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Foreign Investors Call Calvey Detention Decisive Moment for Russia’s Economic Future

A recent Moscow court decision to extend Calvey’s detention without trial for a minimum of two months on the grounds that his release poses a flight risk.

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Russia, America, Calvey
Foreign investors call Calvey detention decisive moment for Russia's Economic Future. VOA

Last week’s shocking detention of one of Russia’s most renowned and publicly visible American entrepreneurs not only caught fellow foreign investors off guard, it may have prompted a moment of national reckoning about how Moscow handles investor relations, say both Kremlin-aligned and international trade groups.

Baring Vostok founder Michael Calvey’s arrest Feb. 14 on charges of fraud stemming from a lengthy legal dispute with Russia’s Orient Express Bank sparked widespread speculation about whether the days of unbridled “reiderstvo” — aggressive Kremlin-backed asset raids and corporate takeovers synonymous with Yukos, Russneft, Bashneft, Stolichnaya Vodka and VKontakte — were a thing of the past, or whether, perhaps, Calvey had actually committed a crime.

A recent Moscow court decision to extend Calvey’s detention without trial for a minimum of two months on the grounds that his release poses a flight risk, along with news that he’s been denied consular access in violation of the 1966 Vienna Convention, doesn’t bode well for professionals such as Aleksander Khurudzhi, who has been tasked by the state with rehabilitating Russia’s image as a secure place to invest.

‘This is a shock’

“From my point of view, what happened is in complete contradiction with statements of a Russian president who, from all rostrums, has expressed the same unchanging viewpoint: that Russia is open for investments and that Russia will do its best to attract and safeguard both Russian and foreign investments,” Khurudzhi, deputy ombudsman for the Kremlin office of business ethics, told VOA.

“This is a shock,” he added. “It undermines all the work being conducted by the Agency for Strategic Initiatives. All the work that has been done for the last seven to eight years aimed at improving the investment climate. It undermines trust in the system as such … (and our entire) team isn’t sleeping at night. Without any exaggeration, the work is being carried out for 24 hours. This is a challenge for all of us, for our whole team.”

Russia, Calvey, America
Russian President Vladimir Putin addresses the Federal Assembly, including the State Duma parliamentarians, members of the Federation Council, regional governors and other high-ranking officials, in Moscow, Feb. 20, 2019. VOA

Indeed, during his annual State of the Nation address before Russia’s Federal Assembly on Wednesday, President Vladimir Putin, who has been faced with record-low approval ratings, even made a fairly explicit reference to Calvey’s detention.

“To achieve … great (economic) objectives, we must get rid of everything that limits the freedom and initiative of enterprise,” Putin said. “Honest businesses should not live in fear of being prosecuted of criminal or even administrative punishment.”

Putin, who met Calvey multiple times since the American arrived in Russia in the mid-1990s, has said he had no foreknowledge of Calvey’s arrest, and that despite his repeated calls to keep commercial disputes and litigation from culminating in spurious charges against foreign investors, he has no direct influence over how Russian courts render their verdicts.

Russia, Calvey, America
FILE – CEO and co-founder of the investment fund Hermitage Capital Management Bill Browder attends the “Prospects for Russia after Putin” debate in the Houses of Parliament, London on Nov. 18, 2014. VOA

Vocal Kremlin critics, such as Hermitage Capital co-founder Bill Browder, are deeply skeptical of these claims.

“The arrest of Mike Calvey in Moscow should be the final straw that Russia is an entirely corrupt and (uninvestable) country,” Browder said in a tweet Friday. “Of all the people I knew in Moscow, Mike played by their rules, kept his head down and never criticized the government.”

Browder was denied entry into Russia in 2005 after his lawyer, Sergei Magnitsky, began investigating governmental misconduct and corruption in response to suspicious tax evasion charges brought against Hermitage by Russia’s Interior Ministry.

Magnitsky died under suspicious circumstances in Russian custody in 2009.

Seen as a ploy

For someone like Browder, it would seem Putin’s claim of political impotence in the face of a fully independent judiciary, despite copious historical evidence to the contrary, is nothing more than a cynical public relations ploy meant to portray Russia as a nation of procedural law, while denying justice and consular access to the very foreigners who fastidiously try to abide it.

Even prominent Putin allies, such as Russia’s ex-finance minister Alexei Kudrin, have sounded the alarm, calling Calvey’s arrest an “economic emergency.”

russia, Calvey, america
FILE – Alexis Rodzianko talks to Reuters in Moscow, Sept. 16, 2009.
VOA

For U.S. citizen Alexis O. Rodzianko, president of the American Chamber of Commerce in Russia and a longtime Moscow resident, the initial shock of Calvey’s detention might, however ironically, reveal a longer-term opportunity to recalibrate Russia’s ties with foreign investors.

“Sure, at this point it’s damaging. It certainly makes every one of us who were here thinking about, ‘Well, you know, how far is it from me to his prison cell?’” he told VOA. “But I think it could be a defining issue for the business climate here. It could be the beginning of a bad streak, or it could be the signal for Russia to actually take some positive action.”

Calvey’s formal indictment on Thursday, however, speaks more to the former than the latter outcome.

Rodzianko, who’s convinced the charges against Calvey are without legal merit, said he’s personally convinced the arrest stemmed from “a commercial dispute in the usual sense,” and that “people who set it up were not expecting the resonance that it (has) received.”

Asked if he thought Calvey’s arrest could be in any way politically motivated, he said he was convinced it was not.

