US fund manager Michael Calvey and his fund, leading Russia-based private equity fund Baring Vostok, have confirmed they reached a deal with former Russian partners in a corporate dispute over their joint investment Vostochny Bank, that is widely believed to have led to a criminal case and Calvey’s jailing.

“The Shareholders of Vostochny Bank have settled their corporate dispute,” the two sides said in a joint statement sent to bne IntelliNews by email. “IC Finvision Holdings (“IC Finvision”) and Evison Holdings Limited (“Evison”) (together the “Shareholders”) signed a settlement agreement (the “Settlement Agreement”) to the benefit of the Bank, its clients, depositors and creditors.”

The criminal case, as has been reported previously, is the result of a conflict between Baring’s shareholders and Artem Avetisyan, an executive at a state-owned investment agency and a shareholder in the bank, who is very well connected to the Russian security services. Finvision is a bank that was under Avetisyan and was used to take control of Vostochny via regional court decisions last year. Evison is a holding company used by Baring Vostok. bne IntelliNews was the first to report that talks between the two sides had begun on October 15.

However, things went wrong with its investment into Vostochny Bank, a regional specialist bank, after the fund fell out with its partners, the Russian investors in the bank. The dispute ended up in a London arbitration court, but the corporate conflict significantly escalated after the Russian partners used their government connections that resulted in a criminal case Baring Vostok and the arrest of US fund manager Michael Calvey on February 14, 2019.

Under the terms of the settlement signed yesterday all claims in Russian and foreign courts and all arbitrations will be withdrawn. The process may take approximately two months.

Baring Vostok brought an arbitration case against Avetisyan in London that ruled against the Russian partners and threaten to have their assets frozen. That provoked the actions in Russia as the Russian partners sought leverage to counter the London case. Avetisyan brought counter actions in far flung Russian regional courts that ruled in his favour, while criminal charges were brought against the Baring Vostok team, who were arrested.

Despite the settlement of the commercial part of the dispute, the agreement has no direct baring on the criminal case against Calvey and his colleagues who are charged with embezzlement. The agreement cannot stop the court case, which is a matter for the investigating authorities and not under the control of the corporate entities.

“The Settlement Agreement addresses all legal disputes and claims between the Shareholders including the arbitration matters but it is in no way concerned with the criminal case against former directors of Vostochny Bank,” the statement says.

Despite the settlement of the corporate dispute and the payment of the amount of alleged damages to the Russian partners by Baring Vostok, and without Baring admitting any guilt, the prosecutor has found reasons for the case to go to trial and the case will proceed, reports Kommersant.

While the statement did not specify the terms of the financial settlement that is part of the deal, the Russian partners claimed that Baring Vostok had embezzled RUB2.5bn ($31.8mn) and were seeking its return.  These claims were essentially disproven during the initial court hearings, but the judge refused to consider key documents that backed up Baring Vostok’s position.

In Russia once the wheels of justice start turning it is almost impossible to stop them. While it is widely believed that Avetisyan used his connections with the state to start the criminal investigation, even if this is true, once an investigation has been started it can not be stopped by fiat.

However, it seems likely that the courts will drop the case, or at least find the defendants guilty but suspend or defer a sentence in a face-saving decision for the Federal Security Service (FSB) that brought the charges. The case turns on the embezzlement of RUB2.5bn but if that money has now been paid by Baring Vostok to its Russian partners there is no embezzlement nor cause for the prosecution, making a positive outcome to the case much more likely.

Back to work

The partners at Baring Vostok have bitten the bullet. While they have maintained all along that they are in the right and were backed up by the London courts, in Russia it is rules of the game that count, not the rule of law.

The economy may have been hammered by the coronacrisis but Baring Vostok’s business is increasingly focused in the tech sector, where the economy is booming.

Baring Vostok was an investor into the Kazakh fintech company Kaspi.kz that has just pulled off a stunning $6.5bn IPO in London, allowing the fund to notch up yet another “home run” as Calvey described the funds more successful investments to bne IntelliNews in an interview. Other legendary investments include Tinkoff Bank, Russia’s only pure online bank, that IPO'd in London with a $1.1bn valuation and Baring Vostok was an early investor into Yandex, which floated in London with an $11bn valuation.

Calvey and several of his co-workers were arrested in February last year, although they were later released to house arrest, causing a major scandal that blacken Russia’s investment image. Baring Vostok is by far the most successful international fund working in Russia and has brought billions of dollars of private equity investment into the country.

Highly regarded and well liked in the Russia market, several senior Kremlin officials publically condemned Calvey’s arrest to no avail. The case was brought by the Federal Security Service (FSB) and Russian President Vladimir Putin was reluctant to rebuke the security services or to personally intervene in the case.

With the new economy booming in Russia, even if the real economy isn’t, Baring Vostok is keen to get back to work and would be happy to see the dispute with Avetisyan brought to an end and Calvey and his colleagues released from house arrest, where they have been for more than a year and a half.