Behind the scenes of the operation to jail the top managers of Baring Vostok

The Bell

The arrest of Michael Calvey, the founder of private equity firm Baring Vostok has shaken Russia’s investment community. The Bell explains how the management of the country’s largest foreign investment fund ended up behind bars


  • The real reason: Baring Vostok’s conflict over Vostochny Express Bank with co-owner Artem Avetisyan;
  • Connections: Avetisyan is friends with security official Nikolai Patrushev’s son;

Baring Vostok founder and managing partner, Michael Calvey. Photo: Moskva photo agency / Sergey Vedyashkin

Michael Calvey and another five top managers from Baring Vostok and Vostochny Express Bank, a bank the fund owns, were detained on Friday. They are accused of stealing 2.5 billion rubles ($38 million) from Vostochny, and face up to 10 years in prison. Calvey was formally arrested on Saturday, the four others on Friday.

The formal accusation

The complaint against Calvey and his colleagues was filed by Vostochny shareholder Shevzod Yusupov, the long-time partner of the bank’s second largest shareholder, Avetisyan (he owns 32 percent of the bank’s shares while Baring Vostok controls 52 percent). Vostochny’s shareholders have been in conflict since 2017. The reason for the fight is an additional share issue valued at 5 billion rubles ($76 million), which was necessary to comply with Central Bank rules. Baring didn’t want to buy the share issue and increase its stake in the bank, while Avetisyan would have liked to gain control, but didn’t have enough money, Kommersant newspaper reported.

Investigators have said that a company owned by Calvey, the First Collection Bureau, owed Vostochny about 2.5 billion rubles. Calvey and the other top managers now under arrest decided to resolve this against the interests of the bank. So they held a shareholders meeting and at which it was decided to give 59.9 percent of the shares in a company owned by First Collection Bureau, the Luxembourg-registered International Financial Technology Group (IFTG), in exchange for the First Collection Bureau’s debt. At the meeting, Calvey and his colleagues said IFTG had assets worth 3 billion rubles, but, according to investigators, the actual value of the assets was 600,000 rubles.

In court, Calvey said that the investigators’ version “was almost totally untrue” and that the deal had been approved by all the unaffiliated shareholders of both companies, including Yusupov. Calvey explained that the real reason for the charges is a shareholder conflict between Baring and Yusupov’s partner, Avetisyan, against whom the fund recently filed a case in the London Court of International Arbitration, accusing him of fraud. He believes the accusers have two motives: to force him to withdraw his lawsuit in London and to prevent the dilution of Avetisyan’s stake in Vostochny.

The investigators raised doubts about IFTG’s financial health, but Open Media has seen some of the company’s documents. In IFTG’s 2016 financial statements (just before the deal), audited by KPMG, the company had net assets of $37 million. According to the Central Bank rate on 31 December 2016 this would have been equal to 2.2 billion rubles. IFTG also had cash of $4.8 million. There are no obvious reasons for a significant worsening of the company’s financial health before the Vostochny deal.

Baring Vostok finance director, French national Philippe Delpale. Photo: Moskva photo agency / Sergey Vedyashkin

The real reason for the conflict

Baring Vostok and Avetisyan became partners in early 2017 after two problematic banks were merged: Baring’s Vostochny and Avetisyan’s Uniastrum (the combined entity is now ranked the 32nd biggest bank in Russia). At that point, Baring had already spent two years looking (Rus) for a buyer for Vostochny, whose controlling shareholders were obliged to buy an additional share issue or face intervention from the regulator. Avetisyan’s idea (Rus) was to create a bank to support and lend to SMEs by merging Uniastrum and Vostochny with state-owned MSP bank. A fourth participant was to be Credit Europe Bank, which Avetisyan wanted to buy.

In the summer of 2016, Avetisyan presented (Rus) his idea in a letter to President Vladimir Putin, who, according to Interfax, gave formal approval. In January 2017, Uniastrum and Vostochny merged. But the plan for further mergers were shelved as it ran up against the objections of shareholders and senior officials.

As a result, Baring and Avetisyan found themselves co-owners of  a problematic (Rus) bank without hope of a government bailout. Moreover, the merger with Uniastrum had had a negative impact on Vostochny’s finances. In November 2017, Fitch lowered (Rus) the merged bank’s rating to default, calculating that Uniastrum had 33.9 billion rubles of potentially bad assets, including risky corporate loans.

In early 2018, the deputy chairman of the Vostochny’s management board, Dmitry Levin, initiated an additional share issue worth 5 billion rubles. However, Avetisyan didn’t have enough money to buy, and the issue would, in any case, dilute his stake. Baring, on the other hand, had money. But the fund reportedly didn’t want to spend it on increasing its stake in a bank that it had spent the last three years trying to get rid of. By this time, the shareholders were in open conflict.

