No. 007 Andrew Fox Pessimistic on Prospects for Improvement in Primorye Investment Climate

  

                                                                                                                 No. 7

 

                                                  

                                             U.S. Consulate General, Vladivostok

                                                                April 24, 2001

 

 

 

 

Andrew Fox Pessimistic on Prospects for Improvement in Primorye Investment Climate

 

I met on the afternoon of April 24 with Andrew Fox, the Honorary British Consul and representative of Tiger Securities in Vladivostok.  Andrew had just completed a series of shareholder meetings involving FESCO (Friday), Nakhodka Shipping Port (Monday), and his own company Farmazol (today). He reported on the outcomes of those meetings and his general assessment of Primorye's political and economic situation. 

 

FESCO -- Foreigners Heading for the Exits

 

As predicted by FESCO Marketing Manager Richard Thomas (see the previous e-mail, attached), the board voted Myskov out as Chairman. It confirmed Lugovets and Nadein as CEO and Deputy, respectively.  In an unexpected development, no foreigners were voted to the 11-member board.  Fox said his firm's shares amounted to less than four percent of the company, but he had expected that foreigners would get a seat anyway, if just for show.  Fox said that he and his partners would be trying to sell their shares for around $2.5 million -- a deep discount considering his estimate of the total worth of FESCO at approximately $250-300 million (Thomas had estimated $400 million).  Fox said this was just one more indicator of Primorye's parlous state of foreign investments.  Despite Putin's politically correct statements on foreign investors in Russia, the fact was that in Primorye, they were still streaming for the exits and with good cause.

 

Nakhodka Shipping Port -- Russians Playing Dirty Pool

 

Fox and his partners also had a 25% stake in Nakhodka Shipping Port, the second largest port in Primorye after Vostochniy, with assets valued at around $30 million.  Fox noted that he and his partners, seeing which way the wind blew, sold out last year to the principal stockholder and General Director company, Geliy Nikolayevich Myasnikov.  They were willing to accept a steep discount in the share price in this case, but after the deal had been signed for $2.0 million, Myasnikov reneged and made a new offer of $1.0 million.  Fox and his partners balked.  At yesterday's shareholder meeting, Myasnikov and his allies gained total control of the company by polling 75.2% of shares.  Fox said this would enable them to issue new stock and dilute foreign holdings to next to nothing.  Fox, justifiably dubious of any possibility of a court solution,  was looking for a way to sell the company's remaining shares for whatever he could get.

 

Farmazol -- Not Yet a Target

 

Fox said he had recently purchased 56% of this small company and expected it to be in profit in four to five years.  The company currently markets herbal medicines and teas and has recently acquired an "eternal" lease on 400 hectares of good agricultural land near Vladivostok's airport.

 

The Gubernatorial Election -- Who is the Lesser Evil?

 

Fox was quite scathing in his critique of nearly all the major gubernatorial candidates.  Fox expected little change in business conditions if the current favorite, Acting Governor Dubinin, was elected since "Dubinin is Nazdratenko's man."  He thought former mayor Cherepkov and PolPred Deputy Apanasenko also had a good chance at taking the election, although the latter seemed to need to better manage his campaign.  Fox's bottom line was that prospects could have been better for significantly improving business conditions no matter which of the three major candidates became governor -- even Apanasenko.  Fox's preference was for PRISCO General Director Kirilichev. Fox and his investors held about 7% of PRISCO's shares, and it was one of the few investments Fox had where he had not had to fend off dubious Russian takeover bids.  In fact, dealing with Kirilichev was like dealing with a normal businessman.  Unfortunately, Fox said, Kirilichev's chances of winning the governorship were small. 

 

Addressees:  Please forward as appropriate.

James F. Schumaker
Acting Consul General
Vladivostok, Russia
Telephone 7(4232)30-00-70
Fax 7(4232)26-02-48
SchumakerJF@State.Gov
jfs@compuserve.com

THIS E-MAIL IS UNCLASSIFIED IAW E.O. 12958.

 

 

Attachment:  FESCO Floundering, But a Little Bit of Light Appears at the End of the Tunnel

 

 

Richard Thomas, the newly-appointed Marketing Manager for the Far East Shipping Company (FESCO), called on me at the Consulate General on April 18.

 

Changes Coming at FESCO

 

Thomas said that on April 20, there will be a meeting of the FESCO Board of Directors at which the current Chairman of the Board,  Viktor Mis'kov, will be sacked.  Mis'kov, who is 71,  has been with FESCO in one capacity or another since 1990.  He and another board member, Yevgeniy Ambrosov, are currently under investigation for asset stripping and other financial irregularities.  Thomas added that Mis'kov 's son-in-law, currently FESCO's representative in Australia, is also under investigation, as is Mis'kov 's son, currently in Sweden.  The latter has a reputation as a ne'er do well who lost big money -- most of it FESCOs -- in local casinos.  Thomas said he did not know who would replace Mis'kov, although it was likely that the Federal Ministry of Transport, which now owned about 20 percent of FESCO's shares,  would nominate someone as "absentee chairman."  CEO Lugovets and his Deputy Nadein would be retained and continue to run the company as they had for the past year.  Foreign interests, once accounting for 40 percent of FESCO's shares, were now below five percent and would be represented by Andrew Fox (British Honorary Consul and Chairman of Tiger Securities).  The remaining seats on the 11-member board would go to Russians -- none, apparently, with direct ties to the Primorye local government.

