Michael Calvey Case Revisited: A Corporate Hit, a Bargaining Chip

Alexey Kudrin in the State Duma, 22 May 2018. Source: duma.ru

BY PAVEL KOSHKIN

The American investor Michael Calvey, who was detained in February in Moscow on fraud charges, is back in the news again. Calvey, who has lived and worked in Moscow for years, is the founder of Baring Vostok Capital Partners, a well-known private equity firm that has been investing in Russian ventures since 1994. He stands accused of embezzling 2.5 billion rubles (about $40 million) from the Vostochny Express bank.

Speaking on June 6 at the St. Petersburg International Economic Forum, Russia’s answer to Davos, Russia's former finance minister Alexei Kudrin described Calvey’s arrest as a “shock” for Russia's economy that resulted in huge capital outflow from the country. “Undoubtedly, [Calvey's arrest] is a shock. Since the beginning of this year, the outflow from Russia doubled and reached $40 billion,” said Kudrin, who now heads the Audit Chamber, a government watchdog overseeing state spending.

The Kremlin doesn’t seem to know clearly how to play the February 15 arrests of Calvey and his five international partners. President Putin last weighed in on the matter personally in March, when he defended the case against Calvey and said he believed the Federal Security Service had reasons to pursue the investigation. On June 3, however, Kremlin spokesman Dmitry Peskov, in an interview on RT television, called the case against Calvey and his partners “regrettable,” describing Calvey as a trustworthy businessman and saying that the Kremlin would like to see him attend the St. Petersburg forum. The event opens June 6.

The utility of Calvey’s arrest as a bargaining chip in the Kremlin’s political chess game with the West seems patent, though Calvey himself has urged that his detention not be politicized. But another angle is in play here: internal corporate dynamics with regard to Vostochny Express, purchased by Calvey’s group. The bank made several bad lending bets and in 2016 merged with another undercapitalized bank, Uniastrum, owned by Artem Avetisyan. Calvey and Avetisyan soon found themselves in conflict over the valuation of the merger. It was an ally of Avetsyan who filed the criminal complaint against Calvey.  

Calvey has characterized the matter as a dispute between shareholders and not worthy of criminal prosecution. However, the climate for entrepreneurs in Russia is risky. Proximity to those wielding political power, not adjudication through the courts, is likely to tip the outcome in one direction or another.

The Kremlin’s shifting signals with respect to the Calvey case suggest a different weighting of inputs over time, as well as evolving views on how best to showcase the businessman as a means of attracting investment while simultaneously using his criminal arrest as a bargaining chip to ward off additional sanctions from the West.

Doing Business in Russia

Michael Calvey was a landmark figure for Russia’s investment reputation. Since 1994, Baring Vostok Capital Partners has overseen about $3.7 billion in investments in dozens of Russian companies. The arrest of Calvey and his five partners, including the French national Philippe Delpal, sent shock waves through the Russian business community, for the arrests were originally made in the absence of any charges and the investors were detained without trial, a point made by Alexis Rodzianko, president of the American Chamber of Commerce in Russia, in an interview with the radio station Kommersant FM. 

U.S. investors in particular were stunned by Calvey’s arrest. “You can't help but take this personally. One of the reasons that so many leading figures have stepped forward to voice their concern [over Calvey’s detention] is that any individual active in business in the country understands that what is happening to Michael and his colleagues could happen to any of us,” Bernard Sucher, an American businessman and investor who worked in Russia for twenty years but who now lives in the United States, told me in an email.

Sucher, like many observers, thinks a corporate conflict over the bank Vostochny Express is behind the case. “Understood properly, the Calvey affair is a local, commercial dispute: It highlights unfortunate, enduring realities in the Russian business climate, namely, that when people clash in business, the bureaucracy can be weaponized by one side against another…. Of course, given the prevailing political climate and the high profile of the personalities involved, there's a significant risk of the affair becoming politicized,” he said.   

Sacrificing Foreign Investors

The Baring Vostok partners’ arrest on February 15 came two days after a bipartisan group of U.S. senators introduced what Senator Lindsey Graham described as the “sanctions bill from the hell”—new legislation aimed at imposing tougher sanctions on Russia for its alleged interference in U.S. and European domestic affairs. Among the bill’s targets are Russia’s banks, its cyber sector, its oil and gas industry, the country’s new sovereign debt, and persons who are accused of “facilitating illicit and corrupt activities, directly or indirectly, on behalf of Putin.”