After a Central Bank inspection ended in December, the situation was in deadlock. Vostochny was ordered to increase its reserves by almost 20 billion rubles, which was impossible without an additional share issue. According to Kommersant, Baring and Avetisyan agreed — at a meeting with Central Bank Governor Elvira Nabiullina in January — that the share issue would be delayed to April so Avetisyan could participate. If he didn’t, Baring promised to buy the new share issue in its entirety.

Baring Vostok partner, Vagan Abgaryan. Photo: Moskva photo agency / Sergey Vedyashkin

Who might be supporting Avetisyan?

Avetisyan has plenty of ways of leveraging the security services, according to an acquiantance. He is, among other things, close to Dmitry Patrushev, the son of Nikolai Patrushev, the former head of the FSB and secretary of the influential Security Council, a source close to Baring’s management and a top official told The Bell.  

Until last year, Dmitry Patrushev ran state-owned bank Rosselkhozbank and he is now Minister of Agriculture. Avetisyan and Patrushev served together for several years on Rosselkhozbank’s supervisory board and one source told The Bell that Patrushev is actively helping Avetisyan. If the FSB played a role in the investigation, then Avetisyan’s friendship with Patrushev could have been key, suggested one federal official. It was not possible to reach Petrushev’s assistant and Avetisyan and Yusupov have not spoken to the media.

While Avetisyan sits on a supervisory board chaired by Putin, the issue is unlikely to have been raised at the level of the president, one former official speculated. Putin’s spokesman Dmitry Peskov said on Friday that Putin “had been informed” of the arrests.

The general director of PKB, Mikhail Vladimirov. Photo: Moskva photo agency / Sergey Vedyashkin

Why Baring Vostok is so important

Baring Vostok Capital Partners is one of the largest and oldest foreign investment funds working in Russia. It was founded by Calvey, a former EBRD and Salomon Brothers banker, in 1994.

Calvey’s team are no amateurs. “They have been working in the Russian market for so long that they understand perfectly how everything works,” said one senior investment banker. Baring Vostok has several top officials on its books to help with lobbying, including ex-security service employees and Soviet astronaut Aleksei Leonov, explained one source. “They have emerged in the past from very difficult situations without losing their assets and without scandal, the Russian government knows them very well,” the source said explained. Fund co-head Aleksei Kalinin told Kommersant in 2010 that Leonov helped defend Baring against several ‘raider’ attacks.

Over 25 years, Baring has raised over $3.7 billion for six Russian investment funds. But their most successful investment was Yandex: in 2000, they bought 35 percent of the company for $5.28 million — later selling it for more than $1 billion. Other Baring portfolio companies include Vimpelcom, CTC Media, Avito, Tinkoff Bank and Vkusvill.

Many financiers have spoken out in defense of Baring. “I believe Baring is one of the best and most transparent foreign investors operating in the Russian market,” former Morgan Stanley Russia head, Rair Simonyan, told The Bell. “Michael attracted billions of dollars into the Russian economy and has an impeccable business reputation. He has one of the world’s leading investment companies. It is imperative that the consequences for the market as a result of such actions be taken into consideration,” said Ruben Vardanyan, ex-owner of the leading Russian investment bank Troika Dialog. The head of state-owned Sberbank, German Gref, announced he has known Calvey for a long time “as a good and honest person, who has done a lot to attract investment to the country”. RDIF head, Kirill Dmitriev, said he was personally willing to vouch for Calvey.

Advisor to the management board of Norvik Bank, Alexey Kordichev. Photo: Moskva photo agency / Sergey Vedyashkin

What is Artem Avetisyan known for?

In the mid 1990s, while still a student, Artem Avetisyan founded NEO Center, which in 2000 became the largest Russin valuations company. In 2011, Avetisyan went to work for the newly created Agency for Strategic Initiatives (ASI) as the head of New Business. At the same time, he began his own banking business: at first, he bought a small bank, Regional Credit, from which he created Modulebank and then, in 2015, he bought (Rus) Uniastrum.

Avetisyan was “very involved in the projects of the ASI” and “the government and the presidential administration know him,” one federal official told Forbes in 2017. The magazine also noted that Avetisyan is very good at making friends with relatives of influential people, including the sons of German Gref and the brother of former deputy prime minister, Arkady Dvorkovich. Perhaps ironically, at ASI, Avetisyan was involved in projects to reduce bureaucracy and improve Russia’s investment climate.

Irina Malkova, Peter Mironenko, Anastasia Stognei, Irina Pankratova, Alexandra Prokopenko. Translation by Tanja Maier. Editing by Howard Amos.

Financial journalists from Frank Media contributed to this reporting.

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