Kremlin officials were touting Russia’s investment opportunities at a conference in the Black sea resort of Sochi on Friday when news trickled out that one of the country’s last remaining American investors had been thrown behind bars.
Michael Calvey, the founder of Moscow-based private equity fund manager Baring Vostok, remained one of the last Russia bulls at a time when most of his contemporaries had left the country.
Over 25 years, the fluent Russian speaker from Oklahoma gained a reputation as a savvy investor able to navigate the cut-throat Russian regulatory waters — attracting money from pension funds such as California’s Calpers and western institutions such as the European Bank for Reconstruction and Development.
Now, the 51-year-old former mergers and acquisitions banker has become the most prominent western executive to face jail in Russia — up to 10 years on charges of fraud — casting a pall over an already fraught investment climate.
“If someone who knows Russia so well can fall into this situation, then obviously less experienced investors, which includes everyone else, are going to be very cautious,” said Tom Adshead, research director at consultancy Macro Advisory.
Since Russia annexed Crimea in 2014, a worsening political environment has spooked many foreign investors who, like Mr Calvey, arrived in Moscow in the 1990s.
Foreign direct investments (FDI) shrank from $27.1bn in 2017 to $1.9bn last year, according to the Russian central bank. They stood at $79bn in 2013.
The Kremlin under President Vladimir Putin has had some success in attracting pledges from state institutions from China and the Gulf.
But private equity fund managers, including New York-based Blackstone and Texas-based TPG Capital, ended their attempts to invest in the country following Crimea and the subsequent sanctions on Moscow from the US and EU.
“This is unprecedented. He’s a US citizen,” a longtime western backer of Baring Vostok’s funds said of Mr Calvey’s detention. “Once again [it’s] a new low.”
Mr Calvey’s troubles bring back echoes of past clashes between Russian authorities and foreign businessmen. William Browder, whose firm was once the largest investor in Russian stocks, embarked on a global sanctions campaign against Russia when his auditor Sergei Magnitsky died in pre-trial detention after accusing the officials who arrested him of a $230m tax fraud.
Bob Dudley, the head of British oil major BP’s Russian joint venture, fled the country in 2008 after claiming “sustained harassment” from security services.
Both had taken on powerful interests. Mr Browder pushed for corporate governance change at Gazprom, the listed state-owned gas company, and Mr Dudley fell out with well-connected oligarch business partners in BP’s joint venture.
Instead, Mr Calvey had targeted small to medium-sized growing companies and surrounded himself with Russian nationals.
“Michael has always taken a constructive, long-term view on Russia and investment opportunity in the country,” said Bernard Sucher, a former Russia director for Bank of America Merrill Lynch. “Throw in adjectives like cautious, balanced and thoughtful — they all fit.”
A former Salomon Brothers energy banker, Mr Calvey founded Baring Vostok in 1994 and grew it into a $3.7bn fund management business. The firm’s diversified portfolio helped him weather storms that prompted many other western investors to leave, including the financial crises of 1998 and 2008 as well as Russia’s annexation of Crimea in 2014.
In December that year, Mr Calvey told the Financial Times that he still saw investment opportunities. “We are practically the only people still buying Russian assets, so it seems like it could be a good cycle for investment,” he said. “Of course, we need to convince our (investors) to be patient.”
Prosecutors suspect that he and five others, including three Baring partners, conspired to defraud Vostochny Bank, a Baring-owned top-30 lender that focuses on Russia’s Far East, of Rbs2.5bn ($37.7m).
Mr Calvey denied wrongdoing, telling the court that the charges were part of a long-running dispute with minority shareholders Artem Avetisyan and Sherzod Yusupov over control of the bank. The arrest came less than a week after Mr Yusupov filed a complaint with the FSB, Russia’s intelligence agency. Mr Yusupov denied that the charges were linked to the dispute.
Mr Calvey’s arrest shows that the Kremlin is no longer interested in western investments, a fellow US private equity investor said: “If there were, they would have found a way to proceed without putting the Baring partners in jail.”
Another sign is that the judge on Saturday ruled to keep Mr Calvey in custody for two months, despite influential Russian figures speaking out in his defence.
Sberbank chief executive Herman Gref, a longtime confidant of Mr Putin, said he hoped the charges were a “misunderstanding”.
Kirill Dmitriev, who heads Russia’s state wealth fund, also seen as close to the president, said he was “ready to provide a personal guarantee for Michael Calvey”. Kremlin business ombudsman Boris Titov wrote in Vedomosti, the Moscow newspaper, that the allegations looked “dubious” and the ruling to hold Mr Calvey in jail was “clearly illegal”.
A person close to the Vostochny dispute said: “This is transformative. This kills FDI stone dead forever . . . This sends the message, can you use the security services against your business rivals over a few million dollars? Yes, you can.”
The Kremlin has admitted that Russia’s judicial system is open to predatory behaviours in business disputes. Mr Putin revived a working group intended to tackle the issue in January.
Mr Avetisyan, who did not reply to requests for comment, runs a Kremlin-backed programme designed to improve business conditions and is also a member of two government bodies aimed at protecting business people. He sits on advisory boards of the Russian defence industry, tax agency and the FSB.
On Monday, the Kremlin said it was “very closely watching the case” and insisted that it was unrelated to the state of US-Russia relations.
“Russia was, is and remains interested in creating favourable conditions for foreign investors and will continue to be,” spokesman Dmitry Peskov said.
Mr Calvey is now among the almost 6,000 businessmen in Russian prisons awaiting sentence. “I am still hopeful that the current geopolitical conflicts will moderate in the next few years,” he said in 2014, in the middle of the Crimea crisis. “Hopeful but not naive.”
