Calvey conviction

The Bell

Hello! This week our top story is the conviction of private equity investor Michael Calvey on embezzlement charges in a long-running legal case that has stymied Russia’s investment climate. We also look at the collapse of the Finico pyramid scheme and the top tech company that used AI to fire a third of its staff


Foreign investment test case ends with Calvey guilty verdict

More than two and a half years after the arrest of Michael Calvey — the founder of Russia-focused private equity fund Baring Vostok — one of the most symbolic legal cases for Russia’s investment climate has finally come to an end. A judge found Calvey guilty Friday, handing him a five-and-a-half-year suspended sentence.

  • It took two full days for the judge to read out the verdict in the Baring Vostok case — and he only finished at 10:40 p.m. on Friday. In the end, Calvey was convicted of embezzling 2.5 billion rubles from Vostochny Bank and given a suspended sentence of five-and-a-half years. Fellow defendants from Baring Vostok also received suspended sentences.
  • Throughout the proceedings, Calvey maintained his innocence. “Against the background of most of these cases, getting a suspended sentence is almost a victory,” he said in comments Friday referring to Russia’s high conviction rate. “But on the other hand, it is outrageous to be convicted of a crime that never took place. The accusation of embezzlement is deeply offensive to me as a professional investor who has earned a reputation for honesty over 25 years of work. I consider this verdict to be deeply unjust and regrettable.”
  • A mediator in the conflict between Calvey and Artyom Avetisyan, Baring Vostok’s ex-partner in Vostochny Bank told that the outcome had been agreed when Calvey made amends of the ‘damages’ he was supposed to have caused. “To the best of my knowledge, the applicant [Avetisyan] also hopes for a suspended sentence. At the very least, he has said that he has no further complaints and that he considers the conflict settled,” the source said. Avetisyan’s only public comments on the Baring Vostok case were back in 2019.
  • Financial compensation for the 2.5 billion rubles allegedly embezzled by Calvey and his colleagues was agreed as a part of a settlement between Baring Vostok and Avetisyan’s Finvision company last October.

How the case unfolded

  • Calvey and his co-defendants were arrested on February 15, 2019. Calvey spent almost two months in custody before being moved to house arrest. Over the following year, the other defendants were also transferred to house arrest.
  • Many top business figures quickly spoke out publicly about Calvey’s good reputation and the damaging impact of the Baring Vostok case on Russia’s investment climate. Among others, calls for Calvey’s release came from the head of Sberbank, German Gref; 1990s privatization mastermind Anatoly Chubais; and the head of the Russian Direct Investment Fund, Kirill Dmitriev, who also put up a surety before the court on Calvey’s behalf.
  • The case arose from a 2016 conflict over Vostochny Bank, Russia’s 39th largest bank, following a merger of Baring Vostok’s Vostochny Express Bank and Avetisyan’s Uniastrum Bank. That deal gave Baring a 52 percent stake in the merged entity, while Avetisyan and his partners held 40 percent with an option for another 9.9 percent.
  • When that option was due, Baring refused to honor it. In court, Calvey said there was evidence Uniastrum had carried out asset-stripping prior to the merger.
  • The crux of the case was a transaction in which Vostochny Bank accepted shares onto its balance sheet from Luxembourg-based IFTG. These shares were a repayment of a loan issued by the First Collection Bureau, part of Baring Vostok. According to Baring Vostok, the market value of the shares was 4.5 billion rubles; the plaintiffs insisted the shares were worth just 600,000 rubes.
  • After Calvey’s arrest, Baring Vostok lost a separate Russian court case over Vostochny Bank and was obliged to relinquish control. Earlier this year, the bank was sold to Sergei Khotimsky’s Sovcombank.

Why the world should care There are many reasons for the woeful state of Russia’s investment climate and it’s hard to assess the exact impact of the prosecution of Calvey, a renowned investor who has channeled billions of dollars into Russia and given a start to corporate giants like Yandex and online marketplace Ozon. But the threat of jail time resulting from a corporate conflict will likely deter investors for many years to come. 


Russians lose millions as Finico pyramid scheme collapses

Many associate giant financial pyramid schemes in Russia with the 1990s and the financial Wild West that followed the end of the Soviet Union. But they are still alive and well today. The last few weeks saw the final unravelling of the grandiose Finiko pyramid scheme and the arrest of its founder, Kirill Doronin. The scheme, which launched in 2018, swindled about $100 million from Russians who took part.

How Finiko functioned

On one of its sites, Finiko described itself as an “automated profit-generation system”. Investors had three options. In one, you invested a sum over $1,000 on the promise of up to 30 percent a month in profit (the initial investment threshold later increased sharply). In another, Finiko promised to pay off a debt, loan or mortgage within 10 months if you paid 35 percent of the value of the debt to Finiko. In a third option, Finiko offered to purchase a house or car for 35 percent of the total cost.

