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November 2013 | #10(34)
Moment in History
Dedicated to the 25th anniversary of Sovcomflot THE STORMS THAT SCF WEATHERED As Sovcomflot’s anniversary year draws to a close, we invite you to take another look back over the last 25 years and leaf through the SCF history books. Vadim Dmitriyevich Kornilov, Collegium Member of the Ministry of the Merchant Maritime of the USSR and General Director of OAO Sovcomflot 1991-1999, provides us with some fascinating insights into the past. - Those of my generation look back on the pre-Perestroika period of the Russian merchant fleet with understandable nostalgia. At that time, the tonnage of its vessels was around 25 million tonnes, the industry employed over 450 people and shipping companies, ports and repair years were all under the centralised leadership of the Ministry of the Merchant Maritime. In essence, it represented an industrial concern headed by a minister placed in charge of the shipping sector by the country’s top leadership. Prehistory Over 40 intergovernmental agreements on shipping provided our vessels with access to foreign states’ cargos, including large markets like the USA, Germany, all European Union countries and South-East Asia. Financially speaking, revenues generated by the fleet not only covered the cost of its upkeep, but also contributed an annual sum of over 2.5 billion dollars to the country’s budget. In the early 70s, the shipping industry was experiencing difficulties attracting state funding for its development. Many of the country’s other industries found themselves in precisely the same position as the pendulum swung in the direction of the military-industrial complex. However, we retained our advantage in global shipping with control over our cargo base: the Soviet Union purchased up to 45 million tonnes of grain from the USA annually and at that time this cargo was divided into three parts, one of which was allocated to third country ship-owners. The most difficult task was chartering vessels from foreign companies for the shipment of grain. This was done by the Sovfrakht team led by Nikolay Zuyev, who sought out large-scale deals on economically favourable terms, sometimes using hidden market entry via little-known firms. It was in fact he who approached the heads of the Ministry of the
Merchant Maritime (First Deputy Minister Vladimir Tikhonov and Minister Timofey Guzhenko) with the idea of using the bareboat charter model – the hiring of ships without crews with ownership passing to the Soviet Union following the repayment of their value through freight revenue. The foreign bank involved in the deal issued a loan to the new ship-owner to cover the cost of the ship to the original owner; the new owner secured the loan against the ship and the vessel became his once the loan had been repaid to the bank. Up until the end of the 80s, banks had agreed to register bareboat vessels under the flag of the Soviet Union. Afterwards, due to the fact that foreign banks could not exercise their tax rights on the territory of the USSR (and subsequently Russia), they refused to issue loans if they were not satisfied with the vessel’s country of registration and more acceptable conditions could be found in offshore zones. Foreign ship-owners were already blazing a trail to the offshore zones with 70% of global tonnage being registered in countries, such as: Liberia, the Virgin Islands, Cyprus, the Isle of Man, the Bermuda Islands, etc. All bareboat vessels were entered into the State Register of Shipping and had the right to sail under the flag of the USSR. These ships were operated on the principles of self-financing and complete self-repayment. Foreign currency was used to pay for fuel received at Soviet ports. Foreign currency was also exchanged into roubles to cover port expenses in the USSR and to pay parts of crews’ salaries. 15 years later, at the beginning of 1988, the bareboat fleet consisted of 113 vessels with a combined tonnage of 1,438,000 tonnes. Funds provided by “VOFCO” were used to purchase equipment for ports, build storage facilities and develop a material and technical foundation for shipping companies. Over 500 million dollars was spent to achieve this. Agent, charter, stevedore and bunkerage companies were created overseas and ports and shipping companies were given interest free loans. All of this work was conducted under the leadership of Vladimir Tikhonov via the formation of AllUSSR Association Sovcomflot as part of the Ministry of the Merchant Maritime in 1986. JSC Sovcomflot on the eve of the collapse of the USSR The Ministry of the Merchant Maritime stood out from other ministries due to its pioneering
commercial activities without recourse to state funds. Therefore, on the initiative of Gosplan and the Ministry of Finance, USSR Cabinet Decree № 474 of 16 April 1988 was issued, in accordance with which JSC Sovcomflot (jointstock company) was formed. The country’s shipping companies became the shareholders of this new company. In 1988-1990, contracts were signed for the construction of 85 new Sovcomflot vessels with a combined tonnage of 1.2 million tonnes and at a cost of over 1.7 billion dollars. The collapse of the USSR destroyed the financial system behind the fleet development programme. In spite of their previously pledged commitments, shipping companies in Ukraine, Georgia and Latvia as well as the Baltic, Novorossiysk, Far-Eastern, Sakhalin, and Kamchatka shipping companies refused to pay back loans on vessels already under their management and those ordered on their behalf by Sovcomflot. In order to avoid bankruptcy, in autumn 1991 Sovcomflot was forced to underwrite every single contract. During this dramatic period in Sovcomflot’s history, its total loan obligations were estimated at 3.5 billion dollars. Besides refusing to make loan repayments, many shipping companies made attempts to divide up the Sovcomflot fleet amongst themselves or sell its vessels. Appeals to the Chair of the Government, Prosecutor General and Head of the KGB all carried the following message: Sovcomflot is in debt and can never repay all it owes – it has defaulted on its loans and creditors will start confiscating vessels. The prices of these ships will fall and vessels belonging to other shipping companies will be confiscated. A catastrophic situation will arise when there will be no ships to import grain and the country will starve. In order to save Russia’s fleet, Sovcomflot’s ships must be sold. The company was faced with the task of saving itself in the anarchy surrounding the fall of the USSR. It was necessary to: return bareboat vessels from Russian and former Soviet shipping companies, comply with the demands of foreign banks regarding the registration of ships in member countries of the International Convention on Maritime Liens and Mortgages (Russia was not a member), recommence loan repayments and hold talks with the banks on the restructuring of debts, seek funds to cover operational costs and create