“But then I think, in the circumstances, it can’t but be political, just because of the current state of affairs, because of the current state of relations,” Rodzianko said. “It’s just too easy to make that connection, which I don’t think is a proper connection, but I don’t see how it can be avoided.

Two possible outcomes

“I think it’s a symptom of a problem that Russia has, and Russia has to deal with,” he added. “It could (have one of) two outcomes.”

One, he said, is that Calvey’s arrest will come to signify a continuation of a malevolently corrupt practice that Russian and foreign investors have come to “face on an endemic basis.”

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Or, “it might actually be a mistake which leads to significant reform, which might improve the situation for both foreigners and Russians investing in Russia,” Rodzianko said.

A spokeswoman for the Moscow district court said that Calvey, who was detained along with other members of the firm on suspicion of stealing $37.5 million (2.5 billion rubles), faces up to 10 years in prison if convicted. (VOA)

Next Story

Russia’s Alternative to Western Credit Card Debuts in London

Russia will next year diversify its foreign currency holdings in its National Wealth Fund

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Employees demonstrating a payment card
Employees speak while demonstrating a payment card during a tour at a branch of VTB bank in Moscow, Russia. VOA

A Russian backed bank payment card, introduced after Western sanctions upended Russia’s financial system five years ago and prompted Visa and Master card to deny electronic services to some of the country’s leading banks, is set for its European debut on London Wednesday, when a pilot project will be launched in collaboration with the Dutch global payment company PayXpert.

Moscow authorities hoped to get the MIR card accepted eventually in foreign markets, but progress has been slow outside Russia for the MIR payment system,  which operates outside of Western-controlled international financial systems such as Swift, which banks use to transfer money.

The pilot project with PayXpert “will lay the foundation for new promising trends in the foreign expansion of Russian payment cards,”  according to Vladimir Komlev, the head of Russia’s National Card Payment System, which operates the MIR system.

De-dollarization efforts

The effort is seen by analysts as part of the  Kremlin bid to de-dollarize the Russian economy to lessen the sting of Western sanctions. A Russian Finance Ministry official this month told Reuters that Russia will next year diversify its foreign currency holdings  in its National Wealth Fund, which supports Russia’s public pension system, aiming to lower the share of dollars in the fund’s reserves.

Dmitry Dolgin of the Dutch banking group ING said in  a report this month that de-dollarization efforts are now obvious across most sectors, including local business loans and bank-held international assets, although he said the dollar’s role  has actually increased in company and household savings and cash assets, partly because dollar interest rates have been higher than those offered for euros.

Credit Cards offers unique features
American Express, Visa and Master Card is displayed in this image. Each Credit Card offers unique features and benefits, along with unmatched privileges. Pixabay

U.S. authorities have been able advance sanctions by targeting companies that use dollars, and the establishment of electronic payment systems not tied to the dollar or largely controlled by U.S. businesses is one way for the Kremlin to reduce the impact of the West’s serial punishment of Moscow. Washington and the European Union have imposed a wave of sanctions since 2014 to punish Russia for the 2014 annexation of Ukraine’s Crimean peninsula, alleged meddling in the 2016 U.S. elections, and the poisoning of a defected Russian spy in England.

Komlev told Reuters this year that “In the next three years we want MIR cards to be operational in countries where Russians are used to traveling.” He projected MIR cards would be operational at some banks in at least a dozen countries by the end of this year. Turkish banks started to conduct transactions this year with MIR, which means both “peace” and “world” in Russian.

MIR was launched initially as a national payment system, with the first cards issued in December 2015. Russia’s leading bank, state-owned Sberbank, started issuing them in October 2016, and by the end of last year more than 70 million MIR-based cards had been issued by 64 Russian banks. The Kremlin has mandated that state welfare and pension payments must be processed through the system by next year, along with salaries paid to civil servants.

The card has a long way to go before it rivals VISA our Mastercard internationally. It is not accepted by international shopping platforms or major online booking services for airlines and hotels, although APEXX Fintech, a British start-up global payment company, said Thursday it would now start working with the MIR system. Among smartphone applications only Samsung has concluded an agreement with the MIR system.

Meanwhile, de-dollarization has been moving quickly. Russia’s Central Bank has currency swap deals in place with Iran, China and Turkey, allowing direct trade to be conducted in local currencies instead of U.S. dollars. Russia reportedly lost $7.7 billion in its bid to reduce dollars held in its reserves. Some of the dollars were turned into gold, and since January the bank has purchased 96.4 metric tons of gold.

People stand in line as they wait to enter the bank with their card
People stand in line as they wait to enter a branch of Sberbank of Russia bank. VOA

Alexei Zabotkin, head of the Russian Central Bank’s monetary policy department, has conceded that it would be impossible to completely empty the country’s foreign exchange reserves of dollars, as this would be  “fraught with excessive risks.” According to central bank data the  National Wealth Fund has $45.5 billion, 39.17 billion euros and 7.67 billion British pounds.

In August, the state-controlled Rosneft oil giant announced it would stop using the U.S. dollar for its export contracts.

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Nonetheless, analysts say there are limits on how far Russia can de-dollarize – the ruble is highly volatile and remains unattractive for investors and de-dollarization brings additional and sometimes prohibitive trading costs.

European regulators will be watching the London project closely. EU officials have been sympathetic about Russia’s de-dollarization bid, suspecting that as a spin-off the euro will be boosted as an international currency. In June the European Commission concluded that “the euro clearly stands out as the only candidate that has all the necessary attributes of a global currency that market participants could use as an alternative to the U.S. dollar.” (VOA)