Crunch time has arrived for Baltic Shipping Company, Russia's oldest and best-known shipping enterprise. At a shareholders' meeting April 25, after a year of unremitting disaster, a new management team was voted in.
The boardroom coup is an admission that Baltic Shipping faces a spiral of decline that, if it continues, will lead to the company's fleet disappearing completely.
Results released at the shareholders meeting showed a total loss for 1995 of 215.8 billion rubles ($43.5 million). This is a big hit for a company which one shareholder estimated had assets of $400 million at the start of last year.
In just one incident in January, BSC subsidiary Baltic Express Line, which ran passenger ferries between St. Petersburg and Scandinavian ports, folded when Swedish partners took the firm to bankruptcy court. With its ships motionless in their berths, the company racked up $17 million in losses.
But it is not just a financial decline, it is physical: In the course of the year, the company fleet shrank by 42 ships. Some were old and sold off for scrap but tens of other vessels were unceremoniously seized by disgruntled creditors in ports from Singapore to Rotterdam and sold at auction to raise cash.
Of the 79 ships that remain, another 30 are old and expected to be sold for scrap this year. In addition, 15 ships are currently held in foreign ports while creditors and crews demand payment. In the most recent incident, the freighter Stakhonovets was seized in Italy when its crew filed a lawsuit demanding payment of wages.
There is more bad news. Another nine ships are threatened with seizure abroad, said Yury Sukhorukhov, foreign affairs chief of the Baltic Regional Organization of the Seafarers Union of Russia.
"It's difficult to say how many ships we have in operation, because at any moment, we could get another call saying another ship has been seized," said Sukhorukhov.
This past December, 70 percent of the company's shoreside workers were sent on an extended 10-day holiday. Crews in foreign ports have not received their pay for months on end. The company's total workforce now stands at 3,000, down from 14,000. Most phone lines have been cut, as have several other basic utilities.
"Today it is completely impossible to call ourselves a shipping company," said former company president Grigory Filimonov, shortly before handing in his resignation at the recent annual shareholders meeting.
At least the disastrous state of the company has produced some response. At the shareholders meeting, Mikhail Romanovsky, director of the Russian Union of Shipowners, was elected chairman, a post which had remained vacant since the Oct. 2 murder of the previous chairman Ivan Lushchinsky. Six of nine directors were voted off the board. A new president is expected to be elected at a special meeting June 13.
Anatoly Lutsgoff, chairman of the Invesco financial company in London, which helped BSC secure an $18 million credit in 1994 from ING bank, called Romanovsky "high caliber."
But with the new leadership at the helm, the question remains: Can the company, which previously dominated Russia's trade on the Baltic, be saved?
Three years ago, BSC's future looked bright. Under the leadership of then-president Viktor Kharchenko, the administration headed down the road toward privatization -- among the first Russian companies to do so. Then, just as it was on the verge of clinching a $100 million credit through GE Capital to order new ships from Baltic Shipyards, Kharchenko was arrested on charges of fraud and embezzlement. The credit project fell through, plunging both BSC and the shipyard into severe economic difficulties.
Last year, Kharchenko and others implicated in the incident were cleared of all charges. Today, Kharchenko heads the St. Petersburg Union of Industrialists and Entrepreneurs.
"Baltic Shipping is now completely destroyed," said Kharchenko, who claimed the charges resulted from Transport Minister Yury Volmer's opposition to some of his leadership decisions, such as renting space from the nearby World Laboratory to take advantage of its tax-free status. World Laboratory -- a scientific research organization under the Academy of Sciences -- in 1991 arranged a deal to rent ships from BSC as research vessels.
Kharchenko claims that the Transport Ministry is partly responsible for the demise of Baltic Shipping. "The Russian transportation departments helped this collapse along. All those who were competent were forced out," he said.
But according to Kharchenko one major source of BSC's collapse is corruption within the company, which has effectively robbed it of whatever assets it had.
