Veteran U.S. private equity investor detained in Moscow amid business dispute

Hello! This week our top story is Friday’s breaking news: the detention on fraud charges of U.S. citizen Michael Calvey, one of the most well known private equity investors in Russia. We also take a look at what looks like a new round of U.S. sanctions, a ‘feminist’ ad campaign that badly backfired, and why a leaked video of top Russian officials carousing on a private jet is raising eyebrows.  

Veteran U.S. private equity investor detained in Moscow amid business dispute

What happened

The detention of Michael Calvey in Moscow under extremely questionable charges is potentially a huge blow to the Russian economy. Calvey is the founder of Baring Vostok, one of the largest Russia-focused foreign investment funds. The criminal case is the result of a conflict between Baring’s shareholders and Artem Avetisyan, an executive at a state-owned investment agency who is very well connected to the Russian security services.

Michael Calvey and another five top managers from Baring Vostok and Vostochny Express Bank, a bank the fund owns, were taken into custody on Friday. They are accused of stealing 2.5 billion rubles ($38 million) from Vostochny and face up to 10 years in prison. On Friday, a court arrested (Rus) all of the accused with the exception of Calvey. While he remains in detention, the decision whether to formally arrest Calvey was postponed after a hearing that took three hours and involved two breaks (often used to make telephone calls for direction in political cases). The court will make a decision about Calvey’s arrest on Monday.

What is the formal accusation? The complaint against the head of Baring Vostok was filed by Artem Avetisyan, the second major shareholder in Vostochny. Baring owns 52 percent of the bank’s shares, while Avetisyan has 32 percent. According to the investigators, PKB, a company owned by Baring, owed Vostochny approximately 2.5 billion rubles ($38 million). Calvey and five Baring top managers decided to transfer that debt to Vostochny. They convinced the bank’s other shareholders to accept a 59.9 percent stake in a company controlled by PKB, International Financial Technology Group, in exchange for the debt. Calvey and his colleagues said its assets were worth 3 billion rubles. According to investigators, the real value was 600,000 rubles.

Calvey denies this version of events and said he believes the real reason for his arrest is a corporate conflict with Avetisyan, who the fund suspects of fraud and had begun court proceedings against in the London Court of International Arbitration. Calvey believes his accusers have two motives: to have the charges in the London court withdrawn and to prevent Avetisyan’s stake in Vostochny from being diluted by a planned share issue.

What is the conflict really about? Baring Vostok and Avetisyan became partners in early 2017: Vostochny, owned by Baring, merged with Avetisyan’s Uniastrum bank. Both banks had financial problems, but Avetisyan, who held a senior post in a state investment agency, offered a solution: merge Vostochny with state-owned MSP bank, which was created for SME lending. He suggested this idea to President Vladimir Putin and initially received approval, but in the end the government rejected the plan. After that, Baring and Avetisyan were left with the large, troubled Vostochny, which was facing intervention by the regulator. In order to stave off disaster, Vostochny looked to issue 5 billion rubles worth of additional shares in early 2018. But Avetisyan didn’t have the money to buy the share issue, and Baring didn’t want to waste money on a bank it had been trying to get rid of for years. In January 2019, the bank’s shareholders promised the Central Bank they would buy the additional shares by April.

Who is backing Avetisyan? Avetisyan sits on the management board of the Agency for Strategic Initiatives, an investment vehicle set-up on President Vladimir Putin’s orders (Putin himself heads its supervisory board). Moreover, Avetisyan has excellent ties to senior security officials. In particular, he is on good terms with Dmitry Patrushev, the son of the former head of the FSB and now Secretary of Russia’s Security Council, Nikolai Patrushev, two sources told The Bell. The investigation into Calvey was led by the FSB.

