That their majesties the Beckhams did not turn out was only the first of the ominous signs of the evening. The complete lack of fashion also suggested something was wrong. The amateurish production values, described by a local magazine editor off the record as “like a nightmare kiddie talent show” set a certain mood. The many in attendance had gotten dressed up and were being photographed purely at the whimsy of Jón Ásgeir Jóhannesson, CEO of the Baugur Group, and they took notice of the more powerful people following his whim: the first lady of Iceland, a number of fashion designers, who of course weren’t displaying anything in Reykjavík, and a surprisingly large number of wealthy foreign businessmen.
One friend came back from the show aghast: “You finally knew where the money in Iceland was coming from,” he told me, wiping his hands together as though under a sink. “They’re washing their money here. This is the new Cayman Islands.”
Warnings about mafia ties in Iceland are nothing new and they are almost always exaggerated. For an amusing example, I can turn to the behaviour of a local novelist and cultural critic who, upon seeing the opening of an Eastern fast food restaurant, The Purple Onion, in close relation to a Mercedes Benz, informed me that this was the obvious sign that the mafia had moved in, and that there were fleets of Mercedes coming by this restaurant every night. The restaurant is next door to our offices, and the owner, a gregarious Persian-American from Birmingham Alabama, brought the car that he earned starting Dominos franchises in America with him to Iceland. The novelist had taken typical symbols—a flashy car and a non-Icelander—and made a reactive assumption.
But the novelist can be forgiven for having Russians on the brain. Since Iceland got their first member in the Forbes 500 wealthiest people in the world list, they have been waiting for the allegations.
This requires some explanation, but I’ll start with the attack that the country was fearing: a June 16th Guardian article titled “Next-Generation Viking Invasion” warned that there was “persistent but unsubstantiated whispering that the country’s economic miracle has been funded by Russian mafia money rather than growth and liberalization.” The Guardian had opened by talking about Baugur, which has been purchasing large stakes in British businesses. But in explaining the Russian ties, it switched focus to Iceland’s wealthiest businessman, Björgólfur Thor Björgólfsson and his father.
As The Guardian correctly points out, Björgólfur Thor and his father had financial difficulties in Iceland, then went to St. Petersburg in 1993 and invested in a soft drink venture, then sold that business for a brewery, which would do outstandingly good business. Without naming any specific mafia ties or any improprieties, The Guardian points out that other businessmen who went into the brewery business in Russia didn’t have the connections the Icelanders had: “One [investor] was shot dead in his kitchen from the ledge of a fifth-floor window. Another perished in a hail of bullets as he stepped from his Mercedes. And one St Petersburg brewery burned to the ground after a mishap with a welding torch…But the Bravo business, run by three self-confessed naives, suddenly found itself to be one of Russia’s leading brewers.”
In four easy sentences, a few Icelandic businessmen—all Icelandic investors here labelled later in the article as “the Icelandic predators” — quickly look like Mafiosi.
The Grapevine doesn’t look to prove that the Mafiosi aren’t involved in the new economy of Iceland. With nothing but rumours and with not one specific incident or investor to investigate, we have nothing to refute. Björgólfur Thor has explained that he and his father were able to succeed in Russian industry because they were foreign investors who got into the market early and Russia then, like Iceland today, needed foreign currencies.
While there are no confirmed mafia ties, we can say that the business environment here is welcoming to foreign investors with shady pasts. The Grapevine did an informal survey of local businessmen and business students. When asked whether they would mind if a businessman who did illegal business abroad should be allowed to invest in Iceland. 80% of those surveyed felt the investment should be allowed, as long as no other criminal activity were taking place within Iceland’s borders.
Outside of our survey, we can refer to the recent immigration of a Mr. Bobby Fischer, who, when being offered citizenship, was commended publicly for the more than 3 million dollars he bragged about keeping in the United Bank of Switzerland. Even when a federal grand jury in the US was indicting Fischer on tax evasion and money laundering, secondary and less political offences than his violation of a UN trade sanction, locals were proud that their newest citizen had so much disposable income.
Mafia ties are sexy, and using stereotypes of various nationalities, as The Guardian hints at in its portrayal of Icelanders and Russians in a charming nod to England’s colonialist past, does make for compelling reading, but these topics skirt the scary points to Iceland’s economic boom. For one thing, take a look at the reason Icelandic businessmen had to go to Russia in the first place. As commonly discussed and aggressively argued if poorly documented in a popular history book by former Dagblaðið newspaper editor Illugi Jökulsson, Ísland í aldanna rás: 1976-2000, Iceland’s wealthiest entrepreneur played a role in the largest bankruptcy in the nation’s history, that of Hafskip, in 1986. Were it merely a case of fraud or mismanagement, perhaps The Guardian’s Viking raider analogy would fit, but common assessment today is, as Jökulsson explains, “the most humiliating incident for the Icelandic justice system in recent years.”
