Under the current geopolitical situation and sanctions pressure, the development of local production and search for promising sales markets is a priority task. Russian shipbuilding is one of the key industries with significant potential. Shipbuilding is a branch of heavy industry. The industry is one of the basic ones in the GDP structure, it accounts for up to 1% with the value added level of up to 30%. In addition, it provides employment for one of its employees for about 4-5 people from related industries, i.e. its support has a positive impact on the development of metallurgy, electronics, instrumentation and both domestic and international transportation system of sea and river shipping, which accounts for 70 to 90% of the total volume of freight traffic according to different estimates.
Fig.1. Geography of the Russian shipbuilding industry
Source: Ministry of Industry and Trade of Russia
Over the period from 2019 to 2022, companies included in the register "Shipbuilding: shipyards and design companies. 2023." built more than 600 different ships and vessels with a combined displacement of more than 1.7 million tons. As of the first quarter of 2023, the total volume of ships and vessels under construction and contracted exceeds 530 units and the aggregate displacement is more than 7 million tons.
According to data provided by the Russian Maritime Register of Shipping (RS) and the Russian Classification Society (RKO, formerly the Russian River Register), 367 ships were under construction at Russian shipyards in 2022 (of which 225 units were under RS technical supervision and 142 ships and floating objects were under RKO technical supervision). Last year, domestic shipyards handed over 117 vessels to customers, including 35 offshore vessels (RS) and 82 floating objects, of which 31 self-propelled vessels for inland waterways (RKO). By the way, in 2021, 406 vessels (145 river vessels and 261 marine vessels) were under construction. In 2021, 89 vessels were built at Russian shipyards and handed over to customers, of which 50 were inland waterway vessels and 39 were of the RS class.
Russian shipyards in 2022 reduced the number of ships and vessels delivered by about 20%, but their total tonnage increased by more than half. In particular, in the over 50 tons category, the volume of the delivered fleet decreased by 18 units to 70.
Fig. 2. Comparative dynamics of construction of warships and civilian vessels (over 50 tons) in Russia, pcs.
Also, 35 small ships and boats with tonnage less than 50 tons were built, which is 2.6 times less than in 2021 (91 units). In civil shipbuilding, 55 ships were delivered, which is 6 units less than in 2021. In military and special shipbuilding, 15 ships and submarines were delivered almost two times less than in 2021. Despite the lag in units, the total tonnage of commissioned large and medium-sized ships and vessels increased by 55.2%, to 514,000 tons, including civil shipbuilding - by 80%, to 452,000 tons. Tanker fleet accounts for 53.2% of the delivered tonnage.
The number of dry bulk carriers of RSD 59 project has sharply decreased: from 17 in 2020 and 16 in 2021 to 4 in 2022. This was caused by problems with the supply of German Shottel pod propulsion systems. Overall, the dry bulk fleet accounted for 9.2% of the total displacement of vessels delivered.
The impact of sanctions was felt by the enterprises of the industry in different ways: the share of imported equipment in the equipment supplied under the State Defense Order for military orders is minimized, but for civil shipbuilding orders in certain categories the share of imports varies from 40% to 90%. Large-tonnage liquid bulk carriers (78% of the total tonnage of vessels under construction), fishing and crabbing vessels (5%), passenger and scientific vessels are at greater risk of fulfillment.
Fig.3. Structure of vessels under construction and contracted vessels by type of vessel at the end of 2022, % by total tonnage
The tanker fleet accounted for more than half of the growth, primarily due to large-capacity vessels delivered to SSC Zvezda. However, the continuation of their construction is questionable, given the existing difficulties of interaction between the shipyard and foreign, primarily South Korean, partners. In 2023, 60-70 large civilian vessels are expected to be delivered, the key equipment for which was supplied from unfriendly countries before spring 2022. Analysts see 2024 as the most difficult year in terms of delivery.
Impact of sanctions on the industry
In 2022, sanctions were imposed against the largest shipbuilding companies, which led to changes in the companies' management systems, management changes, as well as to the reallocation of shipbuilding orders to other plants.
Taking into account the complexity and duration of the shipbuilding industry production, the industry experts assessed the impact of the sanctions imposed on each stage of the product life cycle.
Ship construction requires materials and components, equipment, in particular: navigation systems, high power engines and processors, shaftlines, shaft generators, which were supplied mainly by foreign manufacturers, such as Wärtsilä, MAN, Mitsubishi and Yanmar. In the conditions of developing globalization, Russia safely enjoyed the advantages of the latter and purchased up to 95% of all components abroad. According to the estimate of the Ministry of Industry and Trade, the share of imported equipment in the domestic shipbuilding industry is now about 70%. Moreover, all technologically complex products, such as engines, propulsion systems, navigation and communication systems, most of the deck and crane equipment, as well as special equipment, are imported from abroad. The remaining 30% are Russian-made hull and simple steel components.
