Weekly 13 April 2019

Calvey is moved to house arrest, but this is no political thaw

Hello! We focus this week on the latest twist in the ongoing saga of U.S. investor Michael Calvey, who was released from prison — and moved to house arrest. We also take a look at the hawkish new internet law passed by the Russian parliament, why the overthrow of Sudan’s president is a headache for the Kremlin and the tale of minority shareholders in Russia’s retail sector who are fed up with having their rights trampled all over.

Calvey is moved to house arrest, but this is no political thaw

Басманный районный суд изменил меру пресечения с содержания под стражей на домашний арест основателю и управляющему партнеру инвестиционного фонда Baring Vostok Майклу Калви, обвиняемому в мошенничестве на сумму 2,5 млрд руб.

What happened

U.S. investor Michael Calvey, the head of private equity firm Baring Vostok, was placed under house arrest Thursday after almost two months in pre-trial detention on fraud charges. The Investigative Committee asked for the transfer, backtracking on their previous arguments that Calvey was a flight risk and would try to influence witnesses and destroy evidence. Now investigators say “a sufficient number of people” have vouched for Calvey. The Bell was the first Russian media outlet to report (on Monday) that Calvey would be moved to house arrest.

  • What helped Calvey was the number of people speaking out in his defense, one source told The Bell. Other sources said that the Kremlin was aware of his powerful supporters. Among those publicly called for Calvey to be moved to house arrest was the head of the Russian Direct Investment Fund, Kirill Dmitriev. This might have played a decisive role: not only does Dmitriev have a senior position in a state-owned company, but he is also directly tied to Baring Vostok’s business (foreign investment). Moreover, he has an unofficial connection to Putin’s inner circle: Dmitriev’s wife studied with Putin’s daughter at Moscow State University, and now works under her.
  • In court, Calvey gave an emotional speech about his innocence and reiterated he would not leave the country. “Running away is that which one expects from someone who is guilty. For me, running away from Russia would be the same as admitting guilt, it would be self destructive… My entire life is in Russia, everything which I did in the last 30 years, that is evidence enough,” the investor said.
  • In total, six people have been arrested in the Baring Vostok case. After Calvey, Aleksei Kordichev was transferred Friday to house arrest. Unlike Calvey, however, he has admitted his guilt and given evidence against himself and the other defendants. Four others remain in prison, including French citizen Philippe Delpal and Ivan Zyuzin, who has four children.
  • Also this week, there was an attempt to hold a board of directors meeting at Vostochny Bank (the entity at the center of the corporate conflict that led to Calvey’s arrest). Their goal was to change the bank’s CEO, who is preventing the bank from taking sides in the case. The timing was impeccable: of the four directors from Baring Vostok (the board has nine members in total, four from each of of the sides in conflict and one neutral) three are behind bars. However, they were not successful in getting quorum.

Why the world should care

This week there were significant development for two cause celebre cases in Russia: as well as Calvey, prominent theater director Kirill Serebrennikov, who has been under house arrest for two years, was released. There is unlikely to be a connection: Serebrennikov’s case is political, whereas Calvey’s is a corporate conflict. Although they do have one thing in common: new conditions for the defendant have not been accompanied by substantive change to the case. It is likely that Serebrennikov and Calvey were simply moved after a phone call ‘from above.’

Parliament approves a new law giving the state new power to control the internet

What happened

It looks very much like internet freedom in Russia has just half a year to live. The State Duma passed Friday the so-called law on sovereign internet, which will, from November, give the authorities the power to isolate Russia’s internet at a moment’s notice. Changes are unlikely to happen quickly, but the state wants revenge for its unsuccessful attempt to block Telegram.

In December, we wrote in detail about the law, which will significantly expand the government’s ability to control parts of the internet. The official goal is to ensure Russia’s internet security and protect against foreign cyber-interference. The law’s authors are Andrei Lugovoi, who is suspected of poisoning ex-FSB officer Alexander Litvinenko in London in 2006, and Andrei Klishas, a former top manager at metals company Norilsk Nickel.

  • The idea for the law first appeared in 2018 when the government tried to ban messaging service Telegram. The attempt was a total failure and it showed the limited tools available to the state when dealing with the internet — unlike neighboring China.
  • The U.S. cyber attack in October 2018 on Yevgeny Prigozhin’s “troll factory” might have accelerated adoption of the law.

The new law will allow the Russian authorities to:

  • Block websites and services: Until now, internet watchdog Roskomnadzor could only tell internet providers what needed to be blocked, with the result depending on the effectiveness of the target’s defenses. Now, network operators will be required to install special equipment, costing a minimum of $400 million, to carry out targeted blocks, which Roskomnadzor will be in control of itself.
  • Disconnecting Russia’s internet from the world: The law mandates the creation of a traffic-management system that would give access to cross-border connections. This should make it possible for Russia to cut its internet off from the rest of the world in a crisis. It will be up to the government to decide what would trigger such a move.
  • The appearance of a super internet regulator: Roskomnadzor, which has close ties to the security services, will receive significant new powers. As well as installing, modernizing, and using equipment for blocking and filtering traffic, the agency will determine the policy for connecting internet providers to networks and control cross-border communication. In effect, Roskomnadzor will write the rules that govern how the Russian internet works.