According to Jökulsson, Björgólfur Guðmundsson had established a respected shipping company and was suddenly undercut when his bank, Útvegsbankinn, responding to rumours in the local press, declared his company in default on their loans, forcing the company to immediately go bankrupt and have all assets sold at auction. Immediate sale of assets allowed for a 75% payment of claims against debts, which would suggest Hafskip was not in serious financial trouble. Still, criminal charges were pressed against the company, with around 450 landing on the shoulders of Mr. Guðmundsson in 1986. Four years later, Guðmundsson would be cleared of 430 charges and would serve seven months in jail, before setting out for Russia.
The banking and investing public were so disappointed in Guðmundsson’s conduct, that he was the most respected businessman in the country even before he left.
The explanation Jökulsson makes for Guðmundsson’s prosecution is political differences and political corruption: the Progressive Party had a Prime Minister, City Prosecutor and Chief of Police who were after Independence Party member Guðmundsson. In addition, according to Jökulsson, relatives of these Progressive Party members were in positions to profit from the sale of Hafskip’s resources.
If one believes Mr. Jökulsson’s account of the Hafskip bankruptcy, and the vast majority of the country does, then the lesson to be learned is that one political party should not control parliament, the justice system, a newspaper, and have prominent ties to local business that may corrupt decision-making. At present, the Independence Party, not the Progressive Party, has such power. The lesson learned by many from this scandal seems to have been to give other people a chance to be corrupted by power.
Beyond a political system that can easily lead to abuse of power and cronyism, the Icelandic economy has another fundamental difficulty: a population of consumers and workers unprepared for privatization and economic growth.
As the average wage in the country has increased to 2.6 million ISK per year from 1.8 million in only five years, according to Hagstofa, the Icelandic Statistical Bureau, Morgunblaðið has reported that personal debts are skyrocketing. The personal debt in this country increased from 709 billion ISK in 2003 to 879 billion ISK in 2004, up 14%. The average home, according to the same Morgunblaðið report, now has 8 million ISK in debt.
While researching for this story, the Grapevine was presented with a few courses by local barflies instructing us how to get a loan. If you need a large loan, the best idea is to get a friend or wealthy family member to deposit all of their money into your bank account just as you go to apply for the loan. The banks, we’ve been told, only look at the last three months of activity and at your bank accounts.
If you can’t find someone to put money into your account, we were also told to find short-term or independently contracted work. Three months fishing or working construction can get an abnormally high wage that the bank will assume will be consistent year round. Independent contracting can allow you to give yourself large wages by not paying your taxes until the end of the year.
As we were taught these tricks, we consistently asked if they had been used successfully, and we were given full back stories of people who’d gotten large loans, up to 30 million ISK, complete with the sad resolution that the friends were now defaulting on their loans.
A large number of defaults would have already occurred, had it not been for an unusual aspect of the local economy: to make up for their spending, locals are working that much more. In fact, despite the enormous personal debt, loan officers told us that defaults are at a record low.
University of Iceland economics lecturer Guðmundur Ólafsson points out that despite the strong wages, there are aspects of the local economy that are third world. Foremost on the list of third world realities in Iceland was the workweek, which he suggested to be 50 hours a week, something he claims that Northern Europe and the USA did away with around 1900. He also points out that while Icelanders have strong literacy, there is poor local education in industrial matters.
The thriving economy in Iceland, then, is based on a dangerous political structure that has caused a significant bankruptcy in the very recent history, and on a local population that spends without what might be considered a reasonable fear of debt. Add to this news that the privatization of the banks was handled with extreme impropriety—interestingly, Björgólfur Guðmundsson is again involved, though this time he seems to have been rewarded for his political views as opposed to being jailed. (Read the interview with journalist Sigríður Dögg, pages 6 and 8, for more information.)
Guðjón Arnar Kristjánsson, the chair of the Liberal Party, usually known as an ally to the conservative Progressive and Independence Parties, informed the Grapevine that “many aspects of the [privatization] procedure have been dubious… Huge profits of some recently privatized companies, especially financial institutions, show that the companies were sold at suboptimal prices. Furthermore, the banks are causing an overheating of the economy and keeping the interest rates far too high.” He went on to warn of business ethics, claiming: “the law of business today is profit at any price. Business ethics have declined…”
As bad as a fashion show featuring the Beckhams is, as much fear as Russian beer and soft drinks strike in the hearts of English newspapers, as attractive an analogy for business behaviour as modern Vikings are, those in the know about the Icelandic economy seem to point not at blond hair or Russians, but at the ground. The fundamentals of what make a strong economy: banks that are trusted by international investors, high employment levels, a well-educated and confident workforce, a government free from corruption, seem to be in danger. If you want an easy analogy, realize that the country is built entirely on a fault line, sprung from volcanoes.
In a worst case scenario discussion with Mr. Ólafsson from the University of Iceland, he pointed out that “a slight setback in the economy could trigger a domino effect. If people lose their jobs, they can’t pay off their loans, the prices of their properties drop and people could be paying off interest of 15 million ISK for properties that [when corrected from inflation] will be valued at 13 million.” This exact situation has already occurred in Norway and Sweden. In fact, in a news report that did not get nearly as much attention as the Beckhams or the Russians, Norwegian economics professor Thore Johnsen warned the Norwegian business industry that “The banks [of Iceland] could fall down like a house of cards.”