The murder of former chairman Lushchinsky, who was killed in the stairwell of his home, was a big blow. Lushchinsky was apparently taking steps to crack down on corruption in the company and had drawn up proposals to sell more shares to foreign investors. His death is still under investigation, according to police spokesman Gennady Ilyagnov. "In cases of entrepreneurs, it's always very difficult. There are a lot of different aspects that must be examined," he said.
A turnaround will not be easy. "They've more or less withdrawn from the liner business," said Giles Markell, director of London-based Morline, which previously served as an agent for BSC. "As debts have piled up, their vessels have been withdrawn from service."
BSC officials refused to comment on the firm's current situation.
The strange thing is that Baltic Shipping stood out from other Russian shipping companies which have done fairly well adapting to the free market.
In theory, shipping companies' experience operating on world markets back in the Soviet era has given them some advantages over other Russian industries trying to adapt to private enterprise. "The tradition of shipping companies included an awareness of world markets," said Tony Antoniou, partner in charge of the Coopers & Lybrand St. Petersburg office, which advised Northwest Shipping Company and Novorossiisk Shipping Company (Novoship) in drawing up new financial programs. "They're used to operating in international waters with international partners."
But the sector has also had its particular problems. While nurtured under Soviet wings, shipping companies generally weighed in with hefty profits. "Before, these companies could use inexpensive Russian fuel and still receive a regular price from abroad for services," said Mikhail Kuprin, general director of the St. Petersburg office of the Poul Christensen shipping company.
Since the late years of perestroika, however, fuel prices have risen rapidly, while traditional markets such as Cuba and Africa have faded away. "Ships would carry military technology to Cuba, and return here with sugar," said Kuprin. "It was difficult to substitute one market for another." Half of Baltic's fleet was used for trade with Cuba.
Baltic Shipping was especially hurt when Russia slashed its grain imports, a staple of business at BSC's home base of St. Petersburg, which was the Soviet Union's major grain port.
And though other imports from the West began flooding into the Russian domestic market, Russian companies have had difficulty competing with the foreign shipping companies for clients in the containerized service-conscious business of consumer goods imports.
Aging, inappropriate vessels have also hindered development. In Baltic's case, the roll-on/roll-off carriers used to transport military hardware to Cuba are not easily re-equipped to carry container cargo. Today, BSC is discussing purchasing four bulk vessels from St. Petersburg's Baltic Shipyards for the booming metals export business, but it has been unable to come up with the financing to cover the project.
According to Kuprin, Russian ships are also forced to send all hard-currency earnings directly to Russia for accounting, creating delays and other bureaucratic headaches.
In spite of these problems, several Russian shipping companies have managed to navigate the waters of international finance and, at the very least, stay afloat. Some have prospered. Vladivostok's Far East Shipping Company (Fesco) received $60 million in loans last year, while Novorossiisk Shipping (Novoship) scored a syndicated loan through the European Bank for Reconstruction and Development amounting to $200 million. Primorsk Shipping (Nakhodka) also attracted $75 million from the EBRD.
"They've all proved there is life after perestroika," said Giles Markell, director of the London-based Morline financing company. "It all depends on whether you're equipped to handle the transition."
The bottom line in these success stories, observers say, is an active management intent on improving its level of professionalism and market understanding. "Among enlightened companies, financial reporting is becoming important, not just in the short term, but for the long term," Antoniou said. Tufton's McCarthy added, "Those that are successful have quality management."
Although no one will point to specific poor management decisions, nearly everyone admits that the management at BSC has simply not been up to the challenges of a new economy.
Poul Christensen's Kuprin was to the point. "The [BSC] leadership doesn't know how to work. They don't have the professionalism that is necessary," he said.
In his parting words, former president Filimonov, who retains a place on the board, pretty much admitted the management could not adapt. "Those titles we've become accustomed to hearing, such as deputy chief of finances, are simply not those functions that these people have become used to fulfilling. These functions are completely different than what they had to do in the past," he said.
There is lingering optimism for BSC's future, however difficult the challenge may be.
"I think things are looking up," said board director William Butler, a lawyer with the Moscow-based law firm White & Case. "We have a new board of directors who have a better [financial] understanding. They can take more knowledgeable action."