In March 2022, the EU countries imposed blocking sanctions against Russia's largest shipbuilding enterprises. During a year of the industry's operation in the sanctions regime, it became obvious that the key problem for shipbuilding and ship repair enterprises is their supply of ship component equipment. The most acute problems will be felt with regard to marine diesel engines, elements of propulsion (propeller columns) and shipboard (water treatment, sewage treatment and other) systems, as well as anchor and mooring equipment. A shortage of high-power engines is expected.
Due to the high share of imports in domestic civil shipbuilding, a significant share of Russian vessels has traditionally been repaired abroad. Under the current restrictions, most European shipyards (Lithuania, Poland, Estonia, Norway, etc.) have refused to work with Russian contractors, and ship repair enterprises in Indonesia and Turkey have raised their rates; access to spare parts is significantly hampered. This problem is particularly acute in the fishing segment - until February 2022, no more than 15% of the vessels of the relevant purpose were repaired in Russia - and this creates risks for food supply. The current situation may lead to a decrease in domestic demand for new ships due to the impossibility of their further maintenance - according to industry experts, ships go for repairs on average 10 times during their "life". At the same time, military vessels are fully built and repaired in Russia, which potentially opens up prospects for the use of production capacities and technological developments for the civil fleet.
According to industry experts, stagnation in the development of Russian ship repair plants is caused by a high degree of dependence on imports in shipbuilding and, as a consequence, a lack of suitable equipment and its obsolescence (over 65% have been in operation for more than 10 years). Therefore, against the background of the last wave of technological sanctions, the problem of overloading the enterprises servicing the Russian civil fleet, a considerable part of which used repair services abroad, has become acute. It is difficult for ship repair yards to meet the sharply increased demand due to the lack of a sufficient number of operable docks (some of them are sinking, as it happened to the PD-50 dock in Murmansk135 and at PJSC "Slavyansky Ship Repair Yard" in Primorye; the average age of floating docks is 40 years), lack of qualified personnel, spare parts and modern equipment.
Transformation of shipbuilding enterprises' activities
At present, there are more than 1000 enterprises producing industry products. Military and civil vessels in the Russian Federation are manufactured at 188 enterprises, most of which are located in St. Petersburg, Nizhny Novgorod, Severodvinsk and Kaliningrad Region. The largest of them are:
- JSC Zvezdochka Ship Repair Center;
- Production Association "Sevmash";
- JSC Almaz Shipbuilding Company;
- JSC Krasnoye Sormovo;
- JSC Baltiysky Zavod;
- JSC Shipyard Severnaya Verf;
- JSC Admiralty Shipyards
- JSC Dalzavod Ship Repair Center;
- JSC Amur Shipyard;
- Federal State Unitary Enterprise Sevastopol Shipyard;
- JSC Azov Shipyard.
The largest of them (about 40 organizations) are members of JSC "United Shipbuilding Corporation" (USC) - a state corporation controlling and supporting cooperation in the industry. About 80% of the output products are produced by the enterprises belonging to this corporation, which includes the main shipbuilding and ship repair yards, leading design and engineering bureaus located in 17 cities in 11 regions of Russia and employing over 80 thousand people in design and engineering bureaus and specialized research centers, shipyards, ship repair and engineering enterprises, on the basis of which the major part of the Russian shipbuilding complex is consolidated.
Fig.4. Number of shipbuilding enterprises by Federal districts
Source: Ministry of Industry and Trade of Russia
Accordingly, OSK became the main center of import substitution in the Russian shipbuilding industry - being the largest shipbuilding complex in the country, the state-owned holding has been working for 8 years to eliminate import dependence: it has been developing its own projects, launching competence centers, and organizing cooperation with more than 100 Russian suppliers. OSK is also the main partner of the Russian Navy and provides it with almost all types of warships. The main "locomotives" of import substitution in "OSK" were PJSC "Krasnoye Sormovo" (dry cargo ships RSD59, a series of crab trawlers of KSP01 project) and JSC "Lotos" (dredging vessels No. 504-507). At the same time, some enterprises of the corporation, for example, Admiralty Shipyards JSC and ASPO JSC, are still at the stage of planning projects that do not depend on supplies from abroad.
By the way, about 46% of the industry's enterprises had a decrease in revenue at the end of 2022. Thus, the consolidated IFRS revenue of OSK amounted to about 350 billion rubles. This is slightly lower than in 2021, by 8.7%. The decrease is due to the fact that some orders were postponed and some ships were delivered late. This was due to the disruption of component equipment deliveries.