 

  

FESCO is in Deep Financial Trouble but Climbing Back

 

Thomas reported that FESCO was trying to set its house in order but had dug a tremendous hole in the 1990s and nearly collapsed during the 1998 financial crisis.  In 1992, FESCO owned over a hundred ships with a net worth of over a billion dollars.  After a decade of asset stripping and rake-offs by the Nazdratenko regime, its net worth was less than 400 million.  Also, its shipping fleet was down to about 70 dry cargo vessels, but several new container ships promised to turn FESCO's profit picture around.  Moore Stevens, FESCO's accounting firm, reported that in 1999 FESCO lost over $60 million; in 2000, over $50 million, and projections for 2001 showed a loss of about $40 million.  The highly-cooked Russian books for this period show a slight profit each year, including a gain of 32.9 million rubles for 2000.  However, even the Russian accountants had to admit that FESCO would pay no dividend this year, the first time that has happened in recent memory.  Despite the relatively gloomy profit picture, Moore Stevens believes that FESCO, if appropriately managed, could start to show a profit within 3-4 years. 

   

Thomas said that with the demise of Nazdratenko and most of his Vice Governor allies, the years of asset stripping and "contributions" to the Primorye treasury were over.  "Besides which," he noted, "nearly everything worth stealing has been stolen." Despite the depredations of the Primorye leadership, FESCO  still ranked as the 34th largest shipping company in the world, and Thomas believed it could come back with proper management.  One enormous problem was FESCO's bloated payroll.  In Vladivostok alone, over 1,000 bureaucrats were working in FESCO's offices.

In contrast, in a normal shipping company of FESCO's size, there would be fewer than 200 (Lugovets has promised to trim the excess during his term in office, which expires in 2005).  Even worse, FESCO's overseas representatives had been bleeding the company white by setting up bogus businesses, contracting for the sale of equipment through these firms to FESCO at grossly inflated prices, and then pocketing the difference themselves.  Most of these "representatives," including Mis'kov 's relatives, would probably be fired and, in some cases, prosecuted.

 

 

PRISCO Doing Better

 

Thomas noted that FESCO's sister shipping company, PRISCO (Primorye Shipping Company) had weathered the decade of the 1990s somewhat better.  Headquartered in Nakhodka and run by current gubernatorial candidate Aleksandr Kirilichev, PRISCO had managed to preserve most of its shipping fleet, which now consists of about 45 tankers, and was worth more than $300 million.  Kirilichev, over the years, had also managed to re-flag most of his vessels.  This kept them from being "acquired" by the Primorye government or its allies and enabled Kirilichev to shelter much of PRISCO's income overseas.  Recently, anti-Kirilichev newspapers have been leveling the accusation that Kirilichev has been responsible for "capital flight" from Russia and should be prosecuted.  Thomas noted wryly that Kirilichev sponsored capital flight, but from Nazdratenko, not Russia.  

 

 

Biographic Note:  Richard Thomas, an American citizen, is a longtime resident of the Vladivostok area and knows the local scene well.  Originally a Russian Studies major at Wesleyan, he studied at MGU in the mid-1980s and became fascinated with life in Russia.  He came to Vladivostok in 1992, married a Russian citizen, and has lived here ever since.  He was editor of the Vladivostok News (English version) from 1995 until 1998, when the paper folded.  Before that, he taught at DVGU (Far East State University) in Vladivostok.  From 1997 until 1999 he was a member of the Board of Directors of FESCO, representing foreign shareholders.  In 1999, he started up an English-language newspaper in Yuzhno-Sakhalinsk but left when organized criminal elements started moving in.  Most recently, he worked as head of the Investment and Securities Department at the Vladivostok Port Authority until he was appointed to his present position in November 2000.

 

Note on Share Ownership.  Officially, FESCO claims that it is still almost 40% foreign-owned, but this is disingenuous.  According to company records summarized by "Zolotoy Rog," the Federal Ministry of Transport owns 19.8% of shares through the Ministry of State Property (Mingosimuschestva).  According to "Zolotoy Rog," foreign interests account for 37%.  However, the two most significant "foreign" shareholders are "Sirapko Limited" and "Makhaon Limited." Both companies are registered in Cyprus and are likely fronts for Russian investors affiliated with Nazdratenko and Mis'kov. "Zolotoy Rog" also reports that foreign interests will be decreased to "a symbolic percent," which makes Thomas's figure (below 5%) sound reasonable.  Other significant shareholders include Dalnevostochniy Bank (12.9%) and Sovkomflot (5.7%).

 

Note on FESCO Board of Directors.  There are over 30 candidates for the 11 seats on the FESCO Board.  The federal government has submitted a list of 7 people whom it would like to see as members of the board, including two current FESCO executives (Aleksandr Lugovets and Aleksandr Zhiglitskiy), two people from the Federal Ministry of Transport (Sergey Zhelannov and Gleb Fedulov), two people from the Ministry of State Property (Irina Bogacheva and Gennadiy Bogatyrev), and Primorye Vice Governor Gennadiy Tokulenko. "Zolotoy Rog" also mentions that the Chairman of the Board of the regional branch of Morbank, Rashid Mursekayev, and his deputy Roman Pakhomov have submitted their candidacies independently.  Morbank is currently trying to buy up FESCO's "foreign" shares.