What will happen next? The Bell’s financial market sources believe Baring Vostok will fight back. “They [Baring] have been working in the Russian market for so long that they understand perfectly how everything works here. They have emerged from very difficult situations in the past without losing their assets and without scandal, and Russian government officials know them very well,” said one senior investment banker. In addition to professional managers, Baring have several influential backers, including some in the security services. For example, astronaut Aleksei Leonov is Baring’s head of government relations. In 1965, Leonov was the first person ever to spacewalk: Russian officials would have a hard time refusing him.

Why the world should care?

It is unlikely that the detention of Calvey (a U.S. citizen) is a response to the new U.S. sanctions bill, and the scandal is unlikely to worsen relations between Moscow and Washington. Calvey’s detention is, above all, bad news for Russian business and the Russian economy: photos of the most successful American banker in Russia in handcuffs will keep his colleagues away from the Russian market. All of this is yet another confirmation that no foreign sanctions hurt Russia as much as its own internal conflicts and apparent disregard for its investment climate.

Russian officials say they aren’t afraid of new U.S. sanctions

What happened

A three month ‘sanctions breather’ for the Russian market is over. A new sanctions bill introduced to the U.S. Congress by Senators Menendez and Graham doesn’t differ from an earlier version, but it caused the ruble to fall and led to some gloomy pronouncements by economists. But the Russian officials who spoke with The Bell said they were not afraid.

• The Bell was the first Russian publication to see the full text of the new bill, DASKA 2019, and it was clear that there are no serious additions to the 2018 version.
• The only significant change is the addition of a ban on investment in Russian LNG production projects abroad, but Russian companies don’t have any such projects at the moment. The other important difference is that a list of Russian state-owned banks, which were targeted for sanctions, has disappeared. Now the bill suggests including only those banks that provided support for Russian interference in democratic processes or elections abroad — and it suggests that the U.S. president should determine which banks fall are included.
• Russian officials have said publicly that sanctions are unpleasant, but that the country is ready for them, and this tone doesn’t change in off-the-record conversations. “There is no fear,” one official responsible for the economy told The Bell. “A new round of sanctions is unavoidable: why fight against uncertainty?”. There is an understanding that anti-Russian rhetoric will grow as the next U.S. presidential election draws closer, but even now, the rhetoric around sanctions looks like hot air, he added.

Why the world should care

Officials have some grounds for confidence: as The Bell explained last week, the Russian economy is managing quite well despite existing sanctions. But the most unpleasant thing is the uncertainty. Russian media interpreted (Rus) the disappearance of the list of banks from the new bill as an easing of the U.S. position. But the state-owned ratings agency AKRA saw it as more hawkish: now limitations can, in theory, be placed on absolutely any Russian bank.

‘Sit on my face’ – how Reebok misjudged a Russian ad campaign

What happened

Russians on social media have been obsessed this week by Reebok Russia’s ‘feminist’ ad. When the sports brand launched a global campaign entitled #bemorehuman, the Russian office came up with its own campaign which roughly translates to #notinanyframe. The idea of fighting gender stereotypes was the same in both. But, instead of slogans like “don’t apologize for your strength”, the Russian campaign called for women to “get off the needle of male approval, and sit on a man’s face.” Hours after the ads appeared, Reebok deleted some of the photos and said the content had contravened its social media policy.

