Weekly 31 October 2020

Profiting from poverty

Hello! This week our top story is the rapid spread of discount stores as economic woes make Russians progressively poorer. We also look at the likely endgame in the criminal case against U.S. investor Michael Calvey and revelations about the bizarre sourcing of the 2016 ‘Steele dossier’ that alleged President Donald Trump colluded with the Kremlin.     

Retailers invest in discount stores as middle class squeezed

Russia’s biggest retailer, X5 Retail Group, this week announced the launch of a new discount store chain, Chizhik. It’s a sign of the times — competition among discount stores is hotting up: there are almost four times as many low-cost stores now as there were three years ago. Why is Russian retail investing so much in the least affluent?

  • The first Chizhik store is already open in Moscow and by the end of next year there should be 50 more. The chain sells low-cost groceries with an emphasis on food.
  • X5 already operates several chains, including the nationwide Pyatorochka. But Chizhik is a new direction for the company: up to now it focused on the middle class.
  • Pyatorochka was set up in 1999 as a Russian copycat of German discount store chain Aldi. However, a few years ago Pyatorochka went through a big rebrand: prices went up and stores shed their ‘bargain basement’ vibe. Chizhik will operate smaller stores than Pyatorochka (an average of 225 square metres compared to 392 square metres) and will stock fewer items (800 lines instead of 4,500)
  • This type of discount store is increasingly common in Russia. Between 2017 and 2020, there was a four-fold increase in the number of stores serving this sector, and today there are 139,600 across the country. The biggest player in the discount market is Siberian chain Svetofor, which has 712 outlets.
  • There’s a straightforward explanation for this boom: economic problems. “The situation in this country will get worse,” was the blunt assessment of X5 CEO Igor Shekhterman. The full impact of the pandemic on living standards is not yet clear, but economists at Moscow’s Higher School of Economics estimate the proportion of people earning less than $140 a month has grown from 12.3 percent to as much as 17 percent. During lockdown, a third of Russians reported they were economizing on food.
  • At the same time, Russia’s middle class — Pyatorochka’s target audience — is in decline. And that overlooks the fact that by global standards, Russia’s middle class was never very well off: in 2016 the OECD reported that middle class Russians earned less than their peers in Turkey, Chile or Mexico. HSE defines anyone earning over $500 a month as middle class, but President Vladimir Putin suggested earlier this year that the threshold for being middle class in Russia should be a monthly income of just $215.

Why the world should care

Discount stores may be an attractive proposition for those investing in Russia. But their increasing popularity, along with the rising number of low-income households, is a blow to the idea that Russia’s state-led economy delivers higher living standards than the market-driven European model. Recently, U.K. Prime Minister Boris Johnson pointed out that “12 percent of the [Russian] population still has to rely on an outdoor toilet” — now he has another attack line.

 

Will Calvey walk free as truce ends Baring Vostok’s corporate tussle? 

The biggest corporate battleground of recent years has fallen silent. After two years of courtroom drama and media wrangling, private equity firm Baring Vostok and banker Artyom Avetisyan have agreed a truce. But U.S. investor Michael Calvey, who founded the Russia-facing fund, and his colleagues are still threatened by up to 10 years in jail.

What’s going on? Baring Vostok and Avetisyan were trying to cut a deal from day one, according to two of The Bell’s sources. For example, U.S. investor Charles Ryan’s Parus Marine fund tried — unsuccessfully — to act as a mediator in negotiations. In the end, though, the warring parties managed to resolve the issue themselves.

The agreement has two key components. First, Baring Vostok will reimburse Vostochny Bank — the entity at the center of the dispute — with the 2.5 billion rubles ($31.6 million) Calvey is accused of embezzling. Second, both parties will drop all legal proceedings against each other (there are ongoing cases in the U.K., Cyprus, Russia, U.S., and Italy).

The back story

  • The conflict dates from 2016, when Avetisyan was looking for funding for his Uniastrum Bank. At the same time, Vostochny Bank, 74 percent owned by Baring Vostok, needed a capital injection of several million dollars. The two banks decided to merge.
  • In the end, Avetisyan took a 32 percent stake in the merged bank, and had an option on a further 9.9 percent. Baring Vostok had a controlling 52 percent stake, and the remainder went to small shareholders.
  • That share option was the point of conflict. Baring Vostok refused to go ahead with the deal and claimed that assets were withdrawn from Avetisyan’s Uniastrum (the fund’s suspicions were partially confirmed by a Central Bank probe). Avetisyan denied everything and insisted on taking up his option.
  • At loggerheads with Avetisyan, Baring Vostok sought to cancel the option. That was the start of a long series of legal proceedings. Baring Vostok launched cases in Cyprus, U.S. and Italy. Avetisyan filed a countersuit in London and in a court in Russia’s Far East (in the knowledge that it would be easy to influence proceedings in Russia).
  • The key issue in all the cases was the validity of the 9.9 percent share option in Vostochny Bank, and the counter-claims about withdrawn assets. The second issue concerned jurisdiction (could the dispute legitimately be considered in Russia?) and personal claims against the shareholders (Avetisyan’s properties in Italy were seized and there were orders to disclose his accounts and those of his associates).
  • Up to now, the courts have tended to favor Avetisyan: the London court recognized his right to the option (albeit this isn’t a final decision). But it’s not clear-cut: Baring Vostok also managed to secure the seizure of some of Avertisyan’s foreign assets.  
  • The bitterest clash, though, was a criminal investigation in Russia. Calvey and five of his colleagues were arrested in February 2019 at the request of Avetisyan and Sherzod Yusupov, a minority shareholder in Vostochny Bank. According to investigators, Calvey persuaded Vostochny Bank’s board of directors to support a fraudulent deal that loaded the bank with debt. At first, the defendants were detained, but at present they are all under house arrest.

