Ruble Short Selling
The year 1878 had delivered Waldemar a thoroughly respectable set of returns.
Standard Oil paid a capital dividend of fifteen percent—fourteen in the original history—and Waldemar collected eighty-four thousand three hundred seventy-five dollars, roughly three hundred fifty thousand marks.
Bayer’s sales had exploded; over the course of 1878 alone the company distributed nine hundred sixty thousand marks from aspirin and two hundred fifty thousand from phenacetin.
Russia’s Nobel Company declared a dividend of twelve and a half percent—lower than the original timeline’s fifteen—and handed him approximately five hundred thousand marks. On top of all that, the Klondike goldfields paid out fourteen million seven hundred thousand marks, becoming by far his largest single source of income.
And the stream did not end there.
The ten million francs’ worth of French bank shares John Connor had acquired—equivalent to eight million four hundred thousand marks—were also paying dividends. At an average of ten percent of face value, they put roughly eight hundred forty thousand marks into Waldemar’s pocket.
Siemens, of which he held a twenty-five percent stake, paid nothing; every surplus mark had been poured into light-bulb development and plant expansion. Still, once electric lamps began to spread, the returns were expected to be spectacular.
Beyond the equities, Waldemar watched the value of his 1878 vintage wines leap while he sat still. From a provincial cellar, Château Pétrus had already multiplied several dozen times over, and the rest of the portfolio had climbed by tens of percent. He provisionally revalued the eight hundred thousand marks of wine at more than one million six hundred thousand.
In the south of France he had also bought five thousand hectares—fifty square kilometers—of vineyard at an average of eighty-four marks per hectare. Grafting costs were running about five thousand marks a hectare, but once the work was finished the rise in land value alone would more than double his money.
Yet the company that brought him the purest joy was the adult magazine house, Playguy. In a matter of months Playguy had become a press turning out fifteen thousand copies a month, generating thirty thousand marks in monthly revenue. Even after the heavy factory investment and model fees, the firm was already in the black.
Sales had been deliberately held back while the first-year plant was installed; next year’s volume was expected to grow more than threefold despite the factory relocation. Nearly all of that increase would drop straight to the bottom line. At the very least, it was a business that returned three times the capital—returns rarely seen outside short selling.
Lastly there was the unclaimed Congo, where Stanley was already at work. The commonly cited figure of 2.34 million square kilometers covered only the Belgian Congo; add France’s 340,000 square kilometers and Portugal’s roughly 7,000 and the total approached 2.7 million.
Whoever held that territory would command two raw materials the world market chronically lacked—rubber and copper. With large-scale infrastructure investment, abundant hydroelectric power could even make him an aluminum magnate as well. Waldemar was certain that Stanley would soon be sending property contracts from the field.
The books are closed. Time to plan the next move.
1879 was the year the German–Russian antagonism, already visible after the Congress of Berlin, hardened into open economic and political friction. That year Germany passed a new tariff law, protecting domestic agriculture and heavy industry by duties on imported grain, timber, and steel; Russia, long a traditional grain exporter to Germany, took the heaviest blow.
The economic clash poisoned relations, and Bismarck, confronting the eastern threat he himself had helped create, concluded the Dual Alliance with Austria—laying the architecture that would one day become the First World War.
Waldemar decided to ride the same current and make money from it.
If German–Russian relations are doomed whether I lift a finger or not, I may as well pocket the profit.
German capital had already been shorting the ruble since the end of 1878, after the Congress closed; Waldemar therefore felt no hesitation about treating St. Petersburg as an adversary. He summoned John Connor and ordered him to prepare a short position against the Russian currency.
“Your Highness—you mean the Russian ruble?”
“I do.”
“But the counterparty is a sovereign state. For us to touch something of that scale carries enormous risk. With the capital we can deploy, we simply cannot move the ruble.”
Connor’s reasoning was sound, yet Waldemar never lost his ease.
“If we were acting alone, yes.”
“You don’t mean—”
“Britain and Germany, the two great economic powers, will move.”
Waldemar already knew that in the original history Bismarck had, in March 1879, dumped large quantities of Russian government bonds and thereby fanned a short-selling wave against the ruble. Britain had been no exception.
Gentlemen in London, already unnerved by the Russo-Turkish War, had watched the ruble collapse under Berlin’s pressure and gladly poured into the currency war, shorting the ruble with enthusiasm. They had even served as a global loudspeaker, spreading the short pressure worldwide and delivering the final blow to the Russian economy.
Dump every bond on the market!
The damage Russia suffered had been beyond imagination. Armed with that knowledge, Waldemar was confident he could profit from a ruble short.
“In that case, Your Highness—how much ammunition do you intend to commit to this war?”
“We’ll borrow against the Klondike goldfield income from a British bank.”
With the British government itself guaranteeing the revenue, no bank would refuse such prime collateral.
“How much do you mean to borrow?”
“Given the goldfield receipts, what is the maximum we can raise?”
“Your Highness’s gold income is effectively as safe as sovereign paper; the banks will treat it as a gilt-edged asset. They are likely to lend somewhere between three and five times this year’s receipts.”
“So roughly sixty million marks?”
“That is my estimate.”
“That should be enough. Prepare the materials for a leveraged short of the ruble.”
“I will identify the Russian commercial banks involved in Berlin’s ruble forward market.”
“Quickly, please.”
Berlin was then the ruble’s largest offshore exchange. A ruble forward meant a contract to sell rubles at a fixed rate on a future date. Speculators normally waited for the currency to fall by maturity, bought the cheaper rubles, and pocketed the difference. The rubles required for settlement came from Russian commercial banks.
