July 1997 | Age 22 | Neva Group Headquarters, St. Petersburg
The July heat was oppressive, even with the office air conditioning struggling to keep up. Alexei sat at his desk, scrolling through Bloomberg terminals on his computer. Oil prices had been stable all spring—hovering around $19 per barrel—but something was stirring in the markets.
Olga entered with a stack of printouts. "Something's happening in Thailand. The baht is getting hammered. The central bank has spent billions trying to defend it."
Alexei's memory flickered. 1997. The Asian financial crisis. He'd studied it in his past life, but the exact timing was hazy. July? August?
"How bad?"
"The baht dropped fifteen percent in two weeks. The Thai government just announced they're letting it float. It's going to collapse."
Alexei stood, walking to the world map on his wall. Thailand was far from Russia—thousands of kilometers away. But in global finance, distance meant nothing.
"Oil prices are going to drop," he said quietly. "When Asian economies collapse, their demand for oil collapses with them."
Boris, who had been reviewing loan documents in the corner, looked up. "How much of a drop?"
"In 1998, oil went from twenty dollars to ten dollars." Alexei caught himself—he'd almost said "went" as if he remembered it happening. "I mean, if the crisis spreads, oil could drop significantly."
Boris raised an eyebrow. "That's a fifty percent decline. Our entire business model assumes oil at eighteen to twenty dollars."
"Then we need to hedge."
Alexei called an emergency meeting. Boris, Olga, and the bank's two senior traders gathered in the conference room.
"We're going to short oil futures," Alexei announced. "Aggressively."
One of the traders, a middle-aged man named Viktor, shook his head. "That's speculation. We're an oil company. We don't bet against our own product."
"We're not betting against oil. We're hedging against price declines. If oil drops, our physical production loses value, but our short futures position gains. We break even."
"How much of our production?"
"All of it. One hundred percent. For the next eighteen months."
The room went silent. Hedging an entire oil production profile was unheard of in Russia. Most companies simply accepted price fluctuations.
"That's going to cost us," Viktor said. "The margin requirements alone—"
"We have cash. Fifty million dollars in liquid reserves. That's enough to cover initial margins."
"And if oil doesn't drop?"
"Then we lose money on the futures position. But our physical production gains. We still break even. It's a perfect hedge."
Boris did the math. "The cost of carry is about three percent annually. So we're paying three percent for insurance against a price crash."
"Worth every kopeck," Alexei said. "Because the crash is coming."
Olga returned two days later with news from Asia. "Thailand is in free fall. The baht lost another twenty percent. Indonesia and South Korea are showing signs of contagion. The IMF is preparing bailouts."
"Oil prices?"
"Still stable. Markets haven't connected the dots yet."
"They will. Give it two months."
Alexei stared at the oil price chart on his screen. Nineteen dollars and change. The market was complacent. No one saw what was coming.
Except him.
He picked up the phone and called Viktor. "Increase the short position. Double it. I want to be short two hundred percent of our production."
Viktor's voice was strained. "That's not a hedge. That's a bet."
"It's a bet I'm willing to make. Do it."
Boris pulled Alexei aside after the call. "You're moving too fast. We don't know how bad this crisis will get. You're acting like you've seen this before."
Alexei almost laughed. I have seen this before. I remember the graphs, the headlines, the bankruptcies.
But he couldn't say that.
"I read history," he said instead. "Currency crises spread. Thailand is just the first domino. Indonesia, Malaysia, South Korea—they're all vulnerable. When they fall, Asian demand for oil collapses. Prices will drop thirty, forty, maybe fifty percent."
"That's speculation, not analysis."
"It's pattern recognition. The same patterns that happened in Latin America in the 1980s. The same patterns that will happen again somewhere else in the future."
Boris studied him for a long moment. "You've never been wrong about big market moves. Not once. The GKO exit. The dollar accumulation before the 1994 ruble crisis. I don't know how you do it, but I trust your instincts."
"Then trust me now."
"I do. But the board—"
"The board answers to me. I own fifty-five percent of this company. I don't need their permission to hedge."
Olga's network in Asia was limited, but she had contacts in Singapore who tracked oil trading. They reported unusual activity: several Western hedge funds were building large short positions in crude futures.
"Someone else sees what you see," Olga said. "Big players. George Soros's funds, among others."
"Soros shorted the British pound in 1992. Made a billion dollars. If he's shorting oil, he expects a crash."
"Or he's following the same patterns you are."
Alexei considered. Soros was brilliant, but he was also a macro trader—he bet on trends, not on inside information. If he was shorting oil, he'd done his own analysis. That validated Alexei's thesis.
"Increase the position again. Three hundred percent short."
Boris winced. "That's seventeen million dollars in margin requirements. If oil goes up—"
"It won't. Trust me."
On July 15, oil prices dropped thirty cents. Not much—a blip. But Alexei watched the ticker like a hawk.
On July 18, oil dropped another fifty cents.
On July 22, a hedge fund in New York announced major losses from Asian investments. Oil dropped eighty cents.
By the end of July, oil was trading at $17.50 per barrel—down nearly eight percent from the start of the month.
Alexei's short position was already showing a profit. Not huge—a few million dollars—but the trend was confirmed.
"The crisis is spreading," Olga reported. "The Philippine peso is under attack. Malaysia has raised interest rates to defend the ringgit. Indonesia is letting the rupiah float."
"And oil?"
"Traders are starting to notice. Demand projections are being revised downward. I think you're going to be right."
That night, Alexei wrote in his journal:
July 31, 1997
The Asian crisis is here. Not in Russia—not yet—but the tremors are reaching our shores.
Oil has dropped nearly two dollars since the start of the month. My short position is profitable. But this is just the beginning.
I remember what comes next. The crash. The bankruptcies. The oligarchs who overleveraged and lost everything.
I won't be one of them.
The hedge protects my downside. The infrastructure moat protects my upside. When oil recovers—and it will—I'll be positioned to buy assets from the desperate.
But for now, I watch. I wait. I prepare.
The storm is coming. And I intend to survive it.
He closed the journal and checked the oil price one more time before bed.
$17.40.
Dropping.
Just as he'd predicted.