Mound of mafia trouble

By Ian Fraser

Sunday Herald

February 18th, 2001

Kapitan Prakha, image from Nrk.no website

It was a loan deal struck when Russia’s economy seemed set to grow. Now it is a nightmare for Bank of Scotland and its partners as they find out what life is like in the ‘Wild East’

IT is a power struggle with enough twists and subplots to make it the equal of a John Le Carre spy novel. It surrounds the ownership of the MV Dubrava and her five sister ships – and the main protagonists are three western creditors and factions of the Russian mafia, backed by an ousted governor from the country’s notorious “Wild East”.

What make this case relevant from a Scottish perspective is that one of the creditors is the Bank of Scotland which, along with two other financial institutions, effectively owns the six vessels. But the Russian mafia has appropriated the ships with the backing of Yevgeny Nazdratenko, the former governor of the Primorsky Kray region.

The vessels are rusting in St Petersburg’s harbour as the dispute over their ownership rages on.

The UK’s Moscow Embassy and consul-general in St Petersburg have been sucked into the dispute, and have been pressing the Bank of Scotland’s case to the local and Russian federal governments over the past 15 months. But to no avail.

The “Godfather” believed to be at the centre of this tale of skullduggery, piracy, eavesdropping, initimidation and murder is regional governor Yevgeny Nazdratenko.

Until a few days ago, he ruled Primorsky Kray (or region) as a personal fiefdom. The local media rarely dared question him. But his sphere of influence stretched far beyond the Far Eastern maritime province.

He was not averse to using threats of violence and imprisonment in his attempts to obtain “election expenses” from any business unfortunate to be based in Primorsk, however legitimate their activities. But Nazdratenko got his comeuppance when he was dismissed by President Vladimir Putin, purportedly over his mismanagement of the recent fuel crisis.

Some western observers suggested that Nazdratenko’s removal demonstrates Putin will no longer tolerate rogue governors who make life impossible for foreign investors. But given that his successor is a man schooled in the same ways, it remains to be seen whether Putin’s gesture will enable the Bank of Scotland to recoup its losses. When Putin offered Nazdratenko the job of chairman of the state fisheries committee on Thursday it sent a chill up the spine of bank executives and other investors he may have wronged.

Next to North Korea, China and Japan, Primorsk is the diseased heart of Russia’s “Wild East”. Much of the catch, and processed fish from other Russian Far Eastern ports, is shipped into the port of Vladivostok, the eastern terminus of the Trans-Siberian Railroad, for transfer to the rest of the former Soviet Union. Hence its attractiveness as a base for a large fleet of refridgerated and freezer ships such as that operated by Vostoktransflot – the company in which the Bank of Scotland invested – and for criminal gangs. Among other things, the Vostoktransflot vessels were used to transport white fish used in Bird’s Eye fish fingers and McDonald’s Filet O’ Fish.

“Most foreign investors look at Vladivostok, shudder, and look elsewhere,” wrote The Economist two years ago. “The city is not the sort of place where any but the bravest would want to get into a serious argument – or commit any serious money.” But this did not deter those men on the Mound.

In January 1995, the Governor & Company of the Bank of Scotland became lead members of a consortium that lent $23.88 million (£15m) to Vostoktransflot, which then operated the second largest refridgerated cargo fleet in Russia. Having done thorough due diligence, the bankers anticipated steady interest repayments as Russia’s economy seemed poised for growth in the wake of radical market reforms imposed by then President Boris Yeltsin.

The loan was facilitated by the London-based shipping finance and investment company Tufton Oceanic. The two co-funders were De Nationale Investeringsbank, based in The Hague, and the Oceanic Finance Corporation, a Bermuda-based company with links to Tufton Oceanic. Vostoktransflot spent the money to buy three modern refrigerated cargo ships – the Blue Frost, the Blue Reefer and Icicle Reefer.

The trouble arose over the way banks covered their backs. In a complex arrangement, the Russian shipping company put up eight other refrigerated ships as collateral, transferring their ownership to specially created Cyprus-based companies to ensure they were eligible as security. Each of the eight companies was owned by Control Atmosphere Transport, a Vostoktransflot subsidiary.

Alan McCarthyAlan McCarthy, senior vice-president of Tufton Oceanic and a director of Recovery Strategies Ltd, the London-based firm which is now seeking compensation for the banks, insists it is entirely normal. He says Russian shipping companies cannot obtain international finance unless they use “flags of convenience”.

McCarthy said that from 1995-97 the arrangements worked well, with debt repayments met. By June 1999 Vostoktransflot had paid back around $17m of the original loan, leaving more than $7m.

But in 1997 the Moscow fund management group Partnership Investment Corporation (PIC) stepped in to acquire a controlling 55% stake in Vostoktransflot. “They came to prominence in the voucher privatisation of the early 1990s and were young, intelligent and well-educated,” said McCarthy. “We checked their background.”

