Localization without isolation

Russian shipbuilding and shipping industries are going through very interesting times: on the one hand, they should integrate more closely with the Eurasian space and follow the global technological trends; on the other hand they have to escape dependence on foreign manufacturers.

No limit to perfection

Diversification of Russian economy with the increase of its non-resource-based sector is, as it is well known, a strategic task of the Government. Producing and exporting huge amounts of oil and gas we still provide work to foreign companies and fall into a position of dependence on supplies of ships, components and equipment. To use the resource potential as a factor of domestic industry development, ad hoc ministries and authorities, first of all the Ministry of Transport and the Ministry of Industry and Trade, has been developing and implementing a package of measures focused on stimulation of domestic shipbuilding and promotion of related manufactures and competences.

To date, the following measures of state support have proved to be successful: subsidies covering interest rates on loans and leasing payments for ship owners placing orders at domestic shipyards, utilization grant, privileged leasing. Nevertheless, those measures of support require further improvement.

As Victor Olersky, Deputy Transport Minister of the Russian Federation – head of Rosmorrechflot, said at the meeting hosted by Admiralteiskie Verfi shipyard in the framework of the zero-day of the St. Petersburg International Economic Forum (SPIEF 2018), it is reasonable to think about replacement of shipbuilding subsidies with cheap financing. According to him, subsidies covering part of interest rates on loans and lease payments make ship owners dependent on financial periods while providing of cheap financing will let escape this problem. As for utilization grant, which has become popular among the ship owners as a fleet upgrading instrument, it requires increased financing. Shipbuilding leasing also requires further development: to ensure competitive environment it would be good to have several leasing companies in this segment.

In the segment of shipping, the Federal Law “On introduction of amendments into the Merchant Shipping Code of the Russian Federation in the part related to short-sea shipping” came into effect on 1 February 2018. With the new amendments, shipping and storage of hydrocarbons and coal loaded onto vessels in the water area of the Northern Sea Route can be only performed by vessels flying the state flag of the Russian Federation.

Ban without harm

The Ministry of Industry and Trade of the Russian Federation is currently elaborating amendments into the legislation providing for priority to using vessels built in Russia. 

Rishat Bagautdinov, Deputy Chairman of the Russian Chamber of Shipping, Chairman of Vodohod BoD, said in his turn that immediate requirement for complete localization of vessels allowed to operate in Russia is not right since quick localization of all manufactures is not possible.

According to Aleksey Rakhmanov, President of United Shipbuilding Corporation, there are no problems with building hulls in Russia today while there is lack of domestic suppliers of high quality ship components and equipment. 

Central Research and Development Institution “Kurs” (CNII Kurs) is currently creating a unified base of Russian equipment suppliers so that Russian products could be selected instead of foreign ones at the phase of design. Of course, Russia is far from producing everything needed today. The process of localization and attraction of required competence is quite long and complicated.

According to Victor Olersky, the state cannot guarantee potential foreign investors the demand for their products throughout a period of several years. However, it can compensate for their capital expenses for establishing their manufactures in Russia.

Besides, representatives of domestic customers emphasize high cost of vessels built by Russian shipyards in some segments. According to Mikhail Kotov, head of OOO Pacific Fishery Company (Magadan) a crab catching ship which can be built by few Russian shipyards including Pella and Vyborg Shipyard is about EUR 30 million, three times as much as the cost of similar ships built in Croatia or in Asia.

This means that if a requirement to let only Russian vessels operate in the country comes into force immediately, the monopolization effect will cover other segments and the prices will grow amid not very high quality.

The very concept of “foreign ships” can change in 2018. An agreement on cooperation in shipbuilding and shipping is about to be signed in the framework of the Eurasian Economic Union. This will open inner harbours of the member states for each other and will provide for creation of a single market of shipbuilding services. The key risk here is the following: vessels of third parties posing as vessels of member states will enter closed inland water ways of Russia and provoke unnecessary competition.

Therefore, the matter of support to domestic shipping and shipbuilding should be considered in a consistent manner taking into account all possible negative implications of too abrupt movements.

Vitaly Chernov