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By John Helmer, Moscow

I know, I know. It’s old fashioned to regard the celebration of February 23 as Red Army Day. And for all the awards heaped on my head for defending the Fatherland from its enemies, foreign and domestic, on this anniversary I plead paucity of means, and defer to those who have recently written to the Prime Minister promising to spend hundreds of millions of dollars to invest in the Fatherland’s furthest reaches – the Arctic seabed, no less. Even when they are so severely wounded financially that they lack the money to honour their promises, I honour their intentions.

This is a tale of Sergei Frank’s self-sacrifice and derring-do. With such moral qualities as are his, there can be no doubt that on Frank’s application, Prime Minister Putin would scribble “agree”. That not a single company executive or government official would dare to allow even those two syllables to escape his lips testifies to how rare Frank’s qualities are among the leadership of the country.

New financial records have come to light from Sevmorneftegeofizika (SMNG) which weren’t available when this tale was first reported on February 19. These are not audited accounts in the conventional sense — the smng auditor was CV Audit in 2007; Intercom Audit in 2008, and Gerkos in 2009 and 2010. The accounting criteria may, or may not be, compliant with Russian Accounting Standards (RAS); they don’t meet International Accounting Standards (IAS) or Generally Accepted Accounting Principles (GAAP). Beyond the release of plan targets, there is no report for 2011.

Source: SMNG reports published in Russian here and here.

The senior management of SMNG has been incommunicado for the past week, and so it has not been possible for them to respond to requests to itemize the revenue and cost lines in the reports, or the level of SMNG’s debt.

However, accepting the data for what SMNG says they mean, in its peak year of 2010, revenue came to the equivalent of $106 million; earnings, about $42 million; and after-tax profit, $30 million. The company’s commentary acknowledges that recovery from its slump between 2008 and 2009 was almost entirely due to new orders from Rosneft and Gazprom. If not for them, SMNG, a strategic object in the government’s arsenal for the defence of its resources at sea, might be on the edge of insolvency. Who more appropriate than Frank to rescue SMNG if Rosneft and Gazprom will not?

Asset accounting in the published SMNG papers give little idea of what the company is worth to the state if it is privatized, or to Sovcomflot if it represents a capital transfer. The Murmansk branch of the federal property management agency (Rosimuchestvo) told Fairplay there has been no order to make a valuation of SMNG, one of the pre-conditions for transfer to Sovcomflot.

If the ratio of enterprise value (EV) to earnings (Ebitda) is applied to SMNG which the market currently applies to loss-making Polarcus, the Norwegian-listed research fleet operator comparable to SMNG, then the most SMNG could represent on Frank’s books would be $630 million. But if Sovcomflot must then raise $300 million in new debt to finance SMNG’s development, and cover SMNG’s current debts, will Frank end up with a net sacrifice of Sovcomflot value?

In Moscow Taras Sobko, spokesman for the Ministry of Economy, which is in charge of privatization, refuses to say if his ministry favours the deal. While that ministry is generally in favour of competitive auctions for the sale of shares in state enterprises, a loophole in the law allows the prime minister to order a transfer of state assets or merger when he determines this is necessary “to create conditions to attract investment, stimulate the development of the stock market, as well as modernization and technological development of economy.” Moscow press reports that the Ministry of Transport is in favour of the takeover, while the Ministry of Energy is opposed.

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