Asia's battleship supplier fights for survival
By John Helmer
MOSCOW - As the curtain goes up this week on Russia's newest shipbuilding
company, the 100% state-owned United Shipbuilding Corporation (USC), maritime
sources say the curtain may be coming down on a St Petersburg yard, Baltic
Plant (Baltiysky Zavod), a long-time builder of submarines, destroyers and
corvettes for the navies of China, India and Iran.
Baltic is owned by the United Industrial Corporation (UIC) of Sergei Pugachev,
who also owns Northern Shipyard (Severnaya Verf) in St Petersburg. Their naval
shipbuilding contracts, worth several billion dollars, have always been done in
conjunction and in high secrecy.
For some time, Pugachev has been hoping to consolidate the
Baltic works on the territory of Northern and then dispose of the Baltic yard's
land for real estate development. The St Petersburg city government, which
holds a golden share in Baltic, is vetoing that idea for the moment. But Baltic
currently owes an estimated 4.5 billion roubles (US$132 million), and its
new-build order book and cashflow are running down. State shipyard officials,
who announced the formal chartering of USC on April 7, have been contemplating
a takeover of Northern if Pugachev lowers his price. Baltic, they say, hasn't
been part of their plan.
The Baltic yard, whose slips also turn out icebreakers, seemed a better
prospect in 2004, when it was owned by ICT group, a St Petersburg-based
partnership headed by Alexander Nesis. It had been Nesis' ambition, he said at
the time, to leverage his 18% stake in Northern, and with Kremlin backing, to
merge the two yards under ICT's control.
A year earlier, when Nesis announced his bid to acquire the rest of Northern
from its then owner Boris Kuzyk, a former military advisor to the Boris Yeltsin
administration, he said:
There are several players on the Russian
[shipbuilding] market who are not strong enough and for whom it is difficult to
compete with the main competitors - foreign companies. The weaker Russian
producers should not compete against each other but should concentrate their
resources. This will help solve the problem of pre-financing in developing
their products. We want to establish a situation of an absolute technological
advantage, when no one else besides the holding will be able to fulfill the
contract.
At one stage in the conflict, sensitive documents
were leaked that revealed serious supply, standard and contract violations in
Northern's performance of a top-secret contract to build destroyers for the
Chinese navy.
Nesis proved to be right, but Pugachev proved to be stronger, first eliminating
Kuzyk at Northern and then driving Nesis backwards. Nesis conceded that
Pugachev was well connected. The Russian media claimed the connections included
old career ties to Vladimir Putin, when the now prime minister was a KGB
officer.
In April of 2005, Nesis conceded partial defeat, agreeing to sell his
shareholding in Northern to Pugachev. A spokesman for Nesis said at the time:
"The essential point is that the stage of war has changed to a stage of peace.
Everybody is happy." Baltic, he said, would concentrate on civilian vessel
construction while Northern would specialize in naval ships. ICT would supply
components and equipment to Northern, which had been withheld during the hot
phase of the takeover battle.
Four months later, Nesis conceded that he was selling Baltic to Pugachev, and
leaving the St Petersburg shipping sector altogether. One of Nesis' men said:
"We made the decision to sell [Baltiysky] because the price was attractive. We
have always said that these two plants have to be in the hands of one company,
but we never said whose hands."
He intimated that the price, not officially disclosed, was "less than $100
million". That figure was surprisingly low, if Baltic's order book to 2008
amounted to $700 million, as was claimed. The bottom line was also reported to
be running between an annual profit of $10 million and a loss of about as much.
If Pugachev was as rich as he was later cracked up to be, this wasn't because
of the two St Petersburg shipyards.
At the start of 2008, Forbes reported that the Pugachev fortune amounted to $2
billion; London media raised the figure to ฃ3.5 billion; and the Russian
Finance magazine claimed he was worth $4 billion. There was no suggestion that
these were ill-gotten gains, and in any event, Pugachev enjoyed legislative
immunity, for he has been the senator from the Tuva Republic in the Upper House
of the Russian parliament since December 2001.
In mid-January of 2009, Pugachev got approval for the takeover of the failing
French newspaper, France-Soir, from the Commercial Tribunal of Lille. His son,
a French passport holder, was the nominee proprietor. No acquisition price for
an 85% stake in the title, which has a circulation of less than 23,000 copies,
has been published. In February, allegations about Pugachev senior's past began
circulating on Russian websites. Without substantiation, they are unprintable.
They have been followed in March by blogger claims that Pugachev has engaged a
Moscow public relations agency to block publication of the bad news, wherever
it threatens.
The agency, known as Secret Advisor, headed by Leonid Levin, describes its
mission "to advance the Russian PR industry and communication sphere, to make
them more civilized". Asked to confirm whether Levin's agency represented
Pugachev and would respond to the allegations, an agency spokesman said it
would call back.
