Pacific Maritime Magazine - Marine Business for the Operations Sector

Russian Shipping Companies Seek Larger International Share

 

Yamal LNG's decision to build their LNG-carriers in South Korean shipyards stems from a shortage of technological capability in Russian yards, but future Russian LNG-carriers could be built at the Zaliv shipyard in Crimea. Photo courtesy of the JSC "Shipyard "Zaliv"(Kerch).

The Russian government is considering a package of measures aimed at improving the current situation in the domestic shipping industry.

According to an official spokesman of the Russian Ministry of Transport, the current situation in the industry remains complex, and is reflected by the fact that at present only 5 to 6 percent of Russian cargo is transported by vessels under the Russian flag, which is significantly lower than the 60-percent figure during Soviet times. This reduction has resulted in annual losses to Russian shipping of $10 to $15 billion.

Among other problems are the high average age of the Russian shipping fleet, (which applies both to maritime and inland waterway transport), as well as the poor technical condition of the majority of Russian seaports.

The situation is aggravated by the ever-growing competition from Baltic seaports, which plan to significantly increase the volume of transshipment of Russian cargo during the next several years.

There is also a threat of a further reduction in the share of Russian participation in global cargo traffic, due to a planned opening of domestic inland waterways to foreign vessels, which will give foreign operators access to Russian cargo.

According to Andrei Klepach, Russia's Deputy Minister of Economic Development, the majority of Russian shipping companies still prefer to operate under foreign flag, which has proven to be fairly profitable.

According to data, provided by Klepach, in 2001 the volume of foreign trade cargo transportation by ships under the Russian flag was comparable with the volume of shipments on ships under foreign flags, controlled by Russian companies, being equivalent to about 6 million tons per year.

However in 2014 the volume of shipments under foreign flag amounted to 15 million tons of cargo, while under Russian flag, by contrast, cargo has declined to 5 million tons.

Klepach believes that such a situation is unacceptable and should be addressed in the near future.

The figures have been confirmed in recent statements by Russian President Vladimir Putin, according to whom the Russian government plans to significantly reduce the volume of support for domestic companies with foreign jurisdiction, while simultaneously increasing support for those companies registered in Russia whose ships sail under the Russian flag.

According to Putin, in 2014 the value of Russian goods and cargo moved by offshore companies reached a record $111 billion, which is a fifth of total Russian exports last year. At the same time about half of the $50 billion of Russian investments in other countries were also moved by offshores. According to Putin, these figures signify a withdrawal of capital from the country, and in particular the domestic shipping industry.

In the meantime, according to Vladimir Vasiliev, Deputy General Director of the Central Research and Design Institute of the Russian Maritime Transport, one of Russia's leading research institutes in the field of maritime transport, there is a need to develop a careful approach for the fight with offshores in the Russian shipping industry.

Vasiliev says, "De-offshorization should only apply to those shipping companies that operate in Russia while being registered in an offshore zone," as this provides them an operational advantage. "The same should not applied to those companies which operate abroad."

At the same time, the state plans a series of measures to encourage Russian shipowners to register vessels under the Russian flag and to build them at Russian shipyards. Implementation of these measures should also help to increase the share of the Russian shipping industry in the international arena.

According to state plans, these measures would include the reserve of shipments of some state and transit cargoes for Russian carriers (which should ensure stable orders for local shipping companies); the creation of conditions for the building of modern transshipment facilities in Russia and the implementation of free economic zones in Russian seaports.

In addition, the Russian government also plans to design a complex of measures, aimed at encouraging domestic shipowners to renew their fleet, through the placing of orders for the construction of new vessels at domestic shipyards.

These plans will be aided by an existing state program calling for the scrapping of old vessels (more than 30 years old) and the provision of state subsidies for the purchase of new ships.

The amount of planned subsidies is expected to be not less than 10 percent of the cost of a new vessel. In order to receive a grant, the shipping company must dispose of a ship and invest the funds in the construction of a new one. All the orders must be placed in domestic shipyards.

Most new Russian vessels are currently ordered by the Russian shipowners from abroad. For example, South Korea's Daewoo Shipbuilding & Marine Engineering (DSME) shipyard, one of the world's largest shipyards, is currently involved in the building of five LNG-carriers for the transportation of LNG for the Yamal LNG project, (the construction of an LNG plant at Sabetta, north-east of Russia's Yamal Peninsula). The carriers are expected to be purchased by Greek Dynagas shipping company and Japanese NYK.

As part of the project, transportation will take place from the South Tambeyskoye field, whose gas reserves are estimated at 1.3 trillion cubic meters per year.

In addition, to Dynagas and Japanese company NYK, Japanese company Mitsui OSK and Canadian company Teekay will carry out transportation of LNG from the field.

The companies signed an agreement with DSME on the building of 4 and 6 LNG-carriers respectively for Yamal LNG in the summer of 2014.

