Graham Stack in Kyiv -

Latvian regulators have ordered Riga Shipyard to consolidate a UK subsidiary on its accounts for 2012, following concerns about the local shipyard's involvement in a 2011 deal to sell to Ukraine's state energy company a drilling rig for $400m that was sourced from for just $220m. Opening up the accounts could provide answers to some lingering questions about the murky deal.

Latvian regulators told bne that they have ordered Riga Shipyard (RKB) to consolidate the UK subsidiary Northsale Logistics Limited on the accounts filed for 2012. The move follows a bne article detailing the shipyard's involvement as an intermediary in supplying the rig to Naftogaz Ukrainy in 2011 for $400m, which had been sourced from Norwegian leasing company Standard Drilling for just $220m.

According to RKB's accounts, the deal with the rig was implemented via its UK vehicle Northsale Logistics Limited. The UK company was then sold on December 28, 2012, which RKB auditors claimed exonerated them from consolidating Northsale on the books for 2012 - and thus potentially disclosing key aspects of the deal. But Latvia's Financial and Capital Market Commission has now decided otherwise. "Following inspection the Financial and Capital Market Commission addressed RKB requesting to submit a consolidated annual report for year 2012," FCMC told bne.

However, RKB responded that it "disagrees with the Financial and Capital Market Commission statement," suggesting a spat is in the offing.

Christmas present

Opening up the Northsale accounts could provide answers to some lingering questions. A recent court decision in Ukraine suggests that RKB was anxious to divest Northsale before year's end 2012 - apparently to ensure its exclusion from RKB accounts for 2012.

The court case, heard in August, resulted from an appeal by Naftogaz's offshore operator Chornomornaftogaz, the new owner of the rig, against a back tax claim. It revealed that the parties to the rig deal suddenly agreed to cut the price of the rig by $14m in late December 2012, after the rig had already arrived in the Crimea and was waiting to clear customs.

In December 2012, Naftogaz was suffering cash flow problems during the seasonal spike in gas purchases, and subsidiary Chornomornaftogaz was even sued for bankruptcy by one unpaid supplier. Also, in early December the then minister of energy Yury Boiko, who had overseen the original deals, was replaced by a new man, and the Naftogaz official who had directly supervised the rig procurement, Sergei Katsuba, a Boiko ally, also left the company to take a seat in parliament. This may mean both cash and will were lacking to complete payments for the rig according to the original contract from the tender of 2011.

According to the court case, on December 17 Naftogaz and RKB suddenly amended the contract. The amendment saw the price payable to RKB reduced from $400m to $386m, and the contract amended to exclude one item in the scope of supply. It was not specified in the court case what this suddenly dispensable item was.

Naftogaz and RKB both declined to respond to questions on the changed parameters for confidentiality reasons.

With the amendment agreed on December 17, knocking $14m off the price, the sale was then promptly closed on December 21 - all payments made and the rig accepted by Chornomornaftogaz. Before even the conclusion of customs procedures on December 29, RKB divested Northsale on December 28. This allowed RKB's auditors to leave the subsidiary off the 2012 accounts - until Latvia's regulators intervened.

Wriggling in Riga

RKB, a listed company, has never disclosed its "Christmas present" of $14m made to Naftogaz. In comments made to the RKB shareholders' meeting in May, RKB owner Vassily Melnyk said that Naftogaz had paid the company $400m for supplying the platform, and RKB had in turn sourced the platform from a broker for $393.7m, according to unofficial minutes of the meeting provided by minority shareholders. The discrepancy in prices named is just one of the mysteries that opening up the Northsale accounts might solve.

Northsale was acquired from RKB by another UK company, FTS Management, an investment consultancy owned and directed by a certain London-based Valery Smirnov, who is also linked to accountants Howell Wade. FTS Management claims to have operated since the 1990s, but the website only went active in 2013, and the phone number is invalid.

Smirnov is apparently a long-standing business associate of RKB owner Melnyk: he figures in the UK as director of Quantrade Limited, a shareholder in Melnyk-linked Latvian knitwear firms. In 2003, Latvian media also named Smirnov as a representative of Maltese company Kattegat Dredging Shipping Ltd, an RKB affiliate. According to the media reports, Smirnov had filed a complaint to police about embezzlement from the Maltese company by its director Maksim Frantsev, whose corpse was later discovered in a shallow grave near Riga. Smirnov did not respond to emails.

Clouds on horizon

RKB's victory in the Ukrainian tender in 2011 had the blessing of Latvian authorities, despite the fact that the small shipyard had no experience or capacity for building offshore drilling rigs - its standard products are floating restaurants and patrol boats. Latvia's economy minister even flew to Kyiv to attend the signing ceremony.

Since then Riga's stance on Naftogaz and the rig deals has hardened. In 2012, Latvian police launched a money-laundering investigation into a UK shell company, Highway Investment Processing, which acted as an intermediary in an identical deal by Naftogaz to acquire an offshore drilling rig for $400m signed in April 2011. Highway banked at Latvia's Trasta Komercbanka. Now the Latvian financial regulator seems to be getting in on the act.

Meanwhile, back in Ukraine there are also signs of turbulence around Chornomornaftogaz. In July, the new energy minister, Eduard Stavitsky, appointed his own man Sergei Golovin as CEO of the offshore drilling company. In early October, Chornomornaftogaz guards locked up officers from the State Financial Inspectorate, who had arrived onsite to review past procurement at the company. The company confirmed the incident, but blamed the government inspectors for producing faulty paperwork.