The Baltic Course  

Black trails of white steamers

By Mikhail Tuzhikov, Тransport Rossii

Throughout the world shipping companies are under constant supervision by consignors, business people and … corrupt state officials. It is no coincidence that the privatization of Baltic shipping companies followed the same scenario

Photo: The BC archives

For most people the words “shipping company” evoke only an association with ships and all other watercraft floating at sea. In fact, this is not quite true or rather is not true at all. Shipping companies manage ports, shipyards, maritime shipping route boards, etc.

As you may know from geography lessons at school, dry land takes up only a little over one-quarter of the Earth’s surface (29.2 percent to be more exact) while the rest or 361.06 million square kilometers is covered by vast unbroken waters encasing the Earth. Whatever is extracted from land or manufactured there is transported by rail, trucks or other means to final receivers – ports. From these truly golden warehouses cargos are shipped all over the world by steamers, tankers, bulkers, dry cargo boats, lighters and other vessels.

Until 1917 everything was more or less simple: the Russian Empire with its fleet and ports in what now is modern-day Finland, Russia, Estonia, Latvia, Lithuania and Poland on one side and Sweden, Germany, Denmark on the other side. Germans represented the greatest competition to Russian shipowners and shipping companies. After the distintegration of the Soviet Union in 1991 the number of competitors in the Baltics doubled from four to nine and there are several dozens of competing shipping companies and various shipowners.

For a better understanding of the versatile shipping business of the Baltic region, one needs to choose a starting point, which could be the condition of the Soviet merchant fleet – the ancestor of all post-Soviet shipping companies.


Look for the trail of money!

Baltiyskoe Morskoye Parokhodstvo (BMP) or Baltic Shipping Company was always considered the largest shipping company in the Baltics. Its origins date back to 1830, the foundation of the St.Petersburg-Luebeck Shipping Company that was reorganized into BMP in 1922. By 1990 BMP comprised of three ports (Leningrad, Vyborg, Kaliningrad), the Kanonersky shipyard,  the Torgmortrans shipping route board, a mobile unit for rescue, salvage and diving, ship-lifting and underwater repair units, shipyard and building facility, and other units. BMP had a fleet of 178 cargo and passengers vessels with an aggregate deadweight of over 1.5 million tons sailing to more than 400 ports in 70 different countries of the world.

The year 1991 may be described as “the beginning of the end” of the legendary shipping company. The place at the helm of BMP was taken by the new director general, Victor Kharchenko, who immediately leased 15 vessels to the international public organization Global Laboratory for 3.8 million US dollars.

In 1992 BMP was partly privatized but the controlling stake remained in the hands of the state.

In March 1993, BMP president Kharchenko and seven of his colleagues in high positions at the company were arrested. They were all accused of embezzling the shipping company’s money, and the lease of 15 ships in 1991 was the key count under the charges. Kharchenko’s former deputy, Arnold Rusin, became the new leader of the company. It was at that moment that Severno-Zapdanoye Rechnoye Parokhodstvo (the North-West River Shipping Company) was without public knowledge (but hardly by accident) reorganized into a holding, Severno-Zapdanoye Parokhodstvo (SZP) or theNorth-West Shipping Company, omitting from its name the unnecessary attribute of “river”. Running ahead of events, it can be said that SZP later became the leading Russian shipping company in the Baltics only three years after the bankruptcy of BMP, but we will come to that later.

In 1995 Rusin resigned as chairman at the BMP council of directors, and his place was taken by Ivan Lushchinsky, who was killed in October of the same year. The crime still remains unsolved, as is usual in such cases. His successor, Grigory Filimonov, held out for six months but, fearing his life, resigned in April 1996.

In June 1996 Mihkail Romanovsky, president of the Russian Union of Shipowners, was elected as the new director general for BMP but, like his predecessor, he kept the office only for six months, resigning in December.