Alexei Dmitrenko, a PIC executive was installed as managing director, with plans to address a debt crisis that was already starting to afflict Vostoktransflot. But by 1998, partly as a result of the Asian crisis which affected freight rates across the region, Vostoktransflot started having difficulties meeting debt repayments. The company was also being given an increasingly hard time by the Primorsky authorities who appeared not to have approved of PIC having a controlling stake.

Later that year, the Russian press launched a hate campaign against the company, which was followed by police searches of its office and ransacking of managers’ homes. Nazdratenko accused the company of eavesdropping on the regional administration and electoral commission.

By early 1999, Vostoktransflot was finding it impossible to carry out its normal business. Managers were accused of siding with former managers who were alleged to have “stolen” most of the company’s fleet by using flags of convenience.

In June 1999, bailiffs accompanied by 20 masked gunmen stormed the shipping business’s office building and installed a new management team that had the blessing of Nazdratenko’s regional government. This team was headed by former boss Viktor Ostapenko.

Nazdratenko endorsed the coup and accused the ousted management of being the puppets of foreigners, mismanaging the fleet and illegally selling off ships.

The new management ordered Vostoktransflot’s captains to break contracts and head for home – in what was described as a bid to “save the Russian fleet from foreigners”. This was despite the fact many were carrying full cargoes for customers in other ports. He promised salaries and benefits to the sailors – but these never materialised. The company was finally declared bankrupt in September 1999.

The situation was not without parallels. Honorary British consul Andrew Fox, who is also a director of the Vladivostok-based Far Eastern Shipping Company (Fesco) was threatened with imprisonment in June 1999, in the presence of witnesses including two silent uniformed generals heading the former KGB and the interior ministry.

This was after he and other directors, including Anatoly Milashevitch, former chairman of Vostoktransflot, took control of the board of Fesco in order to make management and operational changes and avoid bancruptcy. “Nazdratenko considered this a dangerous development and took his own action,” said Fox.

Fox had to go into exile from Vladivostok for seven months but events following the coup at Vostoktransflot were more bloody: in September 1999, Taisiya Ponomaryova, legal adviser to Vostoktransflot’s deposed chairman Anatoly Milashevich, was assassinated hours before she was due to fly to Moscow to meet lawyers at the Prosecutor General’s Office.

She was killed at her dacha north of Vladivostok when a bomb exploded under the floorboards beneath her bed. Evidence she had been intending to hand over on the struggle for control of Vostoktransflot was destoyed in the ensuing fire. Vostoktransflot’s current management has denied any complicity in the murder.

The six ships at the heart of the dispute – the Dubrava, Anton Gurin, Kapitan Pryakha, Vasily Polishchuk, Kapitan Kirichenko and Kommunary Nikolayeva – were detained by St Petersburg customs authorities in May 1999. Vladivostok customs ordered them to be detained, apparently for avoiding paying taxes and duties. “The ships falsified their tax declarations in Vladivostok … They can’t leave until all this is resolved,” claimed Oleg Dudkin of the St Petersburg customs office.

The six have been stranded in St Petersburg’s harbour ever since. Crews were stuck for months in below zero conditions without any pay. Last January, the captains appealed for help, saying their vessels had run out of fuel and were in danger of sinking.

Claiming their crews, totalling about 150, were owed at least $800,000 in back pay, the captains complained about how Russian authorities had tried to gag them and were forced by intelligence services to sign a document stating they would do everything possible to prevent the ships from sinking.

In a letter sent to Russian authorities and the media, the captains wrote that their vessels “appeared to be in critical condition. The crews’ effectiveness will be paralysed completely owing to the impossibility of cooking and living in cabins which will drop to below zero very soon.” This was despite an act of generosity by the Bank of Scotland. Together with De Nationale Investeringsbank, it paid about $1m for fuel, provisions and legal fees for the six ships.

Crews’ wages were paid until July 1999 and food, provisions and fuel until March 2000. But then the creditors lost patience, believing there was now little chance that the ships would be permitted to re-enter international waters. McCarthy said: “We supported them that long for humanitarian reasons, but also on the basis that we would achieve a benefit in terms of getting the ships out of there and have access to our security. There’s a point where commercial realism takes over from humanity.”

However, in May 2000, the crews decided to formally arrest the ships – which was legitimate under maritime law given they had received no wages for nine months.
In the meantime, sources close to the creditors suggest Nazdratenko was all the while attempting to force Tufton Oceanic to pay bribes to help resolve the problem.

Fortunately, for BoS two of the eight mortgaged vessels were not berthed in St Petersburg when the deal went pear-shaped. The Zolitaya Dolina was in the Welsh port of Barry, sold by creditor banks at auction for $1m. The Hermann Matern was off the coast of the Latvian capital Riga and was brought back to Falmouth where she was sold at auction for $1.5m.

Last December, five of the vessels were sold at auction to the Preobrazhenskaya Trawling and Fishing Base – which is based in a village suspiciously close to Vladivostok and is believed to be controlled by Governor Nazdratenko – for $4m.

