Free-market capitalism in 1990s Moscow involved gangs, guns and lots of cash, writes Colm Keena

Investing in business in Moscow in the early 1990s offered the prospect of high returns but it was not for the fainthearted.

Russia's version of free-market capitalism involved gangs, guns, paranoia, wheels within wheels, and a lot of cash. The State, in the form of the Revenue, customs, the police, the courts, and company law, was either underdeveloped, corrupted, or both. It was a dodgy game.

But that didn't stop a number of Irish people attracted by the possibilities that existed in Russia at a time when the Irish economy seemed to be going nowhere.

Limerick businesswoman Finola Walsh and her family managed to set up a very successful clothes shop, M1 Fashion Store, on Leninsky Prospect. Cork businessmen Michael Coughlan, Brendan Flannery and Richard Pratt set up three very successful supermarkets, the Garden Ring Supermarkets, in central Moscow.

These formed the core businesses of an overarching group called Irlasto, based on Ennis Road, Limerick. Irlasto and its chief executive, Kieran Walshe, had formed a relationship with a number of Russians who could act as necessary partners in businesses formed by Irish investors.

The chief Russian figure in the arrangement was a Dmitri Kishiev. Russians partners were not just a legal requirement, they were also needed for protection. All high-street retail businesses in Moscow needed protection if they were going to survive. However, such relationships also meant businesses were in danger of being expropriated by the very people who were meant to protect them.

In time this problem raised its head but at first business boomed for Irlasto. Board minutes from 1993 seen by The Irish Times record Mr Walshe stating that the retailing businesses in Moscow were experiencing "strong growth" and that seven businesses would be operational by end 1993.

M1's turnover for the 11 months ending December 31st, 1992 was slightly under $4 million. Irlasto got management fees of $200,000. "Our profit share from this business for 1992 was wiped out by the clawback of Vat of over $500,000 which was levied by the Russian authorities in early March of this year," Mr Walshe said, according to the minutes. In one four-week period in August 1993, the turnover was more than $1.2 million.

The first Garden Ring supermarket had turnover of $722,000 for the three start-up months to end 1992, netting Irlasto $75,000 in fees and profits. For the first seven months of 1993, the supermarket had a turnover of $4.76 million, netting Irlasto $499,000 in fees and profits, he said.

These were healthy figures. The management fees and profits accruing to Irlasto, as manager and part owner, were just part of the payouts from the businesses. The other investors, and the Russians, were each also getting fees and profit shares. Even from the perspective of 2006 Ireland, the figures look attractive. From the perspective of early 1990s Ireland, they were awesome.

Mr Walshe and Irlasto began seeking new investors. Many who became involved came from the Limerick area. Gerard Clohessy, brother of retired rugby player Peter Clohessy, became involved in one business, Gyptile Suspended Ceilings.

The Garden Ring supermarkets went from one to three. A new fashion shop, VIP Fashion Store, was opened. A wallpaper and paint shop, Rosie O'Grady's bar, a nightclub, Lily Wong's Chinese Restaurant, and Tressals Hairdressing Salon, which has been linked to Minister for State Frank Fahey, all opened.

Mr Walshe was the key figure and Mr Coughlan became his deputy chief executive. The group began to look at property development ventures, the possibility of a flotation on the London exchange, and involvement in the Russian gas sector. By 1995, by which time the former Dunnes Stores chief accountant Michael Irwin had briefly come to work for the group, total turnover of group companies was $13.6 million for the first quarter, and €11.88 million for the second.

However, not everyone's experience was a happy one. Limerick businessman John Heaton invested in a Moscow nightclub called 2x2. He and the three Cork businessmen became investors, holding 49 per cent between them. Irlasto and the Russian partners held the remainder.

However, in November 1993 there was a $200,000 payout to the Russian partners, apparently to help resolve a dispute.

As with most of the Irlasto businesses, the takings from the venture were transferred to a holding company in Cyprus, which had a double taxation agreement with Russia. While in this account the money remained under the control of Irlasto until the various fees and profit shares were transferred on to the Cyprus accounts of companies controlled by the various stakeholders.

The nightclub never proved fruitful as difficulties developed with the Russian security that operated on the premises and other Russian parties. However, before these difficulties Mr Heaton invested Ir£328,000 in a Chinese restaurant in the basement of the Intourist Hotel on Tverskaya Street, close to Red Square. The restaurant was named Lily Wong's, after a Chinese woman in Limerick who also became involved.

In a statement of claim dated July 1995, Mr Heaton said Mr Walshe said he invested with the understanding that his partners would be Irlasto and Irlasto's Russian partners Dmitri Kishiev and Victor Shenkov; that the projected turnover would be $7 million to $11 million; and that there were no unusual or hidden expenses involved.

