Why Russia can afford to be so indifferent to its international reputation
International investment communities were shocked at the recent arrest of Michael Calvey, the American founder of the largest private equity fund in Russia, Barring Vostok. Mr Calvey and three other partners were arrested on the 15th February on fraud charges, with prosecutors alleging that they embezzled $37.7 million from Vostochny Bank, in which Baring Vostok holds a 52.5% stake. The dispute has gone to arbitration in London and Mr Calvey has condemned the charges as baseless, saying they are the consequence of a dispute with two minority shareholders accused of fraudulently withdrawing assets in 2017.
Despite the wide coverage of events and escalation to the highest levels, Mr Calvey is still in jail, indicating that Russian authorities do not pay much attention to Russia’s reputation in the international investment community. And it seems they can currently afford to be nonchalant. Russia’s external balances strengthened in 2018, with the current account reaching a surplus of $115 billion, or 7% of GDP. Their strong external performance meant that external debt declined by $64 billion to $453.7 billion, while FX reserves increased by $36 billion to $468 billion over the year. As a result, we saw the investment grade rating restored for Russia by all three ratings agencies.
The events surrounding Mr Calvey’s arrest, together with the Skripals’ case and resulting introduction of multi-level sanctions, should cool down appetite for Russian equity assets. However, despite this negative backdrop, We see Russia’s sovereign and corporate debt as a good investment opportunity in the CEE and CIS region, based on strong fundamentals and relative value.
Author: Olga Fedotova