In the case of DSME, Yamal LNG reached an agreement for the building of 16 LNG-carriers for the project in 2013, with an estimated value of $5.5 billion. These unique vessels will be specially designed for LNG transportation through the Northern Sea Route, and will have the highest ice class rating of ARC 7, allowing them to be operated at a temperature of -40 degrees Celsius, comparable to some of the country's existing atomic icebreakers, such as the 55-MW Rossiya.

The ships will be able to go through the ice with a thickness up to 2.1 meters without an icebreaker escort.

In the meantime, the decision of Yamal LNG's operators to build their LNG-carriers in South Korean shipyards has already sparked criticism from the Russian government and Russia's President Putin, as this is contrary to the recently announced state plans to build ships for domestic projects within the country.

At the same time, according to Leonid Michelson, head of Novatek, Russian shipyards currently suffer from a shortage of technological capability to build such ships, despite the fact that United Shipbuilding Corporation, a Russian monopoly in the field of shipbuilding, along with French Gaztransport & Technigaz (GTT) in recent months has started the design and building of new LNG carriers.

There is a possibility that future Russian LNG-carriers could be built at the Zaliv shipyard in Crimea and in the Russian Far East Zvezda shipyard.

Tax Problem

In the meantime, the state is working toward a solution to tax problems in the industry. High taxes remains one of the major problems of the Russian shipping industry, with the rate of income tax in Russia currently set at 20 percent, while the rate of the VAT is 18 percent.

According to an official Russian Ministry of Transport spokesman, many Russian shipping companies still prefer to register their ships abroad, with the most beneficial countries for registration of ships including Liberia, Panama and Greece, as well as others.

In the case of Liberia, according to analysts, this is mainly due to the absence of taxes and exchange control for non-resident (offshore) companies. In Panama, the companies pay only a lump-sum tax, which is a one-time tax, during the registration of the company. There are no restrictions on the nationality of shipowners, and profits generated from the ships' operations are also not subject to taxes.

Moreover the governments of both Liberia and Panama do not require even minimum accounting from registered companies.

In addition to Liberia and Panama, Greece is another popular country for registration of global shipping companies, due to an exemption from taxation, including income tax. In addition, according to Greek legislation, foreign companies are exempted from all duties and taxes on income, arising from transactions outside of Greece, if they have a special permit from the Greek Ministry of Economy.

One of the main conditions for obtaining such a permit is the provision of a guarantee on the annual transfer of not less than €50,000 for the maintenance of the local branch in Greece.

The Greek legislation also requires that each non-resident provide a deposit of €10,000 to the government in the case of non-payment of any fines and fees.

In 2006 the Russian government announced its decision to reduce and abolish taxes for shipping companies. In accordance with that decision, five taxes were abolished, and in particular property and income tax, as well as transport tax, VAT and some others.

According to an official spokesman of the Russian Ministry of Transport, that decision reduced the tax burden on domestic shipping companies by half, and also reduced the cost of ship operations. However, according to some leading Russian shipping companies, the abolishment of taxes has also led to the loss of tax benefits for industry players at the same time.

In the meantime, according to some leading Russian lawyers, despite all the attempts by the state, the problem of taxes will continue to be one of the most pressing in the Russian shipping industry.

According to Mikhail Filippov, a senior lawyer at the Nalogovic company, one of Russia's leading law firms, those tax benefits, which were provided to domestic shipping companies, will still not be enough for re-registration of their vessels under Russian jurisdiction. The majority of shipowners will continue to use foreign flags for their vessels to avoid the strict measures of financial and tax control that would apply in Russia.

There is an acute need for Russia to develop its shipping industry to compete with the ongoing consolidation of the global shipping industry.

For example, French company CMA CGM SA, the world's third-biggest container-shipping operator by capacity, has recently bought Germany's Oldenburg-

ortugiesische Dampfschiffs-Rhederei GmbH (OPDR) for an undisclosed sum.

The acquisition is the latest move by global shipping majors to control the maximum amount of tonnage in the water, as the sea-freight industry remains plagued by overcapacity and falling freight rates.

Meanwhile, at the end of 2014, CMA CGM announced a new alliance with China Shipping Container Lines Co. (CSCL) and United Arab Shipping Co. (UASC).

The alliance, Ocean Three, is expected to involve 150 ships moving about 20 percent of all Asia-Europe cargo, 13 percent of volume on Trans-Pacific routes, and 7 percent of cargo going across the Atlantic.

CSCL said the agreement would operate for two years and then be automatically extended if none of the parties raise objections.

The deal comes as Maersk Line and Mediterranean Shipping Co. (MSC) are preparing to launch their own alliance, known as 2M.

Observers expect the alliances to push smaller operators out of the Asia-Europe route, stabilizing freight rates by driving down supply.

Maersk Line CEO Søren Skou said recently that the 2M alliance is operationally ready to launch and will not require approval from Chinese regulators, after a member of the FMC said he would reach out to the commission's Chinese counterparts before signing off on the plan.

 
 

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