In December 26, 1996, BMP with its 166 years of history was declared bankrupt by the St.Petersburg Court of Arbitration. By then BMP had only 9 vessels left out of the fleet of 178. Through actions of its management, the oldest Russian shipping company had lost its entire fleet, including cruise ships that used to generate multi-million profits. Out of the nine cruise ships that BMP had, six were sold to the US for a song and three were leased to Ukraine’s Black Sea Shipping Company only to be soon arrested in various European ports over debts by the impoverished Ukrainian shipper.

In June 1999 BMP ceased to exist, and the North-West Shipping Company became the largest Russian shipowner in the Baltics.

Expert opinions claim that BMP was taken under by its own managers and offshore companies they had set up. Through their “efforts” 60 of the best vessels of the shipping company were arrested in foreign ports and sold cheaply at auctions. Nobody has bothered to estimate damages incurred by the state that owned 25.2 percent in BMP.


Busy heir

Severno-Zapdanoye Parokhodstvo (SZP) or North-West Shipping Company was established in 1993 on the basis of a river shipping company that was founded in 1923. As of October 2002, the company owned:

  • a transport fleet of 296 units of self-propelled vessels, including 244 cargo vessels and 52 passenger ships;
  • 7 river ports;
  • 2 piloting  companies
  • 5 ship building facilities in Leningrad, Novgorod and Vologda regions.

The shipping company transports about 12 million tons of cargo a year, of which 7 million tons are foreign shipments. SZP has a staff of some 10,000 people.


Germans defeated

The Lietuvos Juru Laivininkyste (LJL) or Lithuanian Shipping Company, which in 1999 marked its 30th anniversary now owns 38 vessels (including 19 dry cargo ships) with an average age of 16 years and aggregate deadweight of 289,000 tons. Transportation by sea is done by  LISCO, the largest of LJL companies.

The Lithuanian government holds 66.66% in LJL but last december announced its intention to sell these shares. The State Property Fund has asked the minimum price for LJL shares to be set at  20.09 million litas or 0.15 litas per share.

The German Association of Shipowners is set to bid for privatization of the Lithuanian Shipping Company at the auction where it will be represented by ADG Shipmanagement GmbH.

By the way, in a privatization tender back in 2000 the value of 75% in the Lithuanian Shpping Company was set as 534 million litas. At the time the bids were won by a consortium of two Israeli companies (Sprinter Gadot YAM Ltd. and financial investor Kamor Ltd.) and Danish company DFDS Tor Line A.S. They offered 200 million litas for LJL but the deal was never pulled through.

In the opinion of Klaipeda city mayor Eugenius Gentvilas, buyers are mostly interested not in ships but the market governed by the Lithuanian Shipping Company that controls strategic ferry lines in the Baltic Sea, linking Kalipeda with Kiel, Mukran (Germany), Stockholm and Arhus (Sweden), which is much more valuable than all the vessels and port facilities. �LJL has firmly established itself nostiprinājies on these ferry lines, defeating the Germans, who have the same kind of ferries,” said the Klaipeda mayor. “Future avents are likely to develop along the following lines: first the buyers will sell part of the ships, citing the need to modernize the fleet, lay off service staff, and ferry lines are taken over by foreign parent companies. In the end all vessels are registered  in cheap-flag countries,” said Gentvilas. One would feel compelled to add that all this would reduce the shipping company to zero.

Before the Russian economic crisis in 1998 LJL together with German-Danish company Euroseabridge carried about 70% of all cargos supplied by the East-West transport corridor by ferries.


Robbery in broad daylight 

The Estonian Shipping Company (ESCO) that inherited 77 vessels after disbandment  of the Soviet Union’s merchant fleet managed to keep only 42 ships by the time of its privatization in 1997. Considering that the state owns only 5 out of 101 ports and the Estonian merchant fleet has 511 vessels, it seems obvious where the Estonian maritime shipping vector had been diverted to.

