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By John Helmer in Moscow

Sovcomflot (SCF), the state owned Russian tanker operator, released this week a board-approved strategy for the next five years, proposing to invest $5.5 billion with a combination of new borrowings and share sales over a six-year period. This capital outlay on a fleet that already counts 146 vessels, with another 16 on shipyard order, is unprecedented.

According to Sovcomflot board chairman, Sergei Naryshkin, a career associate of Prime minister Vladimir Putin and a deputy prime minister in the present Russian government, the “strategic tasks for SCF Group from 2010 to 2015 include both further growth in the SCF Group’s share of servicing Russia’s seaborne exports , the provision of integrated logistical solutions for offshore upstream oil and gas projects, and the continuing expansion of traditional shipping services in the global market.” The statement is cited in the company’s posting of the results of its final board meeting for the year, on December 18. The full text can be read here: http://www.sovcomflot.ru/npage.aspx?did=57531

The wholly owned state company does not publish standard financial reports, audited and noted according to International Financial Reporting Standards (IFRS) or US Generally Accepted Accounting Principles. However, these reports are prepared confidentially for the company board, and they have been the subject of detailed disclosures and testimony in the Sovcomflot trial, which commenced on October 1 in the High Court in London.

Ahead of the release of a financial summary for this year, combining results of the Sovcomflot and Novoship fleets, SCF’s current announcement says that its year-end revenues will come to $1.23 billion. This marks a 25% decline on last year’s result. According to Naryshkin, “in the last five years Sovcomflot has not only become by far the largest Russian shipowner, but has also achieved excellent commercial and financial results.” SCF’s website does not make available annual reports before the year 2005, when the current chief executive, Sergey Frank, replaced Dmitry Skarga.

The freshly reported net asset figure for Sovcomflot, according to last week’s board statement, is $2.8 billion. Although previous reporting from SCF has acknowledged the impact of the global decline of tanker rates, revenues, and vessel valuations, and admits SCF’s accounts have taken “value impairment provisions for some vessels and newbuildings,” the new asset figure remains unchanged from a year ago.

A summary of future strategy by SCF senior executive Yevgeny Ambrosov says priorities include increasing the fleet’s share of Russian oil exports, and “expanding its own fleet, by operating chartering pools and by providing commercial operation of third parties’ vessels”.

There is no mention in the company announcement of the High Court trial of management conduct in pursuit of strategic goals, which, according to the trial evidence, appear to have been identical. The London proceedings have exposed to public scrutiny more detail of the state company’s internal workings, vessel acquisition policy, audit and financial reporting standards than has ever occurred in Russian shipping history.

The High Court judge presiding in the case, Justice Andrew Smith, ruled on October 13 that “if a member of the public does require a transcript, that it should be provided to them. I would be a little concerned about depriving the public of what is their right, in a case like this.” When the judge asked Sovcomflot’s advocate in court, Andrew Popplewell QC, whether he had “any difficulties about that,” Popplewell responded: “Not on our side, my Lord.” Since then, not a single word of the trial transcripts has been reported in the Russian press.

The documents are readily available, however, to all of SCF’s bankers, brokers, auditors, and insurers.

The SCF board is likely to have discussed the implications for the company’s credit worthiness and Frank’s reputation if the outcome of the court case is a rejection of SCF’s claims, particularly if the Skarga management is vindicated. No date for Justice Smith’s ruling has been fixed, but according to the schedule of the proceedings and summary argument, this is likely within three to four months.

SCF’s accountants and auditors are obliged to record the cost to the company of the litigation, and the contingency costs, should the High Court rule against the company, and endorse a counter-claim for costs and compensation for Skarga; the former chartering partner of Sovcomflot, Yury Nikitin; and the former chief executive of Novoship, Tagir Izmailov. London court experts believe the combined financial liability, including contingency risk for Sovcomflot, is about $100 million. SCF’s claim against Skarga, Nikitin, and Izmailov is for about $800 million.

Should the current SCF management lose the lawsuit, and the English court find fault with SCF claims, this is likely to impact on the company’s first share privatization, planned by the Kremlin for next year; and on international borrowing for the investment programme.

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