By Fabrice Deprez and Nicholas Trickett
2018 got off to a rough start for Russia’s busiest port.
In late January, Transneft accused Yevgeniy Tuzinkevich, Novorossiysk port’s harbormaster, of hindering the loading of cargo at the port’s oil terminal. Tuzinkevich, Transneft claimed, insisted in giving priority to the “Penelope,” a tanker controlled by a Rosneft subsidiary. But the Penelope lacked the proper paperwork, preventing it from being loaded and forcing all other ships in the port to sit idle.
This awkward wait had real consequences. By February 21st, an analyst quoted by the BBC’s Russia service estimated that as many as 2.1 million barrels of oil were stuck on the port’s railways nearby. Russian Railways confirmed the bottleneck, saying they had been forced to limit railway transit to Novorossiysk port since February 9th. Sources also told Reuters “between 1,000 and 2,500 rail cars” were waiting to be loaded on to tankers.
That a single ship could cause such chaos might seem surprising: Novorossiysk port is no backwater harbor. With 143 million tons of cargo handled last year (the most out of any Russian ports), it is one of the country’s most critical logistical hubs and a key export point for Russian grain and oil.
The Penelope might not, however, be the crux of the story according to sources quoted by Kommersant: rather, the outlet argues, Transneft was looking to publicize a conflict between the port’s new CEO, Sergei Kyreev, and its administration for control of the harbor.
Transneft is not a random player in this controversy. Sergei Kyreev, who was appointed acting CEO in November 2017, is also the CEO of “Transneft-Terminal” and “Transneft-Service.” Just two weeks after the oil transport giant started complaining of Rosneft’s alleged preferential treatment at the port, Russia’s Antimonopoly Service approved a deal that would see Transneft take a majority share in NCSP Group, the company owning the port.
Nor are talks of logistical hurdles at Novorossiysk port anything new: last summer, record harvest lead to major bottlenecks at Russia’s southern ports, including Novorossiysk, with trucks forced to wait three to four days before being able to dump their cargo in the port’s grain silos. Some regions also complained that more than half of their requests for train shipments to the ports were being denied.
Problems are not limited to large harvests or Russian rail freight’s inability to cope with… well, with anything (see this earlier Bear Market Brief piece for more), or even the need for larger infrastructure investment to boost the port’s capacity. There are also conflicts between the port and companies such as Rosneft, which didn’t appreciate being painted as responsible for the port’s partial blocking. On March 6th, Russia’s Antimonopoly Service announced the opening of a case against the port of Novorossiysk for “abuse of dominant position,” following a complaint from a Rosneft subsidiary. Nothing new for the port. It was forced by the same agency to pay a 10 billion ruble fine in 2016, a decision that was later cancelled by a Moscow court.
Even the middlemen are causing troubles.
According to Kommersant, Transneft’s public row with the port stems from an attempt by Sergei Kyreev to more tightly control the port’s dispatchers. Here again, the conflict echoed a not-so-old dispute: in 2013, Transneft (it then owned 50,1% of the port as part of a holding with the “Summa” group) argued the port’s management wasn’t defending the interests of the company well enough and demanded the resignation of Rado Antolovic, the port’s CEO. No ships were blocked. Instead, Antolovic was accused by Russia’s Investigative Committee of taking a $1.5m bribe. He fled the country and was put on international notice. The charge by Transneft was largely interpreted as part of a struggle with the Summa group to secure a 20% stake of the port then owned by the
Like last time, heads have rolled as a result of the latest fight: in late February, Russian media reported that four of the port’s top executives had resigned. NCSP Group gave no explanation and one of the manager told RBC he had resigned “by own own decision,” but the timing is quite coincidental.
These types of fights pose lingering risks for future import-export operations at Novorossiysk just as Russia lurches into Putin’s fourth term with as yet limited economic growth prospects. At Novorossiysk in particular, trade turnover this January was 19.5% higher year-on-year and transhipments of goods were up 5.4%. But the disorder around port operations is affecting the increasingly vital tax revenues that could be collected from any growth in trade through customs duties.
The National Tax Service (NTS) is demanding 6.95 billion rubles in taxes from the NCSP group as well as 2.47 billion rubles in penalties after audits. The company is countering with a legal defense. The company’s profits were down 25% to 30.5 billion rubles for 2017. Amid tax audits, the issue of taxing export capacity is rearing its head.
Igor Artyomev, head of the FAS, has said “we have two means of regulation in our hands: tariffs and anti-monopoly. In the case of ports and many airports, one is enough – anti-monopoly.” The quote is a big signal that the state is looking to further deepen its control despite FAS’s concerns. That Lukoil’s CEO Vagit Alekperov just announced his intentions to step down is a red flag for large private firms in Russia. Rosneft and Igor Sechin stand to gain and the port scandal is yet another chance to prove that the rules do not apply to them.
These issues don’t even touch the need for investment into physical import-export infrastructure. But the state’s growing role despite its own protestations over the need to privatize are undermining investments, as more and more falls directly onto the federal budget. Planned state investments into port infrastructure are falling to 45-50 billion rubles from 65-70 billion rubles annually for 2018-2021 with 80-85% of investments expected to come from the private sector. Transneft’s seizure of the stake and a refusal to grapple with legal and physical challenges for supply chains will make private investment less attractive going forward.
When all was said and done, the Penelope remained docked at Novorossiysk for the entire month of February. According to the TASS agency, it finally left the port on March 3rd with its cargo, two days after Russian transport minister Maxim Sokolov claimed the situation had “returned to normal” and four days after the power reshuffle at the head of NCSP Group. Whether normalcy provides any relief remains to be seen.