Investors Ask Who’s Safe in Russia After Fund Manager’s Arrest
(Bloomberg) -- For most of the past three decades, American private equity investor Michael Calvey has made billions for his funds by knowing how to play by the rules -- both written and unwritten -- in Russia. Now he’s sitting in a Moscow jail facing fraud charges over a deal that went bad.
His Baring Vostok fund lists “constructive relations” with the authorities as no. 7 of its 10 rules for successfully investing in Russia. It hired a nationally known former Soviet cosmonaut and an ex-KGB chief to help defuse any tensions that arose.
As word of his detention spread, Calvey got glowing recommendations and pledges of support from some of the country’s most prominent businessmen. They include the Kremlin’s own ombudsman for entrepreneurs, who called the arrest an “illegal” act that “rocked the business community.”
President Vladimir Putin, who met Calvey during an earlier effort to court foreign investors, is following the case closely, according to spokesman Dmitry Peskov. Despite the controversy, the Kremlin doesn’t think it will hurt Russia’s investment climate.
But even longtime investors who are used to endless Russian surprises and constant geopolitical risks say they were shocked by the arrest of a savvy market veteran like Calvey. It triggered the worst outflow since November from the biggest exchange-traded fund that invests in Russia and drove local stocks lower.
“Calvey is very well respected within the industry,” said Julian Rimmer, a trader at Investec who helped organize investor meetings for Baring Vostok in London in 2016. “He’s been operating in Russia for a long time and is viewed as something of an insider, or at least someone of whom the regime clearly approves.”
For the moment, Calvey is being held alone in a cell under quarantine as are all newcomers at Moscow’s Matrosskaya Tishina jail, his lawyer, Dmitry Kletochkin, said in a telephone interview after visiting him Monday. “He’s in a fighting mood,” Kletochkin said.
Calvey complained he can’t buy shaving cream or toilet paper from the prison store because he has no money on his account there, according to Evgeny Enikeyev, a member of a civilian-oversight board that visited him briefly on Monday. Calvey described himself as a “patriot” of Russia and said he hopes to write a book about his experience, Enikeyev said.
The American investor denies any wrongdoing. The court has ordered him held for at least two months.
Calvey, 51, started Baring Vostok in 1994 and weathered the repeated crises that followed, targeting mostly low-profile companies that weren’t getting noticed by other investors.
Baring Vostok gained a reputation as the go-to firm for money managers in London and New York looking for ways to invest in Russia’s fast-growing consumer sector. The firm is best known for early bets on tech companies, including a 500-fold return on Yandex NV, Russia’s largest search engine.
Cosmonaut Alexei Leonov, the first man to walk in space, works part time for the fund and has helped Baring Vostok repel a number of “raider attacks,” partner Alexei Kalinin told Kommersant in 2010. He was referring to a fixture of the Russian business scene in which investors use courts, police and other legal pressure to force rivals to sell out on the cheap.
Leonov, 84, left Russia Feb. 6 for medical treatment, his wife said Tuesday. The fund also employs Vadim Bakatin, the last head of the Soviet KGB, as an adviser.
Baring Vostok pioneered a “hands-on” approach, getting close enough to companies that they could detect and avert difficult situations early, according to Tom Adshead, chief operating officer at Moscow-based consultancy Macro Advisory.
“We all view Baring as an example of a company that if you’re smart, do your research, play by the rules, you don’t need to worry about this kind of thing,’’ Adshead said.
For years, the strategy proved a winning one. Baring Vostok has raised $3.7 billion in total capital since it was founded, according to the company website, generating returns of more than $2 billion.
Calvey’s legal troubles stem from a dispute with other shareholders at Bank Vostochny Express, a consumer lender that the fund bought a stake in almost a decade ago in a bet on the rising retail market. The bank ran into trouble in recent years as the economy fell into recession and was merged with one owned by Artem Avetisyan, a Russian investor known for ties to the security services.
When the central bank late last year ordered the bank to come up with more capital to cover its weak loan portfolio, Calvey’s fund and the other shareholders couldn’t agree on who would put in the equity. Baring Vostok sued the others in London, accusing them of stripping assets from the bank they contributed to the merger. Avetisyan didn’t respond to requests for comment.
Calvey and three other Baring Vostok employees, as well as two others, were detained Friday. The case is being handled by the Federal Security Service, the main successor to the KGB.
Boris Titov, the Kremlin business ombudsmen, said the case clearly should have been heard in civil, not criminal court, but in Russia, police and prosecutors frequently become involved in such disputes. “This is a systemic problem,” Titov wrote in a commentary in the Vedomosti newspaper Monday.
Others suggested the conflict could also have been worsened by the deepening chill in U.S.-Russia relations, an allegation the Kremlin denied.
“The guys from Baring Vostok probably thought, ‘This wouldn’t happen to us, we’re about business, not politics,’” opposition politician Alexey Navalny, who says he had been placed under arrest repeatedly by the same judge who sent Calvey behind bars, tweeted at the weekend. “I’m not gloating, it’s just important to understand that everyone and everything is about politics now.”
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