Why was the flourishing ESCO plundered? Piece of cake: Experts claim that all fraudulent schemes were elaborated with filigree details by the best foreign lawyers. Norway’s Tschundi & Eitzen is the major holder in U.S. company Baltic sea ASA that owns 80% in ESCO Holding, the 100-percent owner of ESCO. This full owner of the shipping company borrows 13 million US dollars from it in 1997 and another 150 million Estonian kroons two years later in order to buy the 30-percent stake that initially remained under state ownership.

After privatization the cream of the ESCO fleet, timber-carrying vessels, were sold to a number of offshore companies under the same name of Millenium, and the shipping company was left with only 30 ships out of the original 77. In replacement of the sold-off Estonian ships, the Norwegian owners sent over their own that were leased to ESCO Holding at a very high price. As a result, the shipping company not only cut its fleet by half but also incurred significant loss. In 1996 before privatization, all ESCO results were much better than recent figures with net profit reaching 101 million kroons on a turnover of 1.3 billion kroons. In four years the company was already 322 million kroons in the red, and in one more  year its loss grew to 400 million kroons.

Morever, it turned out that ESCO owners from Oslo, who bought 80% in the company on June 7, 2001, could not pay the Estonian state 179 million kroons in due time. According to the Estonian Finance Ministry, out of a 212.098 million kroons debt for privatization of ESCO, only 31.411 million kroons were recovered through sale of the shipping company shares. The remainder of the debt is considered irretrievable and will have to be written off the balance sheet.

The state came back five years after this highway robbery scheme. The new Transport and Communications Minister Liina ?onisson together with State Auditor Juhan Parts  are set to revise the privatization outcome for ESCO, now being sold for just 27 million kroons.


Once on top, now in disgrace 

Latvijas Kugnieciba
(LK) or Latvian Shipping Company comprising of also the  LASCO shipping company carries cargos to many ports all over the world. LASCO shipping operations are run by subsidiaries, the largest of them being Liberian-registered  Latmar Holding and Cypriot Santomar Holding.

In 1913 the cargo turnover of Latvian ports accounted for 40 percent of the turnover for Russian ports on the Baltic Sea. To date Latvia’s share of the Baltic cargo turnover has reduced by half to 20.26% of total cargo handling in ports of countries that used to be part of the Russian Empire: Finland, Russia, Estonia, Lithuania and Poland.

The Latvian Shipping Company was founded in 1940, and its management was seated in the Latvian capital Riga. During the Soviet rule the shipping company consisted of a transport fleet, Riga and Ventspils merchant ports, Riga shipyard and coastal service  units. In  1959 the Latvian Shipping Company got its first tankers, in 1963 it acquired 3 refrigerator vessels and in 1965 -- 2 gas carriers. By 1983 the company had 108 vessels on its tanker and dry-cargo fleets with an aggregate deadweight of 1.05 billion gross registered tons, including a 49 vessel tanker fleet with deadweight ranging from 4 to 40 thousand tons, 8 gas carriers, 21 refrigerator ships, 4 container ships, 6 ro-ro ships with horizontal loading-reloading. In the Soviet era Latvian Shipping Company ships took cargos to 140 ports in 50 world countries, carrying 7.7 percent of the maritime cargo turnover in the Soviet Union.

In the last twenty years the Latvian Shipping Company has “lost” 51 vessels from its books.

By late June 2002 Latvijas Kugnieciba had 57 vessels: 37 tankers, 12 refrigerator ships of ice-class, 2 gas carriers and 1 dry cargo vessel (a ro-ro container ship). Five more ships owned by LK have been leased with the right to buy them later. All ships have double registration, allowing them to sail under “easy flags” of offshore countries. In 2001 the Latvian government, concerned about the mass exodus of its shipowners from the country, and set up talks to bring them back to native shores.

