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By John Helmer in Moscow

Far Eastern Shipping Company (Fesco), which in Soviet days dominated dry-cargo shipping, has reported another loss in the first half of this year. What makes this news is that the red-ink line came in at $28.1 million; one-quarter of the loss reported for the six months to 2009 at $124.1 million.

Fesco is now owned by a Luxemburg entity called SVG Holding, whose initials stand for Sergei Generalov, the controlling shareholder and also chief executive of Fesco (see image). Generalov, who made his early career as one of Mikhail Khodorkovsky’s employees, is the first Russian shipping and port magnate to voluntarily go ashore for his living.

In the press release, Fesco emphasizes the operating profit of $33.2 million (compared with an operating loss of $73.8 million a year ago), and improved earnings.

According to Yury Gilts, the chief financial officer, this shows “strong underlying recovery of operational performance across all FESCO business units, driven by the overall growth of the economy and restoration of volumes and, although to a lesser extent, margins in transportation and logistics businesses.”

Gilts also mentioned that since the balance-sheet was closed on June 30, the company has logged a “very successful divestment of FESCO share in NCC assets”, providing the company with $600 million of cash in hand, but only $450million of debt remaining to pay. What Gilts didn’t admit to was that Fesco is leaving the shipping, ports and container businesses, in order to do something else. According to the asset statement, Fesco’s fleet value has been cut 18% in the six month period. But that was before the sale recorded in July of the fleet ice-breaker and supply vessel, Fesco Sakhalin, for $77 million. In the first six months of the year, Fesco notched up revenue of $41.7 million from ship sales. As the fleet continues to dwindle, Fesco is turning into an investment company.

“We have decided to get away from the concept of a ship owning company,” company spokesman Stanislav Vartanyan announced yesterday, “and focus on a service development strategy.”

According to the operating ledger, revenues for the first half grew to $387.1 million, an increase of 35% over the same period of 2009. Operating costs grew by 23%, mainly because of rising rail tariffs and land transport charges; and administrative expenses grew by 19%. That reflects growth in staff salaries, and triple growth in the item called “professional fees”. At the same time, termination payments for staff and share options cost less this year than last year. Another loss-maker on the balance-sheet, which grew in size during this year, is the writedown taken on “financial instruments”.

On its tax line, Fesco’s accountant’s notes reveal a serious problem with the Russian tax authorities over whether the company is entitled to pay no value-added tax (VAT) on stevedoring services for the unloading and warehousing of import cargoes. The tax authorities have ruled that the zero VAT tax rate benefit, which Fesco has been getting, should apply to services related to goods manufacture and sale, not transportation. At least $19 million in payment of extra taxes may be required.

The blame for this rests squarely with Mother Russia, according to Generalov. The Fesco financial report says “Russian tax law and practice are not as clearly established as those of more developed market economies, Russian tax laws, regulations and court practice are subject to frequent change, varying interpretation and inconsistent and selective enforcement.” The potential financial impact of Russian tax claims going to court, and of Fesco losing, “may be significant”, the company report says.

The benefit of selective court enforcement is omitted, although Generalov has publicly celebrated his filing of a libel claim against the publishers of Mineweb and this correspondent in the UK High Court in 2008.

Itemization of how Fesco earns its revenues shows that of the aggregate $387.1 million revenue figure, just 20% ($78.4 million) is generated by shipping, and another 13% ($49.1 million) from port operations and stevedoring. The movement of cargo on land earns 49% of the revenue, while rail movement earns another 25%, making a total of $285.1 million.

On the other side of the ledger, roughly half of Fesco’s liabilities are owed by the shipping and ports divisions.

When Moore Stephens was Fesco’s auditor, it reported in its financial report for the first half of 2009 that there was “material uncertainty which may cast significant doubt about the Group’s ability to continue as a going concern.” This year, at the head of the financial report, the new auditor KPMG says: “a review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.”

In a briefing for investment bank analysts yesterday, Fesco said the strategy for its new line of business will be presented to the Fesco board by the end of October. An earlier promise was to deliver the strategy a month ago. According to the company briefing, the new options include expanding railway delivery systems, including wagons and terminals, and specializing on grain export. The remaining fleet may be disposed of as a spinoff company.

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