US citizen and arguably Russia’s most successful fund manager Michael Calvey was arrested on Valentine’s Day, exactly a month ago today, and is still sitting in jail despite a public outcry by his colleagues in the finance industry and a raft of leading Russian liberal politicians.
His case is due to go to trail in April, when Calvey and his colleagues that were also arrested face up to 10 years in jail if convicted. The case has been another blow to Russia’s already battered investment image and now there are calls for international businessmen to boycott the St Petersburg International Economic Forum (SPIEF) in protest.
They are unlikely to stay away. And actually if they did it would probably make things worse.
International portfolio investors yanked $130mn out of the Russian equity market in last week – the biggest outflow since 2010.
It's tempting to link the sell off to the Calvey affair, as other emerging markets have seen big inflows since the start of this year, as it has become clear the US Federal Reserve bank is not going to tighten its monetary policy further, which always drives cash into the emerging markets stocks and bonds.
But while the Calvey affair has surely contributed to the “risk on” sentiment on Russia, the really big concern at the moment is the impending US sanctions, the Defending American Security Against Kremlin Aggression Act (DASKAA).
These sanctions could potentially target both Russia’s top companies and the government bonds – both sovereign Eurobonds and the more important domestic treasury bills, the so-called OFZs. If either of these things happen then it will cause chaos on both equity and bond markets as well as doing some serious damage to the government’s ability to fund itself. The bill is also due to go to the vote in April, which is going to be a news-packed month for Russia.
The call for investors to stay away from SPIEF will probably come to nothing – apart from the fact it is in June and there will probably be some clarity on Calvey’s fate by then. Most of the investors will probably show up at SPIEF anyway for two reasons: minerals and markets.
BP CEO Bob Dudley, who is no stranger to the Russian way of doing business, has already confirmed his attendance at SPIEF this year. Dudley himself fled Russia when he suspected he was about to be arrested, but in his business there is no way he cannot go.
The Kremlin has companies like this over an oil barrel. SPIEF is the most prestigious investors meeting of the year and a soapbox from which the Kremlin peddles its investment case.
Foreign direct investment (FDI) in Russia is not big but the Kremlin values the partners it has – and numbers many of the world’s biggest companies amongst them. For a senior executive like Dudley to not show – and to refuse to come as a form of protest – would be taken as an offence by the Kremlin.
As BP owns some 19% in state-owned oil major Rosneft, a famously ill-tempered company that has already jailed a sitting minister, BP would be foolish to slight its Russian partners. It is almost entirely dependent on Russia to access to oil fields and its relationship with the Kremlin is crucial for the company’s business. Dudley would not dream of doing anything to jeopardise that.
The same logic applies to the big international carmakers and supermarket chains. Russia’s population of 147mn is by far the largest in Europe – half as big again as Germany – and retailers cannot ignore it, irrespective of how risky it is to do business. The five international carmakers that have production in Russia don't want problems with the Kremlin. The car market has been growing again for the last two years (although it slipped in February) and potentially it is the largest in Europe; in the first half of 2007 Russian car sales briefly overtook those in Germany, currently the biggest market on the continent.
I’m sure everyone is very upset with Calvey’s arrest and would love to help, but as the saying goes: businessmen don't care about politics; they care about profits. There is too much money at stake to risk insulting the Kremlin over one unfortunate fund manager. The Kremlin, like most emerging market governments, remains very thin-skinned.
And that means Russia’s investors have to be very thick-skinned. I’ve made this point before: Calvey’s arrest is awful for Russia’s investment image, but it is hard to see how its image could be any worse. Long-term investors into Russia are well aware of the risks. (Indeed, Russian stocks have a special “Russia risk” discount in addition to the usual “emerging market risk” discount.) But they come anyway as the returns are inversely proportional to the risk – as Calvey’s own career has shown.
And a boycott of SPIEF would make things worse. So far the Calvey case has been treated as the commercial dispute it is. As I argued in a recent op-ed, President Vladimir Putin’s hands are tied as he has said on multiple occasions in connection with other arrested businessmen that the Kremlin cannot interfere with the courts. Once the case was launched by the Federal Security Service (FSB) the legal machine has to be seen, at least, to go through its cycle. That means Calvey has to sit in pre-trial detention like any other Russian businessmen until the formal trial starts in April.
But behind this charade is Putin’s relationship with the FSB, which is a crucial lever in his control system. To let Calvey out by fiat would undermine the FSB and embarrass the service, which would be shown publically to be a plaything of irate businessmen. It's a golden rule of Russia watching that if the Kremlin has to chose between limiting damage to its international image and the domestic agenda, it always choses the domestic agenda.
However, given the vocal support that the liberals in government have offered Calvey and the genuine appreciation of his work and him personally by those in the government, it seems likely that the Kremlin will try and arrange a release somehow. Perhaps some technicality will be found to cancel the case. Or in order to allow the FSB to save face, maybe Calvey will be found guilty but given a suspended sentence and a token fine. The easiest way to get him off the hook would be for an independent auditor to revalue the shares that are at the heart of the case. Baring Vostok Capital Partners (BVCP) hired KPMG to value these shares, while its Russian partner Artem Avetisyan reportedly used an auditor he controls to come up with the much lower valuation. If a second audit comes up with the same RUB3bn valuation that KPMG put on the shares the case against Calvey would collapse.
A fix is only possible while this remains a “normal” corporate dispute. However, a boycott of SPIEF to protest Calvey’s arrest would make the case political and that would almost certainly ensure Calvey’s incarceration. US Ambassador Jon Huntsman is reportedly staying away from SPIEF in protest, but other than this gesture the US government has been remarkably quiet on the whole affair. If lots of other businessmen stayed away that would only make Calvey’s predicament worse.
If you try to bully Putin into releasing Calvey with a boycott you tie Putin’s hands. In the same way that he can’t be seen to be interfering with the court system, he can’t be seen to cave in to western strong-arm tactics. That would undermine his authority with the elite – the only constituency he actually cares about. And these grey tactics are a favourite of his; Putin has also befuddled opposition to Russia in Europe by never explicitly admitting to a military intervention in Ukraine, giving his supporters room manoeuvre. (The Italian Prime Minister Giuseppe Conte said last week that he is working on lifting international sanctions imposed against Russia.)
If Calvey were actually found guilty and jailed then all that would change, I’m sure. The US government would weigh in with more sanctions and what other means it could to free Calvey. However, in the meantime the clever strategy is to keep things on the down-low and let the BVCP legal team fight the charges on the basis of their patent ridiculousness. If he is lucky then Calvey will be out of jail by May and can make it to SPIEF himself. And I think he probably would go. It would certainly go down well with the Kremlin – misunderstanding… no hard feelings… lets get back to work… etc – and what is important in Russia is not the rule of law, but the rules of the game.