But the Dubrava was not put up for bid as it has outstanding debts to the EKO-Phoenix fuel company and had been undergoing main engine repairs. The vessels were auctioned on the orders of Kirovsk regional court following a suit filed by the captains of the ships over wage arrears of over $1.5m owed to about 150 crew.

But the Bank of Scotland and Recovery Services Ltd, which had been lining up a sale of the six vessels to Greek shipping company Laskaridis, insist this auction was without legal foundation.

In a tit-for-tat spat, a representative of the Kirovsky region alleges the January 1995 funding arrangement which saw the ownership of the eight disputed vessels transferred to Cyprus-based companies as a “fake deal” – a point strongly disputed by the creditor banks.

McCarthy said: “What this has done to thousands of Russian sailors employed by the company and to their families can only be imagined. The damage done to future financing of the Russian fleet is incalculable.

“The message to international lenders and investors is clear: any vessel, which at any time in its history has been registered under a Russian flag … has no [protection] whatsoever when it is in a Russian port.”

Andrew Fox said: “For BoS, the situation is grim. From what I know, their ability to get back some money is mostly a function of what agreements they can achieve with the legal authorities in St Petersburg and Moscow. The good news is the Primorsky pressure to block such action should have now stopped, along with the resignation of the governor and the core of his team. They were actively involved in lobbying against Bank of Scotland so this should be good news albeit a ray of sunshine in a storm.”

Copyright 2001 SMG Sunday Newspapers Ltd

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2 Comments for “Mound of mafia trouble”

  1. Hi Ian,

    Interesting please permit be make a quick (i.e. there will be typos) rant on this issue.

    NZ had the same problem (see Oshka NZ Maritime Records). Right now I am investigating the collapse of the Finance Industry, specifically South Canterbury Finance where I now find my self investigating a Christchurch address where the facade is classic old boys but inside its a nest of local and foreign crooks.

    Two interesting points:-

    1. In NZ case we got sucked in by agreeing to submit invoices at inflated rate to Russian firms. These where then paid with a third unidentified (Cypriot based) co. getting paid. The key purpose was to allow Russians to obtain hard currency.

    2. The key NZ firms involved where agricultural (milk and apples) businesses who got in when Russia looked like it was going to recover and then got sucked in when the ruble collapsed.

    In farming terms this has far bigger consequences as NZ farmers borrowed from Asian banks originally to cover the debt then to expand when Fonterra managed to hype milk prices and bring about an over-valuation of property prices handled by NZ burgeoning Finance Houses that are now truly in the stocks.

    Like Enron, Fonterra is internally audited by Taranaki dairy expert Denis McKenna who correctly predicted, nine months beforehand, that Fonterra’s attempt to split the company and list it on the stock market (an attempt defeated by local farmers). Fonterra is hiding a debt which could be as large as NZ$9 billion.

    Meanwhile as finances dry up (in many cases simply implode) NZ farmers find they can no longer diversify and find are being forced to stick with milking or sell to offshore interests. For despite the domestic economy, farm prices continue to climb,, but the only ones now afford to buy are the Russian and Chinese investors.

    3. There are parallels here with the Food For Oil affair (where income was generated for Saddam by coercing tenders to falsify the amount of product shipped, with the excess passed on as kickbacks to Iraq) the purpose of which was later identified as being to buy Russian arms.

    Again hindsight now shows the biggest players in this market were Russian and Chinese firms tied to the state-owned energy sector, who used the scam to hide their own assets while racking up debt that would never be repaid but led to market collapses. Again, the goal for Russia was partially attempting to secure hard currency while China I suspect was simply buying influence and favours for a later day.

    4. In NZ Fonterra (which supplied 80% of milk consumed in Iraq along with Australia providing 80% of the wheat shipped) deny wrongdoing but it is hard not to be suspicious when you find that the former head of NZ Dairy Board Ian Robertson firm dabbles in NZ ice ceam, Middle Eastern oil and Russian arms specifically depleted Uranium.

    Meanwhile, since 2005, the NZ authorities continue to claim they have investigated the affair (as they where forced to do, following a critical report of their handling of the UN FFOP made by Transparency International, on behalf of the OECD), though in fact they have to date not looked at a single page of the UN primary documents or interviewed a single party named as having involvement in UNFFOP, according to UN documents. I can confirm this having spoken to several NZ agents who confirmed no such investigation ever took place and they were never interviewed [message clipped].

    The Far East was of course the stomping ground of the Cambridge five and in light that a decade same ring can be identified as recruiting and training the American spies who later headed American opts in the Far East one can be forgiven for questioning if historians got it all wrong that five instead of being Soviet spy ring where in fact unknowingly working for Russian controllers who in turn where getting their orders not from Moscow but from Bejing. Certainly much of what these rogue Russians have done abroad has benefited Russia very little when compared to the advantages it ultimately given China in its pursuit of economic dominance.

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