Tuesday, October 12, 2010

Russian Shipbuilding on the Verge of Big Changes

By Eugene Gerden

If the Russian government’s plan is successful, during the next 10 years the Russian shipbuilding industry will reach European levels of production. Photo by Eugene Gerden.

Russia is hoping to restore its position in the world’s shipbuilding industry through the implementation of a complex long-term domestic shipbuilding program recently initiated by Russia’s President Dmitry Medvedev.

Under the terms of the program, which is expected to run through 2030, Russia plans to increase the attractiveness of its shipyards to the international community, start the development of new types of vessels, and to establish specialized shipbuilding zones that will have a special tax and customs regimes. Particular attention is expected to be paid to the development of the country’s largest centers of shipbuilding, including St. Petersburg, Severodvinsk, Nizhny Novgorod and the Kaliningrad region.

The Russian government is unhappy with the current situation in the domestic commercial shipbuilding industry, where the deterioration of equipment is estimated at 70 percent. At present only 30 to 35 Russian shipyards could be considered competitive. During the period from 2001 to 2009 Russian shipping companies purchased 143 new marine vessels, of which only 17 were made in Russia. To date, there are 168 shipyards in Russia, of which 86 are owned by the state. In 2008, total sales in the Russian shipbuilding industry amounted to 150 billion rubles (USD$ 4.5 billion).

Despite the relatively low cost of the skilled labor force in Russia, (compared with the world’s shipbuilding centers) its current productivity does not meet modern standards, primarily due to technological and organizational backwardness.

According to Felix Ostashevich, former chief of planning departments of the USSR Ministry of Shipbuilding, the current Russian shipbuilding industry is mostly based on the production of ships from foreign components, while some shipyards, especially those located in the border areas of the country, usually prefer to buy not only foreign components, but also metal.

The Russian shipbuilding industry has always paid more attention to the production of warships than commercial shipbuilding. In this regard, most of the country’s shipyards traditionally focused on the implementation of military orders, while commercial shipbuilding has never been developed. During the Soviet period domestic commercial shipbuilding was considered as one of the segments of the military-industrial complex, but since the collapse of the USSR Russia’s need for warships has declined, while its need for commercial vessels has increased.

In the early 1990s the Russian government was unable to re-equip and transform the former Soviet navy yards into commercial shipyards, due to conceptual and technological differences. As a result, all efforts to start the production of commercial ships at navy facilities failed.

Until recently, the majority of Russian shipyards specialized in the production of hulls, importing most of the equipment, engine packages and all the instruments from abroad.

“Russia is experiencing an acute shortage of capacities, especially for large-capacity shipping,” says Vladimir Gorbach, General Director of Russian Technology Center of Shipbuilding and Repair.

“During the Soviet times, in certain years, the volumes of production amounted to 970,000 tons per year. With the present 50 large shipyards, the Russian shipbuilding industry uses about 250,000 tons of metal per year, however by 2016 these figures should be increased up to 1 million tons in order to implement the state project,” he says.

High taxes pose another major problem for the Russian shipping industry, resulting in many Russian shipping companies preferring to register their ships in offshore zones. The situation is aggravated by the lack of guaranteed freight base, due to the fact that the Russian fleet carries only 5 to 6 percent of the total volume of sea cargo trade.

However, everything could change in the near future. Currently, the Russian government is completing the consolidation of the domestic shipbuilding industry through the recent establishment of a giant shipyard holding called United Shipbuilding Corporation (USC). This company, to be comprised of the country’s largest shipyards, is expected to become the biggest holder of shipbuilding, ship repairing and engineering assets in Russia and will be responsible for the implementation of the President’s program.

Roman Trotsenko, CEO of USC said recently that the recovery of the industry is already under way. In 2009 the production grew 62 percent, thanks to the delivery of several large vessels, as well as the ever increasing support from the state.

If the Russian government’s plan is successful, during the next 10 years the Russian shipbuilding industry will reach European levels of production, and by in 2030 Russia will become one of the world’s largest shipbuilding countries, able to compete with China, Japan and Germany.