• Critics of the campaign called it vulgar, and were perplexed about the relationship between sport and sex. They also saw the call to “sit on a man’s face” as a rape fantasy. Feminists, many of whom were also unhappy with the ad, said sexual domination was a bizarre way of rejecting a desire for male approval.
• Many were puzzled about how any of this was possible in an international company like Reebok. Alexander Golofast, the brand’s former marketing director in Russia (who quit amid the scandal) told The Bell that they didn’t test the ad on focus groups and came up with it in a hurry. The author of the slogan which upset social media users most of all, Zalina Marshenkulova, runs her own feminist Telegram channel (a sort of micro blog) called Female Power, which has 25,000 subscribers and is known for its dark humor. Golofast asked her to come up with slogans for the campaign, and to pose for photos: the idea was to freshen up the company’s plain, vanilla logo. As Marshenkulova is also the managing director of an ad agency, her agency handled the project. A source familiar with the details of the agreement told The Bell, Reebok’s Russian divisions spent $223,000 on its #bemorehuman campaign.
• Reebok’s Russia head was informed well in advance about the campaign, according to Golofast. However, after criticism on social media, management demanded that everything be deleted. Moreover, it turned out that Reebok’s head office wasn’t aware of its Russian division’s interpretation of the campaign.
• It’s unclear if the controversial ads actually worked. On Russian social media they were mentioned more than 100,000 times. The phrase about “the needle of male approval” became a meme: other brands suggested, instead, sitting on a truck or a flight to Vienna, while KFC said it’s chicken nugget burger is “so big that it doesn’t fit in any frame”.

Why the world should care

This drama is good evidence that feminism is a difficult topic for Russian society. While this ad caused a fuss, there are many, many crude ads with sexual messages: LG sells vacuum cleaners with the slogan “I’ll suck for a kopeck” and sushi is promoted with the phrase “take it in the mouth”. This campaign is also an interesting example of the freedom enjoyed by the Russian outfits of large international firms.

Just for fun? A video of drunken Russian officials is leaked online

What happened

A video has appeared in which senior government officials are drunk on board a private jet and singing a popular Russian ballad, ‘Oh, my fate, my fate’, by folk singer Nadezhda Kadysheva. The video includes former deputy prime minister Arkady Dvorkovich, former agriculture minister Alexander Tkachev, Prime Minister Dmitry Medvedev’s former press secretary, Natalya Timakova, as well as the former head of government protocol, Marina Yentaltseva. The Bell spoke with a source who thought the video was filmed about three years ago, when all of those on camera still had senior government positions.

• It is unclear whose private jet is shown. According to the property and income declarations that all officials are required to submit, none of the four officials has a private jet. Dvorkovich said in 2011 that he “flies commercial” and sometimes rents private jets for which he pays for himself. After the video was published, two sources close to Dvorkovich told The Bell that he uses private jets affiliated with Gazprom companies. It’s unclear how the other officials in the video normally fly.
• “There is nothing in it to be ashamed of, most importantly, it doesn’t break any rules,” said President Vladimir Putin’s press secretary, Dmitry Peskov, when asked about the clip. It’s obviously not forbidden to have fun in Russia – and officials are no exception. But if the private jet belonged to one of them and he/she hadn’t declared it, they should be fined (Rus) the cost of the jet. If it was owned by someone else, for example a businessman, one could make the case that it was a bribe.
• Perhaps the more interesting question is why it was leaked now. On Wednesday morning, the FSB and the tax police carried out searches at dozens of major grain companies that are suspected of tax evasion. Dvorkovich was in charge of the grain market when he was deputy prime minister and, on the video, he jokingly suggests a toast to the “agrarian lobby”. On the same day, state-owned bank VTB took ownership of 49% of the shares of Russia’s largest grain company, which formerly belonged to Medvedev’s college buddy Ziyavudin Magomedov, who was arrested in 2018. It is believed Magomedov’s arrest cost Dvorkovich his government position (he’s now head of FIDE, the World Chess federation)

Why the world should care

These sort of clips don’t just appear in Russia. Look at the recent video of U.S. Congresswoman Alexandria Ocasio-Cortez showing her dancing as a teenager. While Republicans were quick to criticize, Ocasio-Cortez was not dancing on a private jet and it was long before she became an elected official. Really, it’s difficult not to agree with Peskov: officials are people too and they like to enjoy themselves. Just don’t ask too many questions about the private jet: and don’t expect the four Russians to do an ironic reprise like Ocasio-Cortez.

Peter Mironenko

Anastasia Stognei contributed to this newsletter. Translation by Tanja Maier, editing by Howard Amos.