Michael Calvey, the founder of Baring Vostok, Russia’s biggest and most successful private equity fund, and often referred to as the most famous fund manager in Russia, was arrested on February 14, according to reports. 

Baring Vostok confirmed in a statement that "four employees were detained". Russian media reported that Vladimir Putin was not aware of Calvey’s detention.

US citizen Calvey started his career in Russia in 1994 with the European Bank for Reconstruction and Development (EBRD) and then moved on to setting up Barings. His fund has returned huge profits for its investors with a string of “home runs,” as Calvey has described them to bne IntelliNews over the years in a string of interviews.

Late on February 15 Barings released a statement: “Baring Vostok believes that the detention of its employees and the charges that have been brought are a result of a conflict with other shareholders of Vostochniy Bank. We have full confidence in the legality of our employees' actions and will vigorously defend their rights. Baring Vostok's activities in the Russian Federation are and have been fully compliant with all applicable laws.”

Hard blow
The arrest of Calvey will be a hard blow to Russia’s already extremely fragile investment climate as Barings is seen as squeaky clean and has always managed to stay above politics in its investments. Moreover, given that Calvey is one of the most experienced foreign fund managers working in Russia, the arrest will unsettle those few Russia-orientated international investors still putting their money to work in Russia.

Calvey has been detained under a warrant issued by the Moscow Basmanny regional court as part of a case involving charges under Part 4 of Article 159 of the Criminal Code of Russia. It covers fraud committed by an organised group or on a large scale, the court said in a statement on its website.

Prosecutors have accused the defendants of embezzling RUB2.5bn ($37.5mn) by persuading Orient Express Bank (OEB, aka Vostochny bank) shareholders to approve a share sale at an unrealistically low price.

A defence lawyer told Interfax that "the criminal case is based on materials provided by the [Federal Security Service]".

The court said that the issue of his detention will be reviewed on February 15. The press secretary of Basmanny Court, Yunona Tsareva, told RBC that Calvey has already been taken to the courthouse.

Calvey made a brief statement, released by the court, which stated: "The actions of law enforcement agencies are not directly related to the activities of Baring Vostok and other portfolio companies."

The court has also issued orders for the detention of other Baring managers including Vahan Abgaryan, Philip Delpal and investment director Ivan Zyuzin. Warrants have also been put out by the court for the former chairman of Vostochny bank and advisor to the chairman of the board of Latvian bank Norvik Bank (recently renamed PNB Banka) Alexey Kordichev, and the general director of private joint-stock company PKB Maxim Vladimirov. They have all been detained, according to RBC.

Battle to control Orient Express Bank
While details of the case were still emerging, RBC reported that the arrests are linked to a commercial dispute between the shareholders of OEB, which includes Barings and Russian banking wunderkind Igor Kim.

The small regional specialist was making inroads into competing with the state-owned retail behemoth Sberbank, founder and CEO of OEB Sergei Vlasov told bne IntelliNews in an exclusive interview (“Orient Express Bank building from the bottom up”) published in September 2012, shortly after the bank was set up.

Amongst OEB’s other shareholders at the time was the World Bank's commercial arm, the IFC, which owns 13.9%, and Kim, who is from Siberia and specialises in regional banking epitomised by his Ursa bank. His first ever interview with the international press was with a bne IntelliNews correspondent. Ursa was eventually merged with commercial bank leader MDM Bank and held an IPO.

Kim brought Barings into OEB as an early investor that eventually faltered following the collapse of oil prices in 2014 and the subsequent economic crisis.

By 2015 Kim exited the shareholding of OEB, leaving Barings, now the main shareholder, to deal with the headache of surging toxic debt and dangerously low capital levels. 

Baring Vostok boosted its stake to 74.4% from 67% following Kim's departure, according to a statement on the lender's website. The Kazakh-born ethic Korean was instrumental in attracting Calvey into the bank back in 2010, when Baring Vostok bought an initial 30% stake.

After the rise of his Ursa bank (that started life as Sibakadembank in the 90s) Kim became a wheeler-dealer in Russia’s banking world, acquiring and selling banks several times. He famously used Ursa to take over fellow banking wunderkind Andrey Melnichenko’s MDM Bank, which was the most successful of the second tier banks in the 90s. MDM Bank became one of Russia’s top commercial banks after the 1998 financial crisis by dint of not collapsing, unlike all the first tier banks. Kim merged Ursa and MDM, but the resulting bank was not a success and MDM Bank’s star has waned since.

Started over
Kim started over in 2009 and used Orient Express as a vehicle to acquire Morgan Stanley's mortgage bank and Santander's consumer lending unit in 2010. He also acquired Barclays' Russian retail business, after it gave up on a Russian retail banking adventure, and renamed it back to Expobank. By the time of his departure from Orient Express, Kim’s stake was believed to have shrunk to as little as 3% in OEB, according to bne IntelliNews’ reporting at the time.

