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By John Helmer in Moscow

President Vladimir Putin signed this week a decree allowing a limited association of Russia’s state controlled shipping companies, Sovcomflot and Novorossiysk Shipping Company (Novoship). Promoted as a merger of the two, Putin’s brief decree, a text of which has been released publicly, puts a stop to a market selloff, which has been bitterly contested by shipping company managers, board members, and Kremlin aides for three years.

“In the context of consolidation of the two companies a tanker company is being created that will be certainly ranked among the world’s five top tanker firms,” announced Sergei Frank, chief executive of Sovcomflot, according to a Kremlin release of a meeting he had with Putin on Wednesday. The text of Putin’s brief remarks indicate the ambiguity of the decree, which creates a single shareholding structure for the two tanker fleets, but also preserves their separate operations.

According to a press release issued by the London public relations firm Waughton, “the combined company will be able to offer the full range of shipping services to Russian and international oil & gas majors on the basis of the most advanced technologies, including LNG shipping and servicing offshore projects.”

The four-paragraph decree explicitly limits the consolidation to the state shareholdings, swapping the 50.34% state stake (67% of the voting shares) in Novoship for a new emission of Sovcomflot shares. This leaves minority shareholders of Novoship holding about 30% (voting shares) without a buyout offer. No money will change hands. Management of the two tanker fleets will remain separate, as will the company brand-names, marketing programmes, and tax jurisdictions.

The second paragraph of the presidential decree identifies the Sovcomflot shipping assets as “strategic”, invoking Russian regulation of 2004 that imposes a de facto ban on privatization or IPO — unless Putin’s successor decides otherwise. The Russian presidential election is scheduled for March 2008.

Sovcomflot board chairman, Igor Shuvalov, a Kremlin aide; a number of other senior government officials; and Frank have been trying to promote a share sale among investment banks in London. Morgan Stanley and JP Morgan have been rumoured to be seeking the IPO mandate. In April, Frank told a London newspaper that he wants to float 20% of his company, “benchmarking ourselves against the stock market.”

The latest move by Putin makes this impossible for the time being. The decree sets a timetable of nine months to effect the shareholding transfer. Only the president, and thus Putin’s successor, is empowered to cancel the strategic status, in order to allow a share sale.

Frank’s predecessor as CEO, Dmitri Skarga, told Fairplay: “the decree locks up the two companies’ capital for several more years, and prevents the one thing that drove the consolidation plan for the past few years — cash from a foreign share sale. As usual, the state gets nothing, only the empty shares of Sovcomflot, and will lose the real asset, Novoship.”

Eduard Faritov, maritime analyst at Renaissance Capital in Moscow, said “the merger was widely expected. The potential for operational synergies/scale economies is limited as both companies are large (in the top 10 largest global tanker operators), and the market is competitive (even combined capacity reflects only 2.2% market share).”

Currently, Sovcomflot operates a fleet of 56 vessels of 4.4 million deadweight tonnes. Novoship’s fleet is also 56 vessels, but with 3.7 million dwt.

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