In 2022, due to sanctions and termination of operations in Russia by a number of foreign shipowners, restrictions and growth of freight rates for bulk carriers and tankers, the creation of Russia's own maritime fleet became relevant. Given the shortage of production capacity for the construction of large-capacity vessels, there is a trend towards cooperation between shipyards and redistribution of orders. For example, in 2022, a contract for the construction of two Project 22740M icebreakers was transferred from SSC Zvezda to JSC OSSZ. Norebo Group of Companies is becoming a significant participant of the Russian shipbuilding and ship repair market. In 2022, Pella-Stapel LLC (part of Norebo Group) was transferred from PJSC "NW Severnaya Verf" to LLC "Pella-Stapel" (part of Norebo Group) with an order for the construction of four long-liners of project 200101. At the beginning of 2023 it became known that contracts for the construction of four trawlers of project 03095, two trawlers of project 1701 and two crab trawlers of project 03070 were also transferred to LLC Pella-Stapel with AO LSZ Pella, and the transfer of four trawlers of project 170701 from PJSC NW Severnaya Verf is under consideration. In 2021, Norebo Group acquired Sudoremservis JSC and Petropavlovsk-Kamchatsky Ship Repair Plant JSC in the Kamchatka Territory, on the basis of which it is planned to establish a ship repair and service center for fishing vessels Rem-Nova DV LLC.
State support measures for shipbuilding
Responsive actions to the EU restrictions were taken rather quickly, as the domestic shipyards, supported by the state, were looking for ways to overcome import dependence even before the events of February and in 2022 actively started to implement the relevant measures. The country's leadership set the task of developing the potential of the shipbuilding industry as one of the priority directions of economic development. By the Order of the Government of the Russian Federation No. 2553-r dated October 28, 2019, the Strategy for the development of the shipbuilding industry for the period until 2035 (hereinafter referred to as the Strategy) was approved, within the framework of which plans to achieve the industry's independence from imports have been developed and continue to be developed. The key objective of the Strategy is to ensure creation of modern shipbuilding by achieving 80% utilization of the industry's main production assets by 2035, increasing the production volume by 2.2 times with simultaneous 2-fold growth of labor productivity and increasing the share of domestic products in the cost of final civilian products up to 75%. In accordance with the Strategy for Development of the Russian Shipbuilding Industry, it is planned to build 959 vessels by 2035.
Fig.5. Number of ships planned to be built in the Russian Federation by 2035 by districts, pcs.
Source: Ministry of Industry and Trade of Russia
Thanks to the sanctions regime, the industry received significant support from the government and a new vector of development. After the sanctions were imposed, the following measures were taken as soon as possible to ensure uninterrupted operation of the industry's enterprises:
First, the supply flows of necessary components from the countries that stopped trading with the Russian Federation were reoriented to friendly countries ready to supply the necessary equipment and mechanisms. In 2014-2022, the supply problems concerned only the companies that fell under sanctions, from 2022. - all companies in the industry.
Secondly, a directive was adopted, according to which key equipment and components should be produced in the Russian Federation to ensure the sovereignty of the strategically important industry from external factors. The production of power plants and navigation systems, the most costly and technically complex mechanisms on a ship, is a priority. According to expert estimates, it will take about three years to resolve issues with local production of components. An additional argument for the need to accelerate this process is the rapid obsolescence of technologies in the industry (no more than 15 years), so all developments must be completed and implemented in a short period of time.
The authorities proposed to allocate 65 billion rubles to support the domestic fleet in 2023-2025: 27 billion - for the leasing program for civilian ships, 15 billion - for the creation and introduction of ship component equipment, 8.69 billion will be provided in the form of subsidies for the construction of large-capacity ships, 6.5 billion will be allocated for the modernization of civil shipbuilding facilities, and another 6.02 billion will be used to reimburse part of the costs of construction of fishing fleet vessels in the shipyards of the Far East.
In order to support the shipbuilding industry, the Ministry of Industry and Trade has developed a mechanism for granting subsidies for the implementation of complex projects for the development, creation and introduction into serial production of the most critical types of ship component equipment. Last year the Ministry of Industry and Trade of Russia together with interested organizations identified the most critical positions of shipboard equipment subject to priority replacement and launched the mechanism of granting subsidies for Russian organizations to implement complex development and production projects. The subsidy is provided to stimulate companies to carry out work on development of ship component equipment within the framework of a complex project, taking into account modernization of production, its adaptation to the requirements of individual markets, production and sale of the resulting products. It is planned to reimburse up to 80% of R&D costs for ship component equipment.
The Ministry of Industry and Trade of the Russian Federation holds a biannual competition for subsidies. The volume of financing for 2022 amounted to 7 billion rubles, for 2023 - 14 billion rubles, for 2024 - 1 billion rubles. In 2022, the Ministry of Industry and Trade concluded agreements on the provision of these subsidies with 32 enterprises for 64 types of equipment for a total amount of about 3.4 billion rubles. As a result of the implementation of complex projects, new types of critical shipboard equipment will be presented on the domestic market starting from 2025-2026.