Even before the Baring Vostok affair made the headlines, Russia had lost most foreign investors’ trust. The first nine months of 2018 saw a sharp decline in foreign direct investment in Russia, from $25.8 billion to $2.4 billion, while Russia’s net capital outflow from the private sector almost tripled, from $25.2 billion in 2017 to $67.5 billion in 2018, according to a recent report of Russia’s Central Bank.

The conclusion of special counsel Robert Mueller’s investigation into Russian interference in the U.S. 2016 elections brought to light definitive evidence of Russia’s meddling. This might speed adoption of the U.S. Congress’s sanctions bill, officially the Defending American Security from Kremlin Aggression Act (DASKA), which would impose the tougher economic and personal sanctions.

The stakes for Russia have increased immeasurably—but Russia seems to have been preparing to live under long-standing sanctions, and has preemptively erected its own legislative armory to fight back.

Fighting Sanctions with Laws

In June 2018, Putin signed the bill on countersanctions “in response to unfriendly actions of the U.S. and other foreign nations.” The law gives the Kremlin the authority to introduce economic and political countersanctions against the United States and organizations under its jurisdiction, as well as entities that join in “anti-Russian sanctions.” It bans the import of foreign goods other than those that are vitally important and have no substitutes in Russia, such as pharmaceuticals.

The vague wording of the law gives the Kremlin tremendous leeway to impose restrictions on or blacklist foreign citizens, for example by barring them from entering, working, buying assets, or privatizing state property in Russia. The restrictions are not specified but are to be determined by the government on a case-by-case basis.

A second bill on countermeasures to the West’s sanctions has not yet been signed into law and is awaiting a third reading in the State Duma. It is more intimidating because it contains amendments to the Russian Criminal Code for the purpose of implementing the countersanctions law. The bill imposes criminal charges for “complicity in invoking restrictive measures toward Russia.” For example, would-be whistleblowers seeking to provide information on Russians sanctioned by the West could face imprisonment of up to three years and fines of up to 5,000 rubles (almost $8,000) under the new law. Refusal to do business with Russians because of the West’s sanctions would be punishable by a fine of 600,000 rubles ($9,000) and up to four years of community service or imprisonment.

Hypothetically, penalties could be expanded even to foreign citizens, if they “illegally” obtained secret information about sanctioned Russians. This move would almost certainly have an even greater chilling effect on investors inside and outside Russia and provoke another outflow of foreign and domestic capital from the country.

The Kremlin’s Conflicting Signals

Calvey was moved to house arrest in April; his colleagues remain incarcerated. He has expressed willingness to attend the St. Petersburg International Economic Forum and has repeatedly asked that the case not be politicized. Yet the case has long been politicized in the high-stakes geopolitical game Russia is playing with the West.

The Kremlin’s recently expressed regret over what happened to Calvey might be seen as a cautious conciliatory gesture aimed at restarting a dialogue with the United States over sanctions. The mixed signals the Kremlin has sent out could reflect divided opinion, with some insiders favoring a tougher stance with respect to the United States and others calling for an attempt at compromise, in view of a prospective Putin-Trump summit Putin is said to want. Yet the U.S. ambassador to Russia Jon Huntsman Jr. said in late May he would be boycotting the St. Petersburg Economic Forum to protest the Kremlin’s handling of the Calvey case, underlining the political cast of the affair.

Finding some resolution to the Baring Vostok affair would thus be one of the visible indicators of progress in restarting talks. But Russia’s other moves, including the intimidating recent legislation, suggest that the Kremlin does not believe it can quickly or easily turn the tables in its protracted battle against the West’s sanctions.

Observers are left with two different interpretative lines to follow. The first is that the Baring Vostok affair has aspects of a typical Russian corporate hit in the recourse to law enforcement tactics as a means of conflict resolution, or even of just plain extortion. But the Kremlin’s manipulations suggest that it views the affair as a high-politics bargaining chip. This second line of interpretation does not contradict the first but has its own logic and evolution. The eventual fate of Michael Calvey may allow observers to determine, in hindsight, the relative weight of each of these two aspects of the Baring Vostok affair.

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Pavel Koshkin is a research fellow of the Institute of U.S. and Canadian Studies of the Russian Academy of Sciences (ISKRAN) and a contributor to Forbes Russia
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