Lutsgoff of Invesco in London said BSC had enough liquidity to get over the crisis. "It could be very easy," he said. "They just have to restructure their efforts."
The boardroom coup is an admission that Baltic Shipping faces a spiral of decline that, if it continues, will lead to the company's fleet disappearing completely.
Results released at the shareholders meeting showed a total loss for 1995 of 215.8 billion rubles ($43.5 million). This is a big hit for a company which one shareholder estimated had assets of $400 million at the start of last year.
In just one incident in January, BSC subsidiary Baltic Express Line, which ran passenger ferries between St. Petersburg and Scandinavian ports, folded when Swedish partners took the firm to bankruptcy court. With its ships motionless in their berths, the company racked up $17 million in losses.
But it is not just a financial decline, it is physical: In the course of the year, the company fleet shrank by 42 ships. Some were old and sold off for scrap but tens of other vessels were unceremoniously seized by disgruntled creditors in ports from Singapore to Rotterdam and sold at auction to raise cash.
Of the 79 ships that remain, another 30 are old and expected to be sold for scrap this year. In addition, 15 ships are currently held in foreign ports while creditors and crews demand payment. In the most recent incident, the freighter Stakhonovets was seized in Italy when its crew filed a lawsuit demanding payment of wages.
There is more bad news. Another nine ships are threatened with seizure abroad, said Yury Sukhorukhov, foreign affairs chief of the Baltic Regional Organization of the Seafarers Union of Russia.
"It's difficult to say how many ships we have in operation, because at any moment, we could get another call saying another ship has been seized," said Sukhorukhov.
This past December, 70 percent of the company's shoreside workers were sent on an extended 10-day holiday. Crews in foreign ports have not received their pay for months on end. The company's total workforce now stands at 3,000, down from 14,000. Most phone lines have been cut, as have several other basic utilities.
"Today it is completely impossible to call ourselves a shipping company," said former company president Grigory Filimonov, shortly before handing in his resignation at the recent annual shareholders meeting.
At least the disastrous state of the company has produced some response. At the shareholders meeting, Mikhail Romanovsky, director of the Russian Union of Shipowners, was elected chairman, a post which had remained vacant since the Oct. 2 murder of the previous chairman Ivan Lushchinsky. Six of nine directors were voted off the board. A new president is expected to be elected at a special meeting June 13.
Anatoly Lutsgoff, chairman of the Invesco financial company in London, which helped BSC secure an $18 million credit in 1994 from ING bank, called Romanovsky "high caliber."
But with the new leadership at the helm, the question remains: Can the company, which previously dominated Russia's trade on the Baltic, be saved?
Three years ago, BSC's future looked bright. Under the leadership of then-president Viktor Kharchenko, the administration headed down the road toward privatization -- among the first Russian companies to do so. Then, just as it was on the verge of clinching a $100 million credit through GE Capital to order new ships from Baltic Shipyards, Kharchenko was arrested on charges of fraud and embezzlement. The credit project fell through, plunging both BSC and the shipyard into severe economic difficulties.
Last year, Kharchenko and others implicated in the incident were cleared of all charges. Today, Kharchenko heads the St. Petersburg Union of Industrialists and Entrepreneurs.
"Baltic Shipping is now completely destroyed," said Kharchenko, who claimed the charges resulted from Transport Minister Yury Volmer's opposition to some of his leadership decisions, such as renting space from the nearby World Laboratory to take advantage of its tax-free status. World Laboratory -- a scientific research organization under the Academy of Sciences -- in 1991 arranged a deal to rent ships from BSC as research vessels.
Kharchenko claims that the Transport Ministry is partly responsible for the demise of Baltic Shipping. "The Russian transportation departments helped this collapse along. All those who were competent were forced out," he said.
But according to Kharchenko one major source of BSC's collapse is corruption within the company, which has effectively robbed it of whatever assets it had.
The murder of former chairman Lushchinsky, who was killed in the stairwell of his home, was a big blow. Lushchinsky was apparently taking steps to crack down on corruption in the company and had drawn up proposals to sell more shares to foreign investors. His death is still under investigation, according to police spokesman Gennady Ilyagnov. "In cases of entrepreneurs, it's always very difficult. There are a lot of different aspects that must be examined," he said.
