The jailing of a US financier in Russia over an alleged $38 million fraud is spooking Western investors in the country

Michael CalveyFounder of the Baring Vostok private equity group Michael Calvey, who was detained on suspicion of fraud, reacts inside a defendants' cage as he attends a court hearing in Moscow, Russia February 15, 2019.Reuters/Tatyana Makeyeva

  • The arrest of American financier Michael Calvey in Russia has investors worried about the future of Western investment in the country.
  • Calvey, the founder of Baring Vostok Capital Partners, was arrested in relation to an alleged $38 million fraud against Vostochny Bank.
  • If found guilty, he faces as long as 10 years in prison.
  • However, investors and senior Russian figures have expressed shock at the charges, saying he is known for "his cautious approach and commitment to the market."

American financier Michael Calvey was arrested in Russia last week over an alleged $38 million fraud, and his detainment in jail - set to extend until April 13 - has investors worried about the future of Western investment in the country.

Oklahoma-born Calvey - who founded Baring Vostok Capital Partners, a private equity firm that claims to have raised close to $4 billion - was arrested Thursday, with Russian prosecutors alleging he was part of a "criminal gang" that defrauded Vostochny Bank out of 2.5 billion rubles ($38 million).

He was arrested alongside Vagan Abgaryan, Phillipe Delpal, and Ivan Zyuzin, all partners of Baring Vostok, as well as Alexei Kordichev, the former CEO of Vostochniy Bank, and Maxim Vladimirov, who runs a debt collection firm prosecutors allege helped perpetrate the alleged fraud.

Baring Vostok owns a more than 50% stake in Vostochny Bank, and authorities allege that Delpal, who also sits on Vostochny's board, approved the alleged fraud.

Calvey now faces up to 10 years in Russian jail if found guilty of the alleged "large-scale fraud."

Calvey denies all the allegations, and pleaded not guilty in a court hearing on Friday, saying in a statement: "The claims being made against the management of Baring Vostok by Mr Yusupov regarding Vostochniy Bank and IFTG have no merit."

Other investors and senior Russian figures have expressed shock at the charges, and suggesting that Calvey's arrest could lead Western investors to further slow the pace of investment into Russia. His jailing will remind some of the imprisonment of Sergei Magnitsky, the lawyer representing investment advisory firm Hermitage Capital Management (run by American-British founder Bill Browder), who was jailed in 2008 after he discovered an alleged tax fraud by Russian government officials. Magnitisky was later beaten to death in prison.

According to Bloomberg, Calvey is known for "his cautious approach and commitment to the market," and news of his arrest "triggered the worst outflow since November from the biggest exchange-traded fund that invests in Russia."

"Calvey is very well respected within the industry," said Julian Rimmer, a trader at Investec who has worked with Baring Vostok told Bloomberg.

"He's been operating in Russia for a long time and is viewed as something of an insider, or at least someone of whom the regime clearly approves," he added.

Outflows could deepen, with Tom Adshead, research director at Macro Advisory warning that possible Western investors in Russia are likely to be "very cautious" in future.

"If someone who knows Russia so well can fall into this situation, then obviously less experienced investors, which includes everyone else, are going to be very cautious," Adshead told the Financial Times.

There is already clear evidence that a difficult geopolitical situation in the country is deterring investors. According to Russian Central Bank data cited by the FT, foreign direct investment into the country has dropped from close to $80 billion in 2013, to just $1.9 billion last year.

That marked a drop of $25 billion from 2017 alone, when FDI was valued at $27.1 billion.

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