of returning the money? Would GAZ be able to return the money before year end?
His answers were discouraging:
First, GAZ didn’t have any money to pay first. That’s why Haden had to do it.
Second, GAZ couldn’t make any guarantee of returning the money. The operation would have to go through without any documentation, and we had to take him at his word.
Third, there was one month before the end of the year. For us to have time to send the money and get it back by year end, we had to make the first payment immediately.
The meeting came to an end. Nobody understood anything. Haden’s CFO was panicking. He was supposed to send an enormous sum of money to Russia, without any contract or any guarantee whatsoever of its return, all on the word of this one man. This was all totally out of line with standard financial practice in the US. I didn’t know what to do either. I wanted to help GAZ, but I was afraid of taking any responsibility for this. This was the president’s decision to make. He said we’d risk it. We’d make one payment and see what happened.
The next day, we sent $7 million dollars to Russia. The money came back in 17 days. We sent another payment in mid-December. That came back in ten days. There were now three working days left in the year. What were we to do? Send the last payment or not? GAZ clearly didn’t have time to return it. I called Gornev. I asked him if he’d have time to pay us back. He said yes, GAZ would return it in three days.
We risked again, and we won. The money arrived back on December 24. After helping out GAZ financial specialists, we were on excellent terms. From then on, Haden was first priority when the Russian company paid its suppliers.