Why Was Michael Calvey Arrested? (Updated)

            US citizen Michael Calvey, founder of the Baring Vostok investment firm, has been arrested alongside five others on suspicion of fraud in the amount of 2.5 billion rubles. Calvey, now being held without bail on orders from the Basmanny District Court in Moscow, denies all wrongdoing.

            Michael Calvey is the second American arrested in Russia in as many months. Corporate security director Paul Whelan was arrested on accusations of espionage on December 28, 2018. In both cases, the charges were brought by the FSB.

Who is Michael Calvey?

            Michael Calvey was born in Wisconsin in 1967 and graduated from the University of Oklahoma and the London School of Economics. He has worked in the financial sector for twenty-seven years.  Up to 1994, Calvey worked at the European Bank for Reconstruction and Development in London and New York, where he was responsible for energy-sector investments in Central and Eastern Europe.

            In 1994, Michael Calvey founded Baring Vostok Capital Partners, a direct investment company specializing in private financing in Russia and the former Soviet Union. In the past twenty-five years, Baring Vostok has invested about $2.8 billion in eighty projects around Russia, Ukraine and Kazakhstan. Moscow-based Baring Vostok is a share-holding member of Vostochny Bank, which is at the center of the current accusations.

            The criminal complaint against Calvey was issued February 7^th by another shareholder and board member of Vostochny Bank, Sherzod Yusupov, laying out the following accusations:

            Vostochny Bank gave $2.5 billion in credit to the debt collection agency First Collectors’ Bureau. According to the investigator, Calvey convinced the bank’s board of directors to vote in favor of a settlement, according to which the bank would accept a 59.9 percent share of the International Financial Technology Group in lieu of repayment. Shares of IFTG were assessed at three billion rubles, while their actual market cost was 600 thousand rubles. Yusupov, who now claims to have been misled, conducted negotiations for the deal.

            Calvey made his own comments on the assessment, saying, “Yusupov had access to all documents relating to the deal, and he is himself a highly-qualified specialist. Therefore, it’s impossible for him to assert that he was misled.” Calvey denied wrongdoing and contested the findings of the investigation. “You can easily work out the real value of the shares. They truly cost between two and three billion rubles. That was the conclusion of an independent appraiser.” [Calvey’s remarks are here translated from Russian – Editor’s note]

            In 2018, the Central Bank of Russia ordered Vostochny Bank to conduct a stock offering and raise five billion rubles in additional capital. The initial plan was for shareholders to invest money according to their percentage holdings. Avetisyan pledged to contribute his share of the capitalization, but then it became clear he didn’t have the money. Baring Vostok then stepped in with an offer to provide the 5 billion rubles on its own. That investment would have given Baring Vostok a controlling share of the bank, while reducing Avetisyan and Yusupov’s shares (32.5% and 4.8%, respectively).

            Yusupov and fellow Vostochny shareholder Artyom Avetisyan are currently contesting Calvey’s ownership of a controlling share in Vostochny through a British arbitration court. In Calvey’s opinion, Yusupov has two motives for pressing charges: First, he wants to gain leverage over the arbitration process. Second, he wants to strengthen his negotiating position by raising the stock price of the bank in an offering to Baring Vostok, thereby protecting Yusupov and Avetisyan’s share.

What Do Russian Business Leaders Have to Say About the Case?

            Herman Gref, Sberbank President and former Minister of Economic Development and Trade: “I’ve known Michael Calvey for a long time as a law-abiding and honest man who has done a lot to bring investment into the country, to develop the economy and high-technology companies. Not knowing the details of the accusation, I very much hope that the court will work through it and it will all be a misunderstanding.” (Forbes Russia, Feb. 15)

            Kirill Dmitriev, President of Russian Direct Investment Fund, said he was prepared to post bail on Calvey’s behalf. “I think he has done a great deal to bring foreign investment into the Russian Federation and also helped to set up many Russian companies.” (Forbes Russia, Feb. 15)

            Oleg Tinkov, entrepreneur and President of, among other things, Tinkoff Bank and Tinkoff Insurance: “I’ve known Michael Calvey for over twenty years. I’ve never met a more honest and professional investor in Russia. Baring is the most successful and highly-professional team on the private equity market. Michael truly loves Russia and always comes to its defense. I’m very sad this has happened. It’s hard for me to comment on the case, but I believe Michael.” (Vedemosti, Feb 15)

            Anton Gopka, General Director of ATEM Capital: “This is extremely negative news for the Russian private equity market. Involving an American citizen and applying the specific Russian style of resolving corporate disputes with the oldest foreign fund greatly increases the stakes of these events. Up to now, we always supposed that the foreign investment sector was an oasis of security where deals were done professionally based on English law either the corresponding level of security for those involved. Now it’s clear that any shareholder conflict might end up in Basmanny Court. Regardless of the guilt of those involved or how the case turns out, today Russia’s country-wide risk has risen to a prohibitive level. Situations like this are impossible to comprehend. It’s possible this is being done to cut the Russian market off from foreign investment.” (INTERFAX, February 15)

            Sergei Orlov, employee of Vostochny Bank: “There is a fight for control of the bank between Calvey and Avetisyan. The American, Calvey, owns 43 percent of Vostochny bank, and Avetisyan has 32 percent. The American was offering to invest additional funds in the bank and raise his share to 50 percent plus one of stock, and thereby gain complete control over the bank.

            Avetisyan, having 32 percent and dreaming of the same thing, doesn’t have the money for additional investment. But he has the resource of power. He turned to his friends in law-enforcement. As a result, they put together a flimsy fraud case, and they’re trying to throw the rival in jail.

            Basmanny Court won’t let you go just like that. Once you turn up there, you’re already guilty. That’s the judicial process we have in this country.” (Opinion, Delovaya Gazeta, February 15)

Some Brief Conclusions

            There isn’t much dependable information. What we know is that there’s a fight between shareholders for control of Vostochny Bank. That type of thing happens in every country on Earth every day. That part’s normal.

            But the fact that a typical shareholder conflict is being made into a criminal case with one of the parties arrested on felony charges—that’s not normal. That’s only done in Russia.

            It’s even more abnormal that we’re talking about a foreigner, a US citizen, one of the few outstanding private investors in Russia. That’s never happened before. All we can say right now is, “What will happen next?”

            What do you think will happen next? Comment here or on this article’s Twitter thread @LevLester.