Renowned investment mogul, Michael Calvey, is currently held in pretrial detention by Moscow authorities. His shock detention on charges of serious fraud last month has left Russia’s business world, international observers and even top Kremlin officials reeling. With direct foreign investment in stark decline, Russia’s most senior economists are ringing the alarm bells.
Who is Michael Calvey?
Until recently he was a rock star among investors; the US native was Chief Executive and founder of the private equity firm Baring Vostok Capital (BVC) and one of the shrewdest foreign operators in Russia.
He was a trusted adviser for Western investors looking to profit from Russia’s thriving consumer sector. Calvey’s trademark integrity garnered even the Kremlin’s respect. He is said to have channeled as much as 3.7 billion into Russia and the former Soviet states.
BVC’s future stability seemed secure with the hire of ex KGB chief Vadim Bakhatin and Soviet cosmonaut hero Alexei Leonov to help front deals and smooth political risk. Trophy successes include a 500 fold return on initial investments into Yandex NV, Russia’s largest search engine and the early version of Vimpelcom, now one of the country’s leading telephony operators.
What went wrong?
Calvey’s fortune turned a decade ago when BVC acquired stakes in consumer lender Vostochny Express, which ran into troubles as global monetary recessions took hold. To offset losses the bank merged with Uniastrum Bank, owned by Artem Avetisyan. Uniastrum in turn succumbed to difficulties, prompting Russia’s Central Bank to demand more capital to cover their weak loan portfolio.
With no rescue plan agreed, relations between BVC and Vostochny worsened. Calvey then accused Avetisyan of illegally withdrawing vast sums of money from Uniastrum on the eve of the merger. A London-based investigation against Avetisyan ensued. Calvey promptly faced fraud allegations brought against him in Moscow.
The prosecution’s case
Calvey’s charges are focused on a loan given by Vostochny Bank to another of BVC’s acquisitions, First Collection Bureau. When the time came to repay that loan Calvey chose, instead, to transfer his shares in another company, IFTG, to Vostochny as payment in February 2017.
Reports would have it that Calvey falsely declared the shares to be worth a total of 3 billion rubles, which an FSB audit valued at only 600,000. Sherzod Yusupov, a close associate of Artem Avetisyan’s on the board of Uniastrum Bank, filed the complaint.
BVC contends that the Vostochny board were aware of the correct figures. Representatives also insist that the Russian arrests are revenge for the investigation in London and prevents the dilution of Avetisyan’s assets in Vostochny Bank due to take place later this year.
These suspicions are valid. Where the West interferes with Russian interests, retaliation is sure to follow. Russia’s foreign food import ban following consecutive rounds of international sanctions is a prime example. Likewise, in return for the mass expulsion of Russian diplomats following the poisoning of Sergei Skripal, Russia was quick to respond in kind.
Boris Titov, Russia’s Presidential Commissioner for Entrepreneurs’ Rights, seconded BVC’s theory, sensing foul play. The Commissioner has stated:
“The case of Baring Vostok stems purely from corporative differences and therefore the court’s decision to choose incarceration as a way of pretrial restriction for Calvey is obviously illegal”
(SOURCE: Radio Free Europe)
What now for investment?
The dangers of doing business in Russia are widely publicised, particularly concerning corruption. However, this arrest is significant for two major factors. Firstly, the status of the target; if Russia’s most valuable foreign investment driver is dispensable then no-one is safe. Secondly, the Kremlin clearly no longer cares about the economic consequences of its political actions.
Whether or not Russia needs to feel unbowed, the current climate is bleak. Direct foreign investment plummeted from 25.8 billion dollars in the first nine months of 2017 to 2.4 billion in the same period last year. Thus Calvey’s arrest could not come at a more illogical time, raising serious concern amongst some of Russia’s key financiers. A number of Central Bank bosses have offered to mediate between the two sides. Alexei Kudrin, Russia’s former Finance Minister has dubbed the events “an emergency for the economy”. Moreover Russia’s President, Vladimir Putin, has sought to distanced himself from the proceedings.
A wake up call for Kremlin overconfidence
The degree of self-sabotage makes Calvey’s arrest all the more puzzling. Russian Presidential Press Secretary, Dmitri Peskov, claims the incident will have “no impact on the investment climate”. Putin wants the west to believe that Russia can go it alone. Indeed during last December’s Presidential Press Conference, the President even stated government ambitions for a 3% GDP boost after 2021. Yet the President also emphasised the need for a “breakthrough” in the economy and technology space, without which “there will be no future for the country”.
This begs the question, where then will the money be coming from? According to Bloomberg that onus will fall on domestic sources; specifically stockpiles accumulated by Russia’s business giants and state owned funds over Putin’s twenty year rule. 58% of all venture investments in Russia during 2017 were reported to have been made by just two large state funds. However, oil booms aside, Russia’s record in innovation is poor and if Alexei Kudrin right, economic stagnation beckons. The most troubling part in that is the ambivalence towards ordinary Russians; an increasing number surveyed now report feeling a hard drop in real income after sanctions. Small scale regional protests are increasingly frequent as Putin’s public opinion drops.
How does this impact Russia’s reputation?
Russia’s geopolitical reputation, already battered by the Salisbury incident and the war in Ukraine, is unlikely to be greatly hindered by these arrests. The implications for Russia’s economy are more serious. The position of Moscow’s ruling economists is unequivocal; Central Bank bosses, former finance minister Alexei Kudrin, Sberbank CEO Herman Gref and senior business ombudsman Boris Titov have all weighed in on Calvey’s behalf. One would hope the support of such strong technocrats would be enough to sway the courts. Nevertheless, regardless of sentencing, the arrests have certainly undermined the Russia’s allure for foreign investors.