A turnaround will not be easy. "They've more or less withdrawn from the liner business," said Giles Markell, director of London-based Morline, which previously served as an agent for BSC. "As debts have piled up, their vessels have been withdrawn from service."
BSC officials refused to comment on the firm's current situation.
The strange thing is that Baltic Shipping stood out from other Russian shipping companies which have done fairly well adapting to the free market.
In theory, shipping companies' experience operating on world markets back in the Soviet era has given them some advantages over other Russian industries trying to adapt to private enterprise. "The tradition of shipping companies included an awareness of world markets," said Tony Antoniou, partner in charge of the Coopers & Lybrand St. Petersburg office, which advised Northwest Shipping Company and Novorossiisk Shipping Company (Novoship) in drawing up new financial programs. "They're used to operating in international waters with international partners."
But the sector has also had its particular problems. While nurtured under Soviet wings, shipping companies generally weighed in with hefty profits. "Before, these companies could use inexpensive Russian fuel and still receive a regular price from abroad for services," said Mikhail Kuprin, general director of the St. Petersburg office of the Poul Christensen shipping company.
Since the late years of perestroika, however, fuel prices have risen rapidly, while traditional markets such as Cuba and Africa have faded away. "Ships would carry military technology to Cuba, and return here with sugar," said Kuprin. "It was difficult to substitute one market for another." Half of Baltic's fleet was used for trade with Cuba.
Baltic Shipping was especially hurt when Russia slashed its grain imports, a staple of business at BSC's home base of St. Petersburg, which was the Soviet Union's major grain port.
And though other imports from the West began flooding into the Russian domestic market, Russian companies have had difficulty competing with the foreign shipping companies for clients in the containerized service-conscious business of consumer goods imports.
Aging, inappropriate vessels have also hindered development. In Baltic's case, the roll-on/roll-off carriers used to transport military hardware to Cuba are not easily re-equipped to carry container cargo. Today, BSC is discussing purchasing four bulk vessels from St. Petersburg's Baltic Shipyards for the booming metals export business, but it has been unable to come up with the financing to cover the project.
According to Kuprin, Russian ships are also forced to send all hard-currency earnings directly to Russia for accounting, creating delays and other bureaucratic headaches.
In spite of these problems, several Russian shipping companies have managed to navigate the waters of international finance and, at the very least, stay afloat. Some have prospered. Vladivostok's Far East Shipping Company (Fesco) received $60 million in loans last year, while Novorossiisk Shipping (Novoship) scored a syndicated loan through the European Bank for Reconstruction and Development amounting to $200 million. Primorsk Shipping (Nakhodka) also attracted $75 million from the EBRD.
"They've all proved there is life after perestroika," said Giles Markell, director of the London-based Morline financing company. "It all depends on whether you're equipped to handle the transition."
The bottom line in these success stories, observers say, is an active management intent on improving its level of professionalism and market understanding. "Among enlightened companies, financial reporting is becoming important, not just in the short term, but for the long term," Antoniou said. Tufton's McCarthy added, "Those that are successful have quality management."
Although no one will point to specific poor management decisions, nearly everyone admits that the management at BSC has simply not been up to the challenges of a new economy.
Poul Christensen's Kuprin was to the point. "The [BSC] leadership doesn't know how to work. They don't have the professionalism that is necessary," he said.
In his parting words, former president Filimonov, who retains a place on the board, pretty much admitted the management could not adapt. "Those titles we've become accustomed to hearing, such as deputy chief of finances, are simply not those functions that these people have become used to fulfilling. These functions are completely different than what they had to do in the past," he said.
There is lingering optimism for BSC's future, however difficult the challenge may be.
"I think things are looking up," said board director William Butler, a lawyer with the Moscow-based law firm White & Case. "We have a new board of directors who have a better [financial] understanding. They can take more knowledgeable action."
Lutsgoff of Invesco in London said BSC had enough liquidity to get over the crisis. "It could be very easy," he said. "They just have to restructure their efforts."
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