a new management system for the company. In addition, these tasks had to be implemented urgently and in unison. There was no time or sense in trying to coordinate these actions with government authorities. The parting words of Vladimir Tikhonov provided some guidance: “If you are acting in the interests of your work but in so doing break the rules, you have nothing to fear unless you are stealing.” In a short time Sovcomflot was able to return 42 vessels with a combined tonnage of around 1 million tonnes registered at ports in former Soviet republics and reregister them under “convenient flags”. Five years later, during a company audit by the Chamber of Accounts, the group of inspectors posed the following question: “On what grounds was the fleet withdrawn from the former Soviet republics?” They had to acknowledge that had the vessels remained in the presentday sovereign states, there would certainly have been lost. Sovcomflot was in a catastrophic financial position. The order was given to start by repaying its smaller debts and this led to the opinion on the market that Sovcomflot had started to return its debts. Thus, the confiscation of the company’s ships was avoided. On an even keel In summer 1992, a Russian Presidential decree was issued instructing all enterprises be privatised by 1 September. Directors were threatened with dismissal if they did not comply. The Intergovernmental Privatisation Commission upheld that Sovcomflot had been formed contrary to USSR law and the Chamber of Accounts stated that its vessels had been illegally transferred into the ownership of foreign companies and that the withdrawal of its ships from former Soviet republics was conducted in breach of new legislation. For several years, Sovcomflot underwent continual inspections by the Chamber of Accounts, State Property Committee, tax police, Federal Tax Service, Ministry of Transport, Ministry of Internal Affairs and the General Prosecutor’s Office. All of the old vessels were sold. The new ships were mortgaged to foreign banks and along with the vessels built in 1992-1993 formed the basis of the company fleet. At the beginning of 1996, the tonnage of the fleet had increased to 3.2 million tonnes. The state budget received dividends of 2.2 billion roubles and taxes of 15 billion roubles. Financial obligations
were reduced to 1.4 billion dollars. Total interest on loans was lowered from 9-13% to 6.7%. In the book Sovcomflot, Timofey Guzhenko referred to this as “an exceptional feat in the life of the Russian fleet by post-Soviet entrepreneurs”. Sovcomflot was now on an even keel. The company provided wellpaid work to 4,000 sailors and 240 shore-based specialists. A class-I sailor received a salary of $1,200 per month and a captain earned $4,000. As a result, Sovcomflot and its daughter companies attracted experienced professionals and Russians worked hand-in-hand alongside English, Scottish, Swiss and Cypriot colleagues. Crews were made up solely of Russian citizens. At the end of the 90s, the State Property Committee sent in a team of inspectors from an “independent auditor” which concluded that: Sovcomflot charters out ships at higher than average global rates, sells its services at higher than market prices, works in a professional manner and functions in strict accordance with its vertical management structure – the company is entirely fit for sale. At that moment it was not good news. Unexpectedly for us, we received a prize from an American business school for “Survival in the face of intolerable conditions” and another message from one distinguished organisation expressing gratitude for “keeping Sovcomflot in state hands despite opposition from the government”. By the end of the 90s, Sovcomflot had 78 modern vessels with a combined deadweight of 3.3 million tonnes, which constituted over one third of Russia’s entire fleet. Behind Sovcomflot came Novorossiysk Shipping Company with 2.6 million tonnes. While the average age of vessels in the Russian fleet was 19.5 years, our ships averaged just over 6.5 years. According to the most important performance indicators, Sovcomflot became a genuinely first class shipping company while its administrative costs were the lowest in the history of the industry. Furthermore, the company’s sole source of financing was loans from foreign banks. The period from 1991 to 2000 was characterised by a global economic downturn but Sovcomflot never received financial assistance of any kind from the state. This material is an abridged version of the original article. To read the full version in Russian, please see Marine Fleet Magazine №4, 2013.
Корпоративное издание группы компаний Совкомфлот www.scf-group.ru
The Newsletter of SCF Group www.scf-group.ru
Выпускается ежемесячно АДРЕС РЕДАКЦИИ: Российская Федерация, 353900, Новороссийск, ул. Свободы, 1 Тел. (8617) 60 12 99 РЕДАКТОР Серафима Шукшина E-MAIL S.Shukshina@scf-group.ru ТЕКСТЫ Анна Бокина, Серафима Шукшина ДОПЕЧАТНАЯ ПОДГОТОВКА И ПЕЧАТЬ ООО «Омега-Принт» На с. 4 использованы материалы ИТАР-ТАСС, Корабел.ру, «Золотой Рог».
Issued monthly EDITORIAL ADDRESS 1, Svobody str., Novorossiysk, Russia 353900 Tel. (8617) 60 12 99 EDITED BY Serafima Shukshina E-MAIL S.Shukshina@scf-group.ru TEXTS Anna Bokina, Serafima Shukshina PRINTED BY Omega-Print Ltd.
November 2013 | #10(34)