Russian civil shipbuilding sector ‘facing deepest crisis in history’

The decline reflects the almost complete suspension of supplies of foreign marine equipment and technologies to the Russian Federation, as unprecedented foreign sanctions introduced in the wake of the ongoing military conflict in Ukraine impact the country’s domestic shipbuilding sector. 

That has already posed a threat for the implementation of many projects in the industry due to its traditionally high dependence on the supplies of Western civil marine equipment and machinery. 

According to official state data, the Russian civil shipbuilding sector declined by 43% year-on-year basis to 273,000 gross tons in 2021. On the contrary, the segment of military shipbuilding grew by 15%, up to 80,000 gross tons (the maximum value over the past eight years). 

It is expected, due to the ever tightening sanctions pressure on Russia, the decline of the industry will continue this year, with the industry expected to face a record drop that will be significantly exceed the decline observed in 2021.

Russia state aid

In the meantime, the Russian government is aware of the current problems in the industry, putting particular hopes on the currently implemented state program of import substitution. 

According to earlier statements made by Russia’s Deputy Prime Minister Yriy Trutnev – a state official personally responsible for the development of civil shipbuilding in the Russian government – the state is discussing additional measures to support the industry. Among them are the provision of soft loans for domestic shipbuilders as well reduced interest rate. The list of other support measures also includes additional capitalisation of shipyards, permitting duty-free imports of equipment, exemption from VAT etc.

So far, Trutnev has already instructed the Ministry of Industry and Trade and the Russian shipbuilding monopoly United Shipbuilding Corporation to prepare a plan for import substitution of sanctioned ship assemblies and components in the industry, the supply or which analogues is impossible and to prepare a plan for the financial recovery of some of leading domestic shipyards.

A number of enterprises have been included on Western sanctions lists, such as the Khabarovsk Shipbuilding Plant, Amur Shipbuilding Plant and others. After their inclusion on lists of sanctioned entities, many of them have faced serious financial problems.

There is a possibility that in order to ensure their utilisation, these shipyards will be switched to naval construction projects.

Fishing industry remains reliant upon imports 

Most of industry’s analysts expect the most serious impact of sanctions on the Russian shipbuilding will be observed in 2023, with the biggest negative impact is expected to occur in the segment of fishing trawlers, particularly crab ships, as well as passenger and scientific ships.

By contrast, the dry bulk sector will be less affected by Western sanctions, due to its lesser dependence from the imports of foreign marine equipment and technologies. The same applies to the segment of military shipbuilding.

It is planned, this year the level of commissioning of civil ships in Russia will be comparable to those in 2021 – 50 ships, since some of them are already in a high degree of readiness, and the purchase of key foreign equipment has already been completed. At the same time, the construction time of ships, scheduled for delivery in 2023-25, may be shifted, since the replacement of imported components will require redesign and additional time for the manufacture and installation of new equipment. This, in turn will significantly increase the final cost (by 20-40% given the inflation) of construction.

Currently probably the most complex situation is observed in the segment of marine fish processing equipment (fish factories). Domestic production in Russia has not been fully established in recent years despite all the efforts, taken by the state.

In case of fish trawlers, the total volume of equipment and technologies ordered by Russian fisherman in abroad currently exceeds 140 billion rubles (of which 25 billion rubles have already been paid). It is planned, part of these orders will be never implemented due to sanctions and logistics issues.

Despite the existing problems, the government hopes that shipbuilders may receive some additional opportunities for growth by re-orienting their capacities towards the building of ships in new niches for the Russian shipbuilding sector. One such example is the cruise and passenger vessel sector, which is currently in high demand in Russia due to the booming cruise ferry industry in the country.