Money could be invested in Finiko using Bitcoin or by purchasing Tether — the company’s in-house currency — which traded at a value determined by Finiko. As always with a pyramid scheme, some clients made money off the investments of later clients. But returns were increasingly delayed and all payments ceased in June.

Who was behind it?

Dorinin was the face of Finiko and heavily promoted the company on his social media accounts. His charisma played a big role in the scheme’s rapid expansion, according to a source at the Central Bank. “He looks trustworthy, he’s well-dressed, and he has an athletic physique,” the source said, adding that women were a particular target. A store owner from Krasnoyarsk told The Bell that even when it was clear the company was struggling, Doronin’s YouTube performances convinced her everything would be OK.

The other founder of Finico was Eduard Sabirov, an ex-business partner of former Communications Minister Nikolai Nikiforov (they worked together on the Innopolis project — a state-funded attempt to build a Russian Silicon Valley). Back then, Nikiforov said he had “no doubts about Sabirov’s business reputation”. The third key figure in Finiko was the unusually named Zygmunt Zygmuntovich. 

The three founders blame each other for the collapse of Finiko. Doronin has said his partners deceived him, while Sabirov claimed money disappeared in the accounts of brokers. Before his arrest last month, Doronin announced he was going to move to Turkey. The whereabouts of Sabirov and Zygmuntovich are unknown.

Who invested in Finiko?

A Finiko manager told a local newspaper late last year that there were more than 200,000 investors (but this figure is difficult to verify). By earlier this summer, popular Russian search engine Yandex was recording almost half a million monthly questions about Finiko. That’s significantly more than the Cashberry pyramid scheme, which fell apart a few years ago, resulting in $50 million of losses. 

How it came to the attention of the authorities

Officials first began to take notice of Finiko in spring 2020, according to The Bell’s source at the Central Bank. By the summer, the regulator had passed details to law enforcement. A criminal case was eventually opened against the founders of Finico in December, although even this did not deter new investors. 

Where did Finiko come from

Finiko was set-up in Tatarstan, an oil-rich, majority Muslim region in Central Russia. Pyramid schemes in Tatarstan are common because financial literacy is low, according to a source familiar with the Finiko investigation. Many locals do not trust banks, and are inclined to hand over their money to anyone who promises them mountains of gold.

Why the world should care The financial background to Finico is a multi-year fall in real wages, poverty and a lack of options for savers. Just as the notorious MMM pyramid scheme in the 1990s became a symbol of the post-Soviet period, so Finico tells us something about contemporary Russian politics and society.  


​​Top tech company uses AI to fire 30% of workforce

 Russian tech company Xsolla sparked intense debate Wednesday when it abruptly made 147 employees redundant using an algorithm appraisal system. Founder Alexander Agapitov added fuel to the fire by an aggressive email informing staff of his decision, while posting on Facebook that they should “get the fuck outta here”. 

  • It’s not how redundancies usually happen. But 147 of online gaming payments company Xsolla’s approximately 500 employees received a colorful email Wednesday morning from Agapitov informing them they were being cut loose because a “big data team” had assessed them as “non-involved and unproductive”. Agapitov said an AI system (of which staff were unaware) had determined the 147 people to be culled were contributing less to internal company platforms and meetings, spending less time on their gmail accounts — and were abusing a remote working system.
  • Agapitov’s email was quickly leaked, prompting hundreds of posts on social media and a wave of news coverage. In an attempt to explain himself and calm the media storm, Agapitov called a press conference — but to little avail. Some commentators suggested Xsolla’s reputation was irreversibly damaged, others that it would find it difficult to ever again attract quality staff. That evening Agapitov posted that he was urgently seeking a PR manager, and then followed up with another Facebook post a few minutes later, doubling down on his original position. It said: “Knuckle the fuck down, or get the fuck outta here”.
  • Despite this week’s upheavals, Xsolla is one of the major success stories of the Russian tech industry. Providing an in-game payments service for online gamers, it was founded 15 years ago by Agapitov — himself a keen gamer — in the city of Perm (680 miles east of Moscow). Last year, research by Goldman Sachs and Bank of America suggested Xsolla could be worth as much as $3 billion. It currently has offices in Perm and Los Angeles, as well as a few employees in South Korea (although most of the redundancies this week were in Russia).
  • In several interviews Friday, Agapitov made another attempt to explain himself. “Of course, when I allow myself to indulge in such misbehavior it frightens people and they feel vulnerable,” he told independent outlet Meduza. “I understand only too well that emotional intelligence is something with which I struggle.” Agapitov said he decided to reduce Xsolla’s payroll because the company’s growth rate had fallen below his target of an annual 40 percent.

Why the world should care The tech scene is one of the most dynamic areas of Russia’s economy. But success, rapid growth and an over-reliance on charismatic CEOs brings reputational risk.

Support The Bell!

The Bell's Newsletter

An inside look at the Russian economy and politics. Exclusively in your inbox every week.