Fight for Far East fleet

Europe Business Review, Oct-Dec, 1999

A strange shipping saga with impacts on Australia is taking place in Russia.

It involves many of the political, financial and corruption factors now shaping the disintegration of governmental and economic structures in Russia.

At the centre of the complex affair is the board of the largest shipping company in Russia which elected an official of the government as the company's chairman, in response to political opposition to the influence of foreign investors.

Alexander Lugovets, the deputy transport minister of Russia, has been appointed to chair the board of the Far Eastern Shipping Company (FESCO), based in Vladivostok on Russia's Pacific coast.

The move is the latest in a series of moves to reduce the role and rights of foreign investors in the company.

Foreign investors hold 42 percent of the company Formerly state-run, it has 11,400 workers and 112 ships. Far Eastern Shipping does most of its business in dollars, with annual revenue of $370 million.

Recently Russian officials allegedly threatened to jail a British member of the board of FESCO, Andrew Fox.

Mr Fox, who had lived in Vladivostok since 1992, left the port city after the alleged incident. He is a British citizen and Australian resident.

Fox claims the Vladivostok regional governor, Yevgeny Nazdratenko, has threatened foreign and local investors in his efforts to obtain control of FESCO.

Nazdratenko allegedly said if he did not get Fox's cooperation in changing control of the FESCO board he would confiscate his possessions.

Governor Nazdratenko is said to believe that the Russian state with-drew too early from the post-Soviet economy, and should reclaim control of strategically important companies, including shipping lines.

This political background makes foreign investors in FESCO suspicious of the Governor's actions and motivates their efforts not to allow control of the company to pass into political hands.

A previous Vladivostok marine saga is not a good omen.

Kenneth Dart, who heads the Dart Container Corporation, the largest producer in the world of foam cups, was the major disenfranchised shareholder in that commercial controversy.

It involved VBTRF, a Russian fishing fleet with Western investors and equipment, whose assets mysteriously fell 90 percent in 1997 from their 1996 value of US$750 million.

Mr Fox is representing Dart in the battle for FESCO, as Dart's nominee on the board of directors. Both are determined that investors will not again be pushed aside.

In 1992 FESCO had net equity exceeding US$1 billion. Today it's less than half that. While FESCO is a Russian-registered company, almost all its business is done in foreign currency. About 80 percent of its revenue comes from the Pacific Rim. The company has an office in Australia.

The European Bank for Reconstruction and Development, the supra-national bank set up by European and other countries to finance reconstruction and development of the former Soviet bloc, recently led a syndicate which lent FESCO a reported US$100 million.

If Moscow opposes the anti-investor actions of Governor Nazdratenko it could reassure the IMF, EBRD and private investors.

Otherwise these lenders will be losers - and he left wondering why they ever took risks in Russia, a place where profits can be high but where politics pay more.