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. Last Updated: 07/27/2016

Shipping Industry: Worth Fighting For

The crazy battles now raging between shareholders and management at two obscure Russian shipping companies based in the Far East could make you think Russia is an impossible place to invest.

Alternatively, they could show, first, that Russian management is finally being forced to come to terms with its responsibilities to shareholders, and second, that Russia has lots of secondary industries, such as shipping, that are attractive to invest in.

The crisis out east is part of a much bigger wave sweeping across Russia this spring as, for the first time, managers of Russian companies are forced to give an account of their activities to shareholders who bought stock in their companies.

As in most other cases, stockholders are a new experience for the management at the Sakhalin Shipping Company and the Primorsky Shipping Company. The old Soviet directors had been left to run their companies more or less on their own since perestroika failed and Moscow lost control in the late '80s.

But they have seen their position change dramatically over the last year with the public sale of their stock to outside investors. In typical capitalist fashion, these pesky shareholders have started to ask for higher profits and a voice in the company.

Apparently, management at SASCO and PRISCO decided on a simple solution to the problem. They unilaterally issued themselves with enough shares to take back control.

The old Far East sea dogs seem determined. Management at SASCO has already pushed its plan through a rather questionable shareholders meeting and PRISCO management is equally obdurate.

These battles are messy and obviously scare away investors, but the past 12 months are the first time that post-Soviet Russia has had any kind of stock market. It would be surprising if the process was smooth.

Moreover, the mere fact that investors are willing to take the trouble to fight over their rights in these obscure and remote companies is a good indication of how much value there is in Russian companies. It is not just oil and gas stocks that have attracted interest.

Russia has nine deep-water shipping companies whose shares are now coming on to the market. Many are gems.

FESCO, the largest shipping company in the Far East and also the company that has attracted the most investor attention, has a market value that is about 90 percent below its net asset value in terms of the saleable value of its ships. Its current market value of about $80 million is only about seven times estimated 1994 earnings which are regarded as fairly secure.

Moreover, like most Russian shipping companies, which only sprang into independent existence a few years ago, FESCO is largely debt free. Banks are now lending increasingly to FESCO and other Russian shipping companies against the security of its unencumbered fleet.

Equity investors are wary of investing in shipping companies because their rights as shareholders are still poorly protected. Banks on the other hand are delighted to lend.

It is, in general, very hard to collect on loans in Russia but shipping companies are an exception. The reason is that ships travel all around the world. If ever a shipping company fails to meet a payment, the banks can always seize the company's ship in a foreign port.

Geoff Winestock is a Moscow-based correspondent for the Journal of Commerce.