In 2023-2024, subsidies in the amount of 15 billion rubles are envisaged for the financial provision of costs for the implementation of complex projects for the development, creation and introduction of ship component equipment into serial production. While the industry is deploying production facilities for the products required by shipbuilders, in the next two-three years the Russian authorities will not hinder, but on the contrary, will continue to build and cooperate with suppliers of ship component equipment from friendly countries. Russian companies will be able to partially replace the sanctioned equipment. Suppliers from China, Turkey and South Korea, which have already proved themselves in the shipbuilding market, are also considered as an alternative. China and Turkey are considered as the main candidates for the role of alternative suppliers of ship components. To date, attention is paid to the expansion of supplies of companies that have already proved themselves in the Russian market: WinGD (a Chinese firm potentially capable of leveling out the withdrawal of Wärtsilä and MAN), Weichai (China), Yuchai (China), SJMATEK (China), JMC (China), Gurdesan (Turkey), Aksis (Turkey). According to industry experts, cooperation with Chinese partners is favorable both economically and politically, but among the key disadvantages of cooperation with them are lower qualification of personnel than in Russia, as well as their strong negotiating position against the background of high demand for the products of Chinese shipyards in the world, which ensures their independence from the Russian market.
In September 2022, the Ministry of Industry and Trade reported that the first batches of "technically sovereign" ship equipment should arrive at Russian shipyards in 2024-2025, and work is currently underway to select and integrate existing domestic solutions into production processes.
At the same time, there are some areas where import substitution projects have already been successfully implemented:
On the dry bulk carrier RSD59 (the most sought-after river-sea class model over the last 10 years), specialists from Krasnoye Sormovo plant installed a domestically manufactured thruster instead of its German counterpart, as well as Russian gantry cranes and mooring winches replacing Turkish equivalents. In 2023, serial production of propeller steering columns, previously imported from Germany and China, is scheduled to start for these vessels.
After Wärtsilä's departure from Russia, former employees of the local Wärtsilä office founded Evolution of Marine Digital Technologies ("EMDT"), a company that can ensure our country's import-independence in the field of marine navigation systems by retaining the expertise of Russian developers.
Due to the acute need for its own fleet to export oil and petroleum products under the sanctions restrictions in place in the areas of maritime transportation and insurance services, projects in the tanker segment are being implemented. Zvezda is implementing a project to build 12 Aframax-type oil tankers, two of which - Vladimir Monomakh and Vladimir Vinogradov - have already been commissioned and are performing their functions; two more vessels - Okeansky Prospekt and Akademik Gubkin - will be handed over to customers at the end of 2022.
As for ship repair, a number of state support measures were under discussion in this area during 2022: zero VAT for repair services, reduction of insurance premiums and profit tax preferences for repair companies; reconstruction of existing facilities located in the Arctic and the Far East (e.g., projects to modernize the Krasnaya Kuznitsa shipyard in Arkhangelsk, the 35th shipyard - a branch of JSC Zvezdochka Shiprepair Center in Severodvinsk, construction of a logistics port hub and a compact shipyard on the basis of Petropavlovsk Shipyard and ship repair complexes within the framework of the territory of advanced development in the Far East, etc.). ). Tools are also being worked out to stimulate investments, both on the basis of the existing government programs and through other mechanisms, such as the Federal Investment Fund, subsidizing leasing, etc
The first real measures for the preservation and development of the ship repair business in Russia should begin to take effect as early as 2023 with the adoption of a zero rate of value added tax (VAT) in the second half of the year. The Russian government has prepared amendments to the Tax Code, according to which the VAT rate for ship repair services, regardless of the type of repair and purpose of ships, will be zero, provided that the funds saved from the privilege (20% of the proceeds from the provision of services) will be used by shipyards for investment within seven years. For this purpose they will have to conclude a corresponding agreement on development and modernization of their own production facilities with the Ministry of Industry and Trade and the Ministry of Finance. The annual amount of investment should be at least 20% of the cost of ship repair services that the company provided in the previous year. The funds should be used to finance the costs of acquisition, construction, manufacturing, delivery of fixed assets used for ship repair.
The introduction of the sanctions regime promotes rapid development of the shipbuilding industry in many aspects. In view of the dependence on imported equipment and components, the state has allocated substantial funds to ensure their domestic production. The goals and stages of implementation of the programs on renewal of the fishing and recreational fleet have also been outlined. In a short period of time new type vessels were built using local components. Due to the current geopolitical situation, the shipbuilding industry has received a huge assistance from the state to ensure the reduction of its dependence on external factors and development to meet domestic demand.