Russia’s Last American Investor: [ARRESTED]

Dear Money & Crisis Reader,

You’d have to be crazy to do business in Russia as an American.

As recently as 2013, the old Soviet stand-in imprisoned 100,000 of its own entrepreneurs for minor or, in many cases, non-existent crimes.

The vast majority of these folks were just struggling business people who ran afoul of Russia’s notoriously complex and corrupt legal system.

But for the past 30 years, one U.S. citizen has prided himself on being able to navigate that system. And he made billions for his clients in the process.

Michael Calvey is the founder of Moscow-based Baring Vostok, one of the last American-owned private equity fund managers in Russia.

His reputation as a meticulous, by-the-book businessman earned him the respect of officials inside the Kremlin and kept him well out of the eye of Russian authorities.

Until now.

The Kremlin Sends a Message to U.S. Investors

Over the weekend, Calvey was arrested by the Kremlin and thrown in a Moscow jail.

Reportedly, the 51-year-old Oklahoman will be facing charges of fraud over a deal that went bad. But, as with all business related matters in Russia, it’s not as cut and dry as it seems.

Baring Volstock is the go-to firm for investors in New York and London looking to invest in Russia. Calvey has a reputation for knowing how to play by the rules — both the law and the more difficult to navigate unwritten rules of doing business in Russia.

Baring Volstock has generated more than $2 billion in returns for its clients, by targeting low-profile companies out of the eye of the average investor. But it was Calvey’s hands-on approach, inspecting each of the companies on a granular level that kept the company out of hot water with the authorities.

Calvey was viewed by those inside and out of Russia as an industry insider. In essence, the poster boy for legitimate foreign business in Russia.

As Tom Adshead, chief operating officer of a Moscow based consultancy told Bloomberg: “We all view Baring as an example of a company that if you’re smart, do your research, play by the rules, you don’t need to worry about this kind of thing.”

This may have been true in the past. But that all changed this weekend.

The Crime

Russian prosecutors are accusing Calvey of conspiring to defraud Vostochny Bank, a Volstock Baring owned bank.

Now, the full details of the alleged crime have not been released to the public yet. But the timing of the allegations is suspicious.

Calvey has been in a long-running dispute with two of the bank’s minority shareholders, Artem Avetisyan and Sherzod Yusupov. And just a week before the U.S. citizen’s arrest, Yusupov filed a complaint with the FSB (the successor to the Soviet Union’s KGB).

The FSB has denied that the complaint had anything to do with Calvey’s arrest but that remains to be seen.

The Time

Calvey is now among 6,000 businessmen awaiting sentence in a Russian prison. But his arrest — and the manner in which this case is being processed — is of particular note.

The Kremlin didn’t have to put Calvey or his partners in jail.

They could have, and should have, prosecuted this case in a civil court. But they decided to pursue this case in a criminal court of law. And when the judge ruled to hold Calvey in custody for two months, it was clear they were sending a message.

For some perspective on just how big a deal this move is, we need to zoom out and look at the bigger picture for a moment.

Over the last decade, Russia has fallen back into the nasty habit of invading the Eastern European countries in its orbit.

Crimea. Georgia. Ukraine. Putin is hell-bent on rebuilding the old Soviet Union. And that makes foreign investors nervous.

Before Russia invaded Crimea, foreign investments were somewhere in the region of $79 billion. Last year, that number had fallen to just $1.9 billion.

Despite all this, Calvey never faltered in his support of Russian business. In an interview with the Financial Times of December 2018, he said he still saw investment opportunities.

You would think someone like Calvey would be valuable to the Kremlin. He’s squeaky clean, believes in the investment potential of Russian business, understands the system better than anyone, and is well liked by the Russian business community.

Influential Russian figures have already spoken out in Calvey’s defense, including the Kremlin’s own ombudsman who called the arrest an “illegal” act that “rocked the business community.”

But it doesn’t matter what Calvey did or didn’t do anymore. Moscow has decided to use his case to send foreign investors a message:

“We don’t need your money.”

Russia is putting up its walls. Shoring up its own economy. And preparing for something big.

Could we be looking at the rise of a new Soviet Union?

The evidence is becoming hard to ignore.

All the best,

Owen Sullivan
Editor, Money & Crisis

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