Pugachev's parliamentary office in Moscow, his holding United Industrial
Corporation, and the bank he indirectly controls - International Industrial
Bank; in Russian, Mezhprombank (MPB) - all decline to answer questions about
the purpose of the France-Soir acquisition and whether Pugachev has the means
to pay for it. The organizations bar direct access to Pugachev himself.
MPB is described by a banking specialist at Alfa Bank Moscow as "one of the
least public [of Russian] banks. All of its information is very hidden and
rarely reported. Their main business is connected with companies belonging to
the same group." An investment memorandum issued in 2005 by Dresdner Kleinwort
Wasserstein for the raising of $300 million in bonds claimed that 72% of the
bank was controlled by Pugachev, but did not mention his name. It is believed
the bank is owned by a New Zealand-registered family trust and controlled
through seven Russian cutout companies.
In September 2008, the bank was rated 30th in Russia by size of assets. At the
time, the total was reported to be 118 billion roubles (at the current rate of
exchange, US$3.6 billion). The bank's website is obsolete, its last news
reported on January 19, 2006.
Standard & Poor's, the international corporate rating agency, issued a
ratings improvement for the bank in February 2008, lifting it from B+ to BB-,
with a forward prognosis of "stable". The fine print of the ratings
announcement, however, carried the warning that the bank's lending and capital
were highly concentrated among related parties, especially Unified Industrial
Corporation, Pugachev's holding.
According to S&P, Pugachev's bank was characterized by "the absence of an
accurate strategy for attracting finance; an unclear strategy of development,
in particular concerning retail business; insufficiently developed systems of
risk-management and high level of risks." S&P said it wasn't sure what
might happen to the bank's capital if the financial markets turned "adverse".
Now that this is exactly what has happened, S&P says the bank is due for a
ratings review next month, and that the data for the review are likely to
arrive on time. No word of the impact of the financial crash on the bank's
profit and loss line is available.
Why would a man as secretive as Pugachev, with a bank and a holding that avoid
published audit reports and public scrutiny, take a seat in parliament and buy
a public newspaper in Paris? Not because he says he values free speech, because
he doesn't say anything at all. Nor because he wants to be accountable to
electors, shareholders, or clients.
When the English press detected a year ago that Pugachev was negotiating to
acquire an interior decorations business from Viscount Linley, a nephew of
Britain's Queen Elizabeth, it was supposed in the London media that the deal
"would ease his entree to British high society, as he snaps up a clutch of
luxury brands in Western Europe". Pugachev was reported at the same time as
owning a chateau near Nice and two villas near Cap Ferrat. For some reason, the
acquisition announcement, which was reported to be imminent in January 2008,
has not materialized. Linley is currently offering a Claridge's Tub Chair for
new customers, and slashing prices on stock. It seems Pugachev isn't buying.
Control of Linley's business, that is. It has been confirmed that Pugachev
purchased from Linley something Russians rarely do - a small minority
shareholding, with one seat on the company board. His is one seat among seven -
four non-executive and three executive directors. Linley retains the majority
and control shareholding. Pugachev appears to hold about 10%. Linley's company
isn't disclosing what was paid for the stake and what more Pugachev may have
agreed to invest, if anything. It isn't clear whether Pugachev's investment and
his seat on the Linley board warrant permission from the Federation Council for
the senator to conduct such a business role, in addition to his electoral
duties, under Russian law.
What is clearer in Russia is that Pugachev's attempt to take control of St
Petersburg principal shipyards and consolidate them into a single maritime
construction business has failed to win Kremlin or Defense Ministry approval.
This outcome casts doubt on the presumption, widely circulated until recently
in Russia and abroad, that Pugachev was protected by Putin. The upshot is also
that his shipyard holding, and possibly also his bank, are stuck with
substantial obligations and a future order book without state underwriting or
guarantees.
Baltic's accumulated debt has been reported at 4.5 billion roubles. How much is
a non-performing loan on the books of MPB is not known. Baltic officials
referred questions about the shipyard's financial and production operations to
UIC. UIC spokesman Dmitry Morochenko said he would not be replying "today".
At the St Petersburg city government industry committee last week, Alexander
Radzhisin said that on April 4 a fire had broken out at the Baltic Plant. No
one was hurt, he said, but the incident reminded the city government that "the
position of the city is to support the workers. To move the plant now would
mean that workers, who are already facing the crisis, won't be able to get a
new job."
He noted that Pugachev had yet to apply to move the shipyard, if that's his
intention. "Any relocation plans should be drawn up with a full explanation of
what will happen to the city infrastructure and its citizens. Such plans have
not been submitted, so far as I know."
John Helmer has been a Moscow-based correspondent since 1989,
specializing in the coverage of Russian business.
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