However, it seems that shareholders are unsatisfied with the distribution of shares following a capital injection early last year. In short the partners want Barings to give up control.

In early September, the Cypriot company Evison Holdings Ltd. filed a lawsuit against OEB, reported RBC. The partner of Baring Vostok, Andrei Kostyashkin, said then that the plaintiff had challenged the appointment of Vyacheslav Harutyunyan as acting chairman of the board of OEB.

In turn, Kommersant newspaper, citing sources, reported on a struggle for a controlling stake of the bank among the major shareholders, naming Baring Vostok and Finvision Holdings Ltd., which is owned by Artem Avetisyan. Kommersant’s sources claimed that the appointment of Harutyunyan, was a move by Avetisyan to take control.

Sources added that the source of the conflict was how the shares should be shared following a recapitalisation of the bank by the shareholders, which occurred at the start of 2018.

The arrests this week are believed to result from this dispute amongst the shareholders in OEB, which remains unresolved.

Doyen of private equity
Barings has long been the doyen of private equity investments in Russia and has scored dozens of home runs. Among the fund’s most famous investments was its acquisition of a stake in Russia’s internet power house Yandex in its very early days.

Barings invested $5m in Yandex as it was just getting going. It went on to become (and still is) Europe’s most valuable tech company following its IPO in May 2011, when it floated with a market capitalisation of over $11bn, Calvey told bne IntelliNews in an exclusive interview in October 2012 (“Baring Vostok raises fifth Russian private equity fund”).

A testament to the quality of the investment is the fact that Yandex is one of a handful of Russian stocks that have regained its pre-Crimea IPO price and is more valuable today than it has ever been.

Over the years Calvey has scored multiple star investments. Baring Vostock’s first investment was back in 1994 in FGI Wireless. It later became Vimpelcom, one of Russia’s four incumbent mobile phone operators.

In just 25 years, Baring Vostok has invested in dozens of companies. Among them are Russia’s biggest commercial TV station CTC Media, the Papa Jones pizza chain that IPO’d a few years ago, A5 pharmacy chain, leading private health care provider European Medical Center, and Russia’s first pure online bank Tinkoff Bank (which is another rare example of a stock subject to an IPO before Crimea that regained its listing valuation.)

Baring Vostok never speaks publicly about its performance, but Calvey points to its investment in Burren Energy as an example of a “home run”—the fund invested $27m in the company from 1995 to 2000 and made a return of about 15-times when it exited following an IPO on the London Stock Exchange in 2003. "If you are a global investor, China is so big you have to have a strategy for it, but not so for Russia: you don't have to be here," Calvey told bne IntelliNews. "Our investors don't invest in Russia for pedestrian returns."

Fresh blow to Russia’s image
Calvey’s arrest will deal a fresh blow to Russia’s already battered investment image. Earlier this week fellow former fund manager Bill Browder, who used to run Hermitage Capital Management until he fell foul of the Kremlin and had his visa pulled, testified to the UK Foreign Select Committee. During his remarks he claimed that it was impossible to do business in Russia without being shaken down because it is a fundamentally corrupt country.

Browder was the driving force behind the introduction of the Magnitsky legislation that has been adopted by several countries as a means to punish corrupt governments.

Browder’s comments were criticised by many people who have done business in Russia over the long term and reporters (bne IntelliNews reporters included) who argue that there are many examples of successful, large and profitable businesses in Russia that operate legitimately, and Barings would be a prime example.

While the details of the case being made against Barings are not clear yet, it seems that this case is simply a shareholders’ dispute and has nothing to do with corruption or the Kremlin. However, the optics are very bad. Given Calvey’s standing in the international investment community as the “smart guy on Russia” his arrest will shake non-resident investors, who will undoubtedly now see more Russia risk in their appraisals.

Common tactic
In addition, even if this is a mundane shareholders’ dispute, in the west at least it is unusual for fund managers to be arrested. Russia’s courts remain malleable and having opponents arrested by a court during a dispute remains a common tactic. The anti-corruption tsar and presidential Ombudsman for Business Boris Titov told bne IntelliNews that he believes that there are more than 100,000 business people in pre-trial detention in Russia on trumped up charges related to business disputes and corrupt officials.

Calvey's arrest will certainly shock the Moscow-based financial community as Calvey was well known and a well-liked veteran. 

Kirill Dmitriyev, head of Russia's sovereign wealth fund and probably the most powerful financier in Russia, was quoted by Reuters as saying that he would personally vouch for Calvey. He observed that Calvey and his team were highly professional and committed to ethical standards.