John Connor answered promptly. Within days he produced a list of several major houses—every one of them a supplier of rubles to the Berlin money market.
“The St. Petersburg International Commercial Bank. The Odessa Accounting Bank. The Imperial Russian State Commercial Bank.”
After confirming the volume of rubles these banks could furnish, Waldemar first had the pounds brought from Britain converted into marks. Three million eighty thousand pounds became sixty-three million marks—precisely the sum Bismarck would deploy against Russian bonds.
Using that mountain of capital as earnest money, Waldemar began writing ruble forward contracts on the Berlin Stock Exchange. At the time, concern over future depreciation already produced an average discount of four to five percent on three-month contracts; with Germany itself now short, the discount had swollen to nearly seven.
Waldemar settled with the Russians—who had done their own arithmetic—on an eight-percent discount for one hundred million rubles. Maturity was four months out.
At eight percent we can’t lose, the Russians thought.
Waldemar thought otherwise.
Right now the mark–ruble rate is nearly three to one. That is about to change.
He was not content with hundreds of millions in forwards. He meant to maximize profit with a leveraged cash short as well. His agent, John Connor, toured the Russian commercial banks and arranged enormous ruble loans. Confronted with a man who held letters of credit for more than sixty million marks, the banks proved more than willing.
“What do you intend to do with the rubles?”
“Frankly, a little currency speculation.”
It was an almost indecently honest answer, yet German houses did the same thing whenever they had a free afternoon, so the Russians barely raised an eyebrow.
“Very well. Five percent interest.”
The French Third Republic was often called a usury state, but Russian commercial banks were worse. Even German capital carrying virtually no default risk was charged rates fit for a developing country. After a month of negotiation Connor secured, from the three banks at an average of four and a half percent, twenty million rubles each—roughly sixty million marks in total.
Those borrowed rubles would be converted into marks and gold and used as weapons to drive the exchange rate down.
“Once we turn the rubles into foreign currency and gold, we re-borrow against that collateral, convert again, and keep going until the ruble is completely broken.”
“Of course, Your Highness.”
Waldemar felt not the slightest pity for the Russian banks that would soon be bleeding.
Those houses did exactly what the Korean merchant banks did during the IMF crisis. Why should I feel sorry for them?
He ordered the rubles held for the moment. A currency attack only paid if the timing was perfect.
If I could know Bismarck’s exact move, that would be ideal—but that is hardly realistic.
Waldemar would have preferred to direct the operation from Berlin, yet diphtheria was about to sweep the city and he could not remain in the Crown Prince’s palace. He told his mother he wished to spend some time with his maternal relatives and prepared a temporary retreat.
“Baldi, Frau Hohenthal tells me you want to stay at Grandmama’s.”
“Yes. I haven’t seen her nearly enough lately.”
“Mm.”
“And while I’m going, I’d like to take my sisters as well. We won’t stay long, so don’t worry.”
Under the force of his charm and persuasion, Victoria, Princess Royal, wore the expression of a woman who knew resistance was useless.
“Very well. That isn’t a bad idea.”
Waldemar packed at once and left for London. Reports on the ruble continued to reach him in Britain. Through January and February his sharp instincts stayed fixed on the German government’s posture. The Germans watched, with growing unease, as France edged closer to St. Petersburg while Berlin–Petersburg relations frayed.
On the fifth of March, intending to deliver a warning to the Russians, Bismarck hurled sixty-three million marks’ worth of Russian government bonds onto the Berlin Stock Exchange.
The result was electric.
“The ruble—the ruble is collapsing!”
Speculators who had been waiting for precisely this moment caught the scent and piled into the trade. Waldemar was among them.
“Convert every ruble we hold into gold and marks.”
With his intervention the ruble’s decline became steeper than anything the original history had recorded. The rate, which had stood at 2.8 marks to the ruble, plunged in the blink of an eye to 2.5. (At the end of 1878 it had been three marks to one.)
Exploiting the greed of Russian commercial banks blinded by loan interest, Waldemar kept borrowing more rubles and dumping them for gold and marks on the foreign-exchange market. As the cascade accelerated, the great British banks joined the speculation.
“While we’re at it, let’s turn the ruble into a corpse!”
The fall was so rapid that the Russian authorities accused Germany of an “economic attack.” A few Russian sentences made no impression whatever on the market. German officials tacitly endorsed the shorts. Waves of speculative capital continued to borrow rubles and drive the currency lower. The British government itself sold Russian bonds into the open market, trumpeting the “risk of Russian ruble insolvency” to the entire world.
By then Russian firms and merchants still holding forward contracts were in panic, clinging to the coats of German and British traders.
“Please—please close out your positions.”
Even an immediate settlement would have left the Russians half-dead.
“Why should we?”
The speculators refused. If they simply held on, the ruble would hit bottom and everyone would make a fortune. Why stop now?
By mid-March the Russian ruble had reached 2.3 marks. Given that in the original 1879 the currency had managed to hold around 2.6, the collapse was nothing short of stunning. Yet the sharks, smelling blood, pressed the attack.
They even joined hands with greedy, corrupt Russian aristocrats and accelerated the assault—an alliance without historical precedent, yet hardly surprising once one considered the fortunes already made. Those fortunes made the speculators capable of anything.
By the end of March the ruble was effectively a corpse.
Two marks to the ruble.
At that trajectory, the currency’s very credibility as money was about to shatter.
How much am I going to make off those stupid bears?
Waldemar watched the blood and tears of the Russian economy with open pleasure and laughed aloud.