 

What will happen to Calvey? Baring Vostok hopes the deal will end the criminal investigation against Calvey, according to one of The Bell’s sources. But the case was sent to court this week. Several lawyers told The Bell that the embezzlement charges cannot be terminated by a reconciliation between the parties. However, a judge can take this into account at sentencing.

 

A complex conflict This case is about more than just lawyers. Both sides are well-connected in the Russian elite and have a whole series of influential acquaintances.

 

  • Avetisyan has close ties to the security services, an associate told The Bell. In particular, he has good relations with Dmitry Patrushev, son of influential Security Council chief Nikolai Patrushev, according to a source close to Baring Vostok, and a federal official.
  • But Avetisyan’s most significant backer is Andrei Belousov. When the Calvey case started, Belousov was a Kremlin advisor, and today he is first deputy prime minister (the most influential economic policymaker). One of The Bell’s sources said that this relationship played an important role in the Calvey case. Belousov denies the allegation.
  • Calvey also has plenty of support. “These guys [Baring] have worked in Russia long enough to understand how things are done here. Apart from professional management, they have recruited several high-ranking people to protect their interests – including representatives of law-enforcement agencies,” a source told The Bell. 
  • Calvey sought backing from other friends in high places, including Rusnano chief Anatoly Chubais, Sberbank boss German Gref, Arkady Volozh of Yandex and Kirill Dmitriev from the Russian Direct Investment Fund.
  • According to two of The Bell’s sources, the authorities are split over the case. So, even if Avetisyan wanted to halt proceedings, it’s far from certain he would be allowed to do so.

Why the world should care

The Calvey case is the biggest Russian business story of recent years and has had a huge negative impact on the investment climate. If foreign investors previously believed good connections were key to solving problems, this case shows that even high-level backers cannot solve everything. There is no guarantee of immunity when doing business in Russia.

 

The PR executive from Perm behind Trump collusion allegations

This week The Wall Street Journal identified the source of some of the most serious allegations against U.S. President Donald Trump in the infamous ‘Steele dossier’ that was compiled by ex-spy Christopher Steele — they came from PR manager Olga Galkina. The news prompted a mini scandal in Russia where Galkina is a well-known — but often un-liked — figure.  

How did the story unfold?

  • Olga Galkina, 40, was the source for several of the most damning claims about Trump’s ‘collusion’ with Russia in the 2016 presidential election. But none of them were confirmed by the investigation of Special Counsel Robert Mueller into Russia’s role in the 2016 U.S. election, and this week the Wall Street Journal published an article revealing Galkina’s role in the compilation of the Steele dossier.
  • In particular, the dossier claims that web hosting company Webzilla, owned by Russian-born Alexei Gubarev, carried out hacking during the 2016 U.S. presidential election, and includes details of a secret meeting between Trump’s lawyer, Michael Cohen, and Russian intelligence officials in Prague. This meeting was allegedly about how to pay for the work of Russian hackers while concealing their activities.
  • Galkina apparently told all this to a Russian employee of Steele’s company who had known Galkina since high school. Later, this employee claimed he passed the information to Steel as rumor, not as fact.
  • Galkina previously worked for Gubarev’s Webzilla. According to managers at the company, when she was facing dismissal she got an acquaintance to threaten Gubarev and demand €10,000 compensation. In a statement, the company also alleged Galkina regularly arrived at work drunk. She was fired in Nov. 2016, shortly before she passed the information about Webzilla to her school friend.
  • Galkina was interviewed by state-owned news agency RIA Novosti on Friday (another previous employer). Her answers were vague: “I’m not happy because I really didn’t expect this news. Of course, it’s complicated. That’s not the story. The story is that this isn’t quite right,” she said, adding that the published information was “untrue”.

Who is Olga Galkina?

  • According to her resume, which is publicly available, Galkina was born in the central Russian city of Perm. In the early 2000s she moved to Moscow where she became a parliament reporter for RIA Novosti, before heading the press service of the governor of Saratov. Later, she worked as a project manager at a PR agency, a press secretary for state agency Rostechnadzor, and then for a newspaper. One of her acquaintances told The Bell that Galkina was also employed by a Moscow construction outfit.
  • Another of The Bell’s sources alleged that, in 2015, Galkina supplied Moscow magazine The Village with a story credited to an “anonymous city hall bureaucrat”. The following year, Galkina was living in Cyprus and working as a PR manager for one of the company’s in XBT group, which includes Webzilla.
  • In PR circles Galkina is renowned for her LiveJournal (a blogging platform that was hugely popular in Russia in the 2000s). Galkina was part of a group of popular bloggers who were featured in articles on Lurkmore, the so-called “satirical Wikipedia”.

Why the world should care

The ‘Steele dossier’ is a clear and striking illustration of how international opinions of Russia are often based on strange sources. But the document raised alarm bells among Russian-speaking readers long before these latest details emerged. For example, it’s hard to imagine a self-respecting Russian media outlet treating pro-government muckraking newspaper Komsomolskaya Pravda as a reliable source — but it is actively cited by Steele. All this does not, of course, mean there was no Russian interference in the 2016 U.S. presidential election.