However, Mr Heaton claimed, it transpired that a Russian company called Bars Ltd claimed a joint venture involvement. Bars staff had to be employed and Bars had to be paid $3,500 per month. Furthermore, other parties, including a local fire chief, had to be given regular payments.

Mr Heaton also claimed that Bars staff repeatedly threatened violence on the restaurant staff. Irlasto intended to fight the misrepresentation claims made against it but the Irlasto operation collapsed before it ever came to court.

As the annual turnover of the Irlasto group companies grew, from $40 million to closer to $60 million by 1996, the main players involved were also looking at possible property developments. A company called Garden City Properties was established, and a site purchased. Also, the Irlasto board began looking at the possibility of a flotation.

Given the huge opportunities that existed in Russia, a lot of major players were looking for opportunities to invest.

Irlasto managed to secure $4.5 million in investments from UK institutions, Barings and Framlingtons. Framlingtons, an investment firm, had set up a Framlington Russian Investment Fund, headed by Lord, formerly Geoffrey, Howe, the former British cabinet minister. Barings set up the First NIS Investment Fund. Both funds included money from the European Bank for Reconstruction and Development. Further investments were pledged to Irlasto, on certain conditions.

Meanwhile payments to the Russian partners went to accounts in Swiss, Swedish, Turkish and UK banks. The beneficiary of a Royal Bank of Scotland account in London was Arigon Company. In 1998 a company on the Toronto stock exchange was raided as part of an inquiry into Arigon Company Ltd. The FBI believed the major shareholder in Arigon, Semion Moguilevitch, was the boss of a Russian gang involved in protection, prostitution, drug smuggling and arms dealing.

Barings produced a 19-page draft statement of affairs for Irlasto in 1998, after Irlasto had collapsed and in preparation for the creditors' meeting.

The Barings document said the Irlasto group transferred all dealings to Most Bank, in Moscow, in the autumn of 1995.

It also says that immediately following the First NIS investment, a due diligence was conducted into the Garden Ring supermarkets. "The company's investigation revealed a hitherto unidentified serious weakness in the Garden Ring business management, in particular in the areas of financial control and reporting.

The Garden Ring business's working capital position was shown to be significantly worse that previously reported, including as a result of an unacceptably high level of stock loss, identified as due to both customer and internal staff theft."

Supplies for the Garden Ring supermarkets were sourced by Steamline, a Cork-based company whose directors were Mr Coughlan, Mr Walshe and Mr Flannery. After the Irlasto collapse Steamline went into liquidation and Musgraves, which was left out of pocket, sought the restriction of the Steamline directors.

The court refused the application. During the hearing it was stated that the due diligence exercised referred to above uncovered a loss of £2 million.

Mr Coughlan told the court the Irlasto operation had collapsed in July 1996 after he and his fellow directors had been threatened by their Russian partners, and had fled Moscow in fear of their lives.

According to the Barings document, an unauthorised transfer of $528,000 was made in February 1996 out of the Russian retail trading companies' bank accounts. In May a further $200,000 was transferred.

"Evidence was provided to the company that showed that Dmitri Kishiev was instrumental in effecting these actions."

Relations between the Russian and Irish partners soured. Negotiations were initiated but were not successful, according to the Barings document. "The failure of these negotiations eventually led Dmitri Kishiev acting to secure the illegal exclusion of the management representatives of the company and of its other Irish partners from all the Russian retail businesses in July 1996. At this time the company's various Russian retail businesses effectively ceased trading." Most Bank was owed $4.5 million.

In August 1997 Lord Howe wrote to Anatoli Chubais, then first deputy prime minister of the Russian Federation and still one of Russia's most powerful men.

Lord Howe said Barings, Most Bank and Framlingtons had between them lost $9 million in the Irlasto operation.

He said that post the collapse of Irlasto in July 1996, Framlingtons had employed international security company Pinkerton to investigate, and it had conducted an inquiry. The inquiry had confirmed, he said, that the collapse had occurred because of actions by Mr Kishiev.

These had included fraudulent banking transactions which brought to a head conflicts between the Irish and Russian partners "which led to the latter physically excluding the Irish management partners from the retail businesses concerned. Our legal advice is that this action was inadmissible from a Russian legal viewpoint.

"While a criminal case was brought against Mr Kishiev, the Moscow city prosecutor declared the case closed in May. There is considerable disquiet about this outcome, in the light of the evidence available to us. It may therefore be appropriate for this case to be re-examined at a higher level legally in Russia."

Mr Kishiev has disputed the claim that he threatened his Irlasto partners. He was never charged in relation to the allegations.

Mr Walshe and Mr Coughlan are now understood to be involved in business in Ireland, in property and other ventures.