Why the world should care

This law is a serious victory for security officials. The fact that control over the internet will be passed to Roskomnadzor initially prompted concern within the government, which tried (Rus) to protest. But changes to the law from the Ministry of Communications, which sought to limit Roskomnadzor’s new powers, disappeared before the final vote in parliament. According to a source, these changes were removed upon the request of the Presidential Administration.

Sudan’s ousted president had promised Russia the ‘keys to Africa’

What happened

During a military coup in Sudan, President Omar al-Bashir, was deposed and arrested. One might call al-Bashir a friend of Russia: he visited Russia several times and met with President Vladimir Putin and Prime Minister Dmitry Medvedev. He has also been linked to ‘Putin’s chef’ Yevgeny Prigozhin, who is tied to mercenary groups working in Syria and Africa.

Al-Bashir’s Russian connections:

  • Grain: Sudan is a major customer for Russian grain. In the 2017-18 season, Sudan was the sixth (Rus) largest buyer of Russian grain exports.
  • Natural resources: State-owned energy companies Gazprom and Zarubezhneft are known to be interested in Sudan’s natural resources and Gazprombank had plans (Rus) to finance a refinery in Port Sudan. In addition, al-Bashir was counting on (Rus) Russia for a series of floating nuclear power blocks, and a hydroelectric power plant on the Nile.
  • Top level friendships: Al-Bashir met (Rus) with Putin in Russia in both 2017 and 2018. During their talks, they discussed grain, energy projects and even a Russian military base on the Red Sea. “Sudan might be Russia’s ‘keys’ to Africa,” al-Bashir told Putin at the end of a meeting in Sochi in the fall of 2017.
  • Prigozhin: Immediately after this meeting, companies tied to Prigozhin headed to Africa, including fighters from mercenary company Wagner. Prigozhin-linked-firms were awarded projects for gold mining, which were extremely lucrative: in 2016, Sudan was Africa’s third largest gold producer. Four sources told The Bell that Prigozhin’s mercenaries were also training soldiers loyal to Sudan’s government.

Why the world should care

Al-Bashir was an important figure in Russia’s efforts to expand its influence in Africa, but his overthrow is not a crushing loss. Sudan is only one country in Prigozhin’s impressive network, which covers 20 African states, from Nigeria to South Africa. The events in Khartoum may be a setback in Russia’s search for the “keys” to Africa, but they will not drive Russia away.

A battle over minority shareholder rights at Lenta prompts a rush of nostalgia

What happened

Russia’s barely-alive equity market hasn’t had any major corporate scandals or big acquisitions in a long time. But this week, a real drama unfolded over the sale of Russia’s third largest retailer, Lenta, to billionaire Aleksei Mordashov.

This deal is the one of a whole cascade of deals in the retail sector that followed the sale of the country’s second largest retailer, Magnit (which we wrote about in last week’s newsletter). Beginning in spring, all eyes have been on St. Petersburg-based Lenta, which has annual revenues of $6.4 billion. Magnit wanted Lenta, as a deal would return Magnit to its market leader position, but Mordashov, the owner of steel giant Severstal, was also interested.

For now, Mordashov appears to have been victorious: Lenta’s largest shareholders, U.S. fund TPG and the European Bank for Reconstruction and Development, agreed to sell him their combined 42% stake for $729 million. But, after this was announced, it emerged a better offer from Magnit had been rejected. In this situation, minority shareholders are the losers, and they are trying to stop the deal. Protests are being led by Prosperity Capital Management, which has again been shortchanged by the major shareholders of a retail company in which they invested.

  • When Magnit founder Sergey Galitsky sold his stake in the company to VTB Bank in February 2018, he sold 29 percent of his 31 percent holding. The reason was obvious: if VTB had bought 30 percent, it would have had to make an offer to all shareholders. Prosperity Capital director Alexey Krivoshapko called the deal “spit in the face” of investors.
  • A few months later, Magnit, decided to buy a pharmaceutical company with small net profits and huge debts from one of the new shareholders, Alexander Vinokurov. Even amaetuer observers could see that the deal was not good for Magnit, yet it was very good for Vinokurov. Prosperity Capital unsuccessfully tried to have the deal reevaluated and Krivoshapko called it a “red flag” for investors.
  • Neither Magnit nor Lenta told minority shareholders they were in talks over an acquisition/sale, and investment funds, led by Prosperity, believe that they have been forced to sell their shares at a lower price than otherwise would have been possible.

Why the world should care

Prosperity Capital Management, founded by Swedish banker Mattias Westman, is one of the major western funds operating in Russia. In the context of the problems his colleague Calvey is currently facing, minority shareholder rights doesn’t look like a big deal. And Prosperity, which played a leading role in the privatization of the electricity monopoly RAO UES, is used to such rough treatment. But, until recently, the fund was making 21% annual returns on the Russian equity market. Today, there are fewer Russian assets in which to invest, and the chances of a successful exit from older investments are becoming slimmer.

Anastasia Stognei