Surprisingly, the global recession has not had a severe impact on the Russian shipbuilding industry. In contrast to Chinese and South Korean shipbuilders, who traditionally receive their orders from around the world, and whose numbers have dropped dramatically since the beginning of the recession, the main customers of the Russian producers are several local state corporations, realizing their long-term investment programs.

In 2008-2009 the Russian shipbuilding industry, in contrast to the European and Asian rivals, even increased its production volumes. For instance, in Germany five shipyards were closed due to the crisis. The sharp decline in terms of order volumes was observed in many Chinese and Korean shipyards.

In addition, according to some Russian experts, during the next several years many of the world’s largest shipbuilding countries will require huge investments in order to sustain their future growth and, many of them, probably, will not be able to implement some of the earlier announced projects, due to the consequences of the recession.

According to estimates of an analyst published in Russia’s Promvest magazine, during the next several years Chinese shipbuilders will have to invest about USD$60 billion in order to survive and to provide further development of the industry, while South Korea has already invested USD$5 billion in the industry.

According to different sources, the USC project’s total cost at the initial stage, is estimated at 200 billion rubles (USD $7 billion). It involves the construction of more than 260 fishing vessels totaling more than 25 billion rubles, as well as more than 300 ships for the development of hydrocarbon resources of the continental shelf. Overall, more than 1,400 ships are expected to be built in Russia by 2020.

“We are going to focus on the production of technologically advanced ships, including those which will be specially designed for heavy-duty operation, such as tankers, gas carriers, as well as platforms of ice-class,” says USC chief Trotsenko.

According to Industrialist of Russia, one of the country’s leading magazines in the field of maritime affairs, particular attention will be paid to the creation of knowledge and groundbreaking technologies, which should help Russia to narrow the gap with the world’s leading shipbuilders in a relatively short time.

“Russia needs its own niche in the global shipbuilding industry. It should focus on the development of high-tech, innovative ships with high added value. This can be vessels, specially designed for Arctic shelf projects,” said Vladimir Kucherenko, a leading analyst of the magazine.

Vladimir Putin, Russia’s prime minister is optimistic about the project. “We believe that Russia has some good niches in the field of shipbuilding,” Putin says. “Although we are not planning to compete with China and South Korea in the production of heavy-tonnage vessels, Russia could be definitely competitive in the segment of specialized vessels, in particular fishing vessels, ships for geologic exploration and some other types of vessels. And we have good prospects here.”

As part of the project, the Russian government plans to zero the VAT for the domestic shipyards, to reduce profit tax from the current 20 percent to 6 percent, and to abolish taxes on water, land and properties for 20 years. The project also involves the abolition of customs duties and VAT on imported ship components that can’t be sourced in Russia.

In addition, the Russian shipbuilders are planning to accelerate their efforts in the development of shipboard equipment, as well as sharply reducing the supply of imported products from abroad.

Moreover, some Russian analysts stress the need to strengthen cooperation between Russia and the world’s leading shipbuilding countries, in particular China, that could take place through the acquisition of a number of Chinese shipyards, which are put up for sale by the state.

According to Cnship Net magazine, last year there were several shipyards put up for sale by the Chinese government. Due to a strong competition in the industry (with a total number of shipbuilders of more than 1,000) several Chinese shipyards are offered for sale every year. Most of them are purchased by South Korean, Japanese and Singaporean firms, however Russia may also take part in the auctions in the coming years.

There is also an ever-growing Russian-German cooperation in the field of shipbuilding. For instance, recently Nordic Yards, a well-known German shipyard, was bought by a former Russian energy minister who sits on the board of Gazprom. The yard will produce icebreakers and ships for Gazprom’s Arctic fleet.

Eugene Gerden is a free-lance writer based in Moscow, Russia who has covered the European maritime industry for 10 years. He can be reached at gerden.eug@googlemail.com.