Ship finance for a modern Russia

Gavin Stoddart, who runs the Russian offices of Moore Stephens International, explains why Russia is a better place to do business than ever before

RUSSIA has had a bad year for financial publicity. The dispute between the Russian state and its largest company, Yukos, created a perception that Russia is a difficult place to do business. But that perception is wrong. For shipping, Russia today is a better place to do business than it has ever been. The door to international finance and international markets is open, with traffic flowing in both directions. The only passport to success is sound and visible financial structures.

Although high-profile conflicts between the Russian and oligarch-owned companies has scared off some international investment and financing in Russia, there is still plenty of appetite from global banks and individual investors to put money into the rapidly developing Russian market. At the same time, a new tranche of small and medium-sized Russian companies is expanding globally, seeking listings on smaller exchanges such as AIM in London, or in Vancouver.

There is still a Russian risk premium on such capital, but all the indicators point to that reducing or disappearing as Russian business practice meets international standards. Some myths are already in the past, such as the perception of Russia having an overly complicated and expensive tax regime. Today, a transparent and well-run business would be just as happy to pay tax in Russia as in many other European jurisdictions. The paperwork is just as straightforward, and the tax rate lower than many.

The three keys for Russian companies to access global finance and markets, and the three keys for investors looking inwards, are simple. The Russian enterprise must have good accounting systems in place and must have accounts going back at least three years, prepared in accordance with International Financial Reporting Standards or another internationally accepted set of standards. The accounts may not need to be audited at first, but the enterprise must be ready for audit in the future.

Then comes the need for a compelling business plan - not the jumble of hopeful numbers which until now many Russian companies have considered sufficient. This plan must contain full analyses of the market, the track record and strength of the company, and the exact plans through which the company intends to develop the market opportunities identified.

Finally, the Russian company must have some form of security to offer. For shipowning companies, this is relatively straightforward, as they can create - as they have been doing for years - offshore companies to own vessels and flag them in global registries. For almost all banks, there are still questions over the Russian flag and register as a suitable place to register a ship mortgage.

However, Russian shipping is doing well, and will do better on the back of a boom in seaborne exports of crude oil which is behind a series of orders for ice-strengthened tankers for Sovcomflot. Other Russian companies such as FESCO are also ordering new tonnage. It recently began an ambitious programme of fleet renewal and management restructuring, as Yuriy Gilts, chief financial officer of FESCO, explains.

“We are active in two different shipping fields here,” explains Gilts. “We are a major liner operator, and at the same time we have a strong bulker and tramp fleet, plus specialised vessels. We are going through interesting times on both sides of the company, with major fleet renewals.”

FESCO today operates over 74 ships, eleven lines and over 42,000 teu capacity and has a series of new container vessels building in Poland and China. At the same time it has an icebreaking supply vessel building in Finland, and was able to win an open tender from ExxonMobil for a seven-year charter for this vessel. Why has FESCO done well and emerged as a strong global player when other ex-state-owned Russian companies have gone under? “We have a clear shareholder structure now,” explains Gilts, “with just over sixty per cent owned by one industrial group. That allows us to set clear priorities. We have a new and very focused management team. And of course we have good markets, especially with China right on our doorstep here in the Far East.”

How about finance? “We tend to use straightforward bank finance for our new projects,” says Gilts. “We can find up to thirty per cent equity for our newbuildings. The rest comes from a mixture of international banks. For instance, ING Bank financed our icebreakers, which are unique vessels which will work for ExxonMobil out of Sakhalin.”

According to Gilts, even strong Russian companies like FESCO still pay a Russian risk premium on finance. “Even when we use single-purpose foreign subsidiaries for ownership, we still face the perception of some sort of political risk in Russia,” he explains. “That means we face higher margins, but major banks do like our business so we don’t have any problem to attract the finance.”

Moore Stephens has been active in Russia, providing business advice and accounting and auditing to international standards, since 1991. But it has never before experienced the current pace of growth. Russia is booming.