To this end Latvia as of January 1, 2002, ceased to apply corporate income tax to ships of  Latvijas Kugnieciba and other shipping companies, replacing it with tonnage tax, and last spring also adopted amendments to the law on personal income tax, introducting certain benefits in taxation of Latvian seamen.

Apart from the Latvian Shipping Company fleet, the Latvian Ship Register lists another 206 vessels of different types other than fishing boats but their age and technical condition do not allow for any optimistic forecasts.

The refrigerator fleet is no longer profitable (5.6 million lats in the red after 2001) therefore the managemnent at Latvijas Kugnieciba plans to sell seven of its refrigerator ships.

Ageing oil tankers are a common feature for post-Soviet territories, and the age characteristics of the Latvian tanker fleet are typical for all Baltic shipping companies.

Analysis of ship service duration in the Latvian Shipping Company tanker fleet shows that 70% of the tankers have either already run out of their service life or will have to be replaced very soon. Lack of funds for building or buying new ships and craving for profit at any cost (even at the expense of damage to human health and the environment) makes shipowners exploit tanker fleet veterans to the very end… even the ultimate end.

After the Prestige tanker accident last November, Spain, France, Italy and Portugal agreed on joint measures to ban outdated tankers from their 200-mile economic waters. Since December 2002, no single-hull ships built over 15 years ago are allowed into these territories. Tightening of tanker safety requirements within the EU means more difficulties in the operation of the ageing LK tankers.

At present part of the Latvian tanker fleet is employed in North Africa, carrying oil, mostly from oil fields in Nigeria. But tankers with larger deadweight are needed there, and these LK does not have therefore it is unlikely to hold out for long there and will have to look for new assignments in other regions – the Far East, for example.

After several failed attempts, an open auction on June 25, 2002, finally sold Latvijas Kugnieciba with all its ships and international contracts for just 35.4 million lats. This was not a real market price but the price offered by the buyers. “If LK was sold in 1993, the price would have been much higher because the shipping company was losing value with every day it remained under ownership of the state,” said Aivars Lembergs, the mayor of Ventspils port city in north-western Latvia. “It [LK] also lost money in the deal with the Latvian electricity utility Latvenergo and in the Banka Baltija which suddenly went bust in 1995, and upon recent purchase of new ships at unreasonably high prices. And every time the loss was counted in tens of millions of dollars.”


The facts:

  • LK deposited USD 44.1 million (26.6 mln lats) in Banka Baltija shortly before the bank went bankrupt, and the money has still not been recovered.
  • The litigation between LK and Gdansk shipyard that started in 1994 ended last October  with a settlement under which the LK management agreed to pay the Poles USD 15 million (9.06 mln lats) for dropping an earlier comission of ships.

Current Latvian Prime Minister Einars Repse holds a different opinion, believing that “Latvian Shipping Company privatization was meant to be a speculative deal with the purpose of reselling.” One could agree with this as the essence of business anywhere in the world is the same: buy cheap, sell dearly.

LK fixed capital is on 200 million lats, managed by five shareholders: Hansabanka 13.27%; Ojay Limited 8.83%; Eastgate Properties Limited 4.45%; the Latvian state 16.87%; Ventspils nafta 49.9%.

A total of 199,990,000 LK public shares with par value of one lat have been registered with the Latvian Central Depository of Securities. In fact, the price for LK stocks on the Riga Stock Exchange has dropped to 0.25 lats per share (as of late Feb, 2003).

In recent years state holdings in LK have not yielded any dividends as they went in other offshore directions. There has been no improvement lately with LK  closing 2002 with a loss of USD 7.7 million instead of the planned profit in the amount USD 7.07 million.



Redistribution of property interest in shipping companies continues. This does not refer to ownership of the controlling stake, which, as a general rule, has usually not been privatized yetin post-Soviet countries. Minority shareholders are simply trying to lay their hands on as many stocks as they can in order to gain control over financial flows within the shipping company before this is noticed by the main shareholder – the state.