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By John Helmer, Moscow

From the Bo Xilai case it can be inferred that at the senior level of the Chinese government, the only things done really fast there are taking bribes and poisoning squealers.

By contrast in Moscow, not having a Russian government for several months and not having capital punishment should be the kind of investor-friendly attributes of Russia which have been underrated and under-priced in emerging market trades.

But consider the costs of inertia and delay in the affair of Sergei Pugachev’s heist from the Central Bank of Russia, and one of the assets he left behind, Northern Shipyard of St. Petersburg. This yard is an asset of strategic importance because it supplies the Russian Navy (plus the Chinese and Indian navies) with its surface combatants. Because it absorbs such a large amount of state budget money, control of the cashflow has been fought over since it was first privatized by President Boris Yeltsin in favour of Boris Kuzyk, one of his defence industry advisors, backed by Vladimir Potanin.

The lure of the sea – that is, money beside the sea – can be as irresistible as the fresh air and the views. In the 16-year contest over Northern, Potanin lost to Alexander Nesis; who lost in turn to Pugachev; who lost to Deputy Prime Minister Igor Sechin and his protégé, Roman Trotsenko, chief executive of the United Shipbuilding Corporation (USC). Pugachev turns out to be the dumbest, I mean smartest of them all. His predecessors sold out for peanuts compared to the one-billion dollar loan Pugachev levered out of the Central Bank.

Fortunately, there has been no urgent requirement for reliable war-fighting vessels during the years of this internecine conflict. By the time Pugachev had decamped, his two St.Petersburg shipyards, Northern and Baltiysky Zavod (Baltic Plant), were having trouble turning the light switches on in the paymaster’s office, let alone paying raw material suppliers and yard workers.

This week Northern is reporting that it has two chief executives – one of them USC’s takeover nominee, Alexander Ushakov, and one, Andrei Fomichev, who led the management when Pugachev was owner. According to Fomichev speaking through yard spokesman Olga Vilde, “until the situation becomes clearer, I will remain CEO, but he [Ushakov] will remain in his current position. The company seal remains with me, and the right to sign, too.”

Ushakov, who is a 40-year veteran of the yard and currently its production chief, was promoted by USC in circumstances Fomichev calls duress. Legally, also according to Fomichev, USC hasn’t the authority to make the change.

Asked to explain the Ushakov appointment, spokesman Alexei Kravchenko told Fairplay that USC has “more than enough grounds for legal and moral reasons not to leave Mr. Fomichev in control of the financial flows, which he has managed to the detriment of the company, [including] constant violations and abuses of corporate law.”

USC claims to hold 96% of the company shares, 20% directly and the remainder through collateral pledges held by the Central Bank, which it took from Pugachev after his loan default. Pugachev now lives in the UK and Monaco. The Central Bank was asked what measures it has taken, civil or criminal, to find Pugachev and oblige him to repay what he owes. The bank spokesman said that because the questions are difficult ones, whose answers require coordination between several departments, the replies will be delivered “but not in one, and not in two days.”

Last month, USC tried to vote all the shares to replace Northern’s board of directors, but the Fomichev group resisted, arguing the meeting and vote were unlawful.

USC has been planning to consolidate control of both Northern and Baltic, relocate their operations to a new site on the Neva River, and with investment from STX of South Korea, start a new production line of gas carriers and other vessels of up to 200,000 deadweight tonnes. Several senior Russian government officials have been involved in the yard problems — Igor Sechin, Dmitry Kozak, and Sergei Ivanov, plus the defence minister and the Central Bank head. But caught in the six-month transition between the outgoing presidential administration of Dmitry Medvedev and incoming President Vladimir Putin, none of them has been able to resolve the dispute by deciding anything.

What is being attempted by USC, in cahoots with the Central Bank, is that the arbitrazh courts endorse and finalize an application to have Pugachev’s businesses declared bankrupt, and his shareholdings in Northern and Baltic transferred to USC in trust, pending parallel court rulings on their debts and obligations. However, an interim ruling in favour of this scheme last October by the Moscow Arbitrazh Court has been challenged on several grounds. Lawyers for the Fomichev group say the Central Bank doesn’t have the statutory authority to use the bankruptcy procedure and seizure of collateral to deprive shareholders other than Pugachev and USC of their rights. The Russian Civil Code also disallows USC accepting trusteeship of the yard from the bank since USC would be an obvious beneficiary of the takeover. Selection of a bankruptcy administrator capable of acting at arm’s length of the Central Bank, USC, and the existing management is also contested.

This means that the onus is on the federal government to issue the required orders to put the collateral shareholdings up for sale by auction. If there is to be no bidding competition, and the shares awarded to USC for strategic, security or other reasons allowable by law, the price must still be fixed independently of what USC says it wants to pay.

Little more than a year ago, Trotsenko’s spokesman told Fairplay that USC valued the fair acquisition price for the two yards, Northern and Baltic, at Rb23 billion ($767 million). “That was the price. But today, with the worsened conditions of OPK [United Industrial Corporation, Pugachev’s holding], those assets should cost much less. The price OPK wants for their shipbuilding assets is many times higher than they cost. I wonder if anyone is ready to buy at that price. We’d like to take our time and see if the real price falls even lower.” The more protracted the conflict over yard management, the lower the takeover price slips.

No share sale is possible until the legal situation is clarified in the courts, however. Without that, Fomichev at Northern and others at Baltic argue that USC lacks the legal right to execute its de facto takeover, and there is no power in Trotsenko’s hands to call and count shareholder votes, fill seats on the board of directors, and replace chief executives.

Also, according to Vilde for Fomichev, there is no justification for the government to favour a USC takeover of Northern because that will curtail competition in the shipbuilding market. “USC and its member companies, which specialize in building surface ships, and Northern Shipyard are competitors in the military surface-ship construction market and civil vessels, in particular, offshore [energy production] floating units. In this segment of state defense procurement, Northern Shipyard is the only shipyard in Russia.”

The government’s competition watchdog, the Federal Antimonopoly Service (FAS), says it has yet to be asked to investigate the shipyard and rule on whether USC’s plan violates the competition rules. Ekaterina Zubova, a spokesman for FAS, told Fairplay that currently there are no petitions on file for investigation, and no precedents for FAS to intervene unilaterally. “If USC will take control and become a monopolist in their area,” the spokesman said, “then the FAS will have to consider this situation. If USC wants to buy the [shipyard], it should submit an application to FAS and this will be immediately posted on the FAS website.” Public announcements from USC that it wants to buy Northern, and the trusteeship deal with the Central Bank, don’t make a takeover, according to FAS. “The talk about it now is just shaking the air.”

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