Competitive patriotism

De-offshorisation campaign announced in Russia should take into account specific features of different industries. As for the international shipping, it is important to expand the fleet controlled by Russia and improve its competitiveness rather than “mindlessly” bring all vessels under the Russian flag.

Tricolour is not a goal in itself

When pursuing a policy of de-offshorisation it is important not to destroy the economy of Russian shipping companies operating at the global level. This opinion was expressed by Deputy Minister of Economic Development of Russia Andrei Klepach at the meeting of Marine Board under the Russian Government held in Moscow on December 20.

According to him, it is not necessary to bring all ships under the Russian flag. What is more important is to increase the number of ships controlled by Russian companies, even if they fly under a foreign flag and to improve legal framework related to the transfer of ships under the Russia flag.

The Board members have come to a conclusion that the  transfer of vessels under the Russian flag should be based on a differentiated approach with consideration of each company’s specific features. Otherwise, national shipping can be ruined and there will be nothing to bring under the Russian flag.

According to Andrei Klepach, the share of Russia-controlled fleet participating in sea transportation of Russia’s foreign trade cargoes has reached 20%, while there is a mid-term prospect to raise it to 32%. 

According to specialized agency Clarkson, some 90% of global large capacity fleet fly the flags of convenience. The Agency says Liberia, Panama and Marshall Islands account for 40% of the global tanker fleet (in terms of deadweight) with Liberia being the first in terms of tanker fleet registration (15% of the market).

As Nikolai Kolesnikov, First Deputy to Sovcomflot Director General, commented for IAA PortNews, the state of registration is often selected in compliance with the industry practice and the requirement of lending banks for obligatory international registration of vessels necessary for securitisation of loans. Exceptionally high capital intensity of the industry and long payback period for newbuildings and acquired vessels require attraction of long-term financing. «Throughout its history Sovcomflot has been raising long-term loans (with maturity of up to 15-20) from international financial market as there is no such a proposal in the Russian market,” Nikolai Kolesnikov explained.

So, on December 16, 2013, Sovcomflot signed a new USD 316 million 10 year credit facility with a consortium of three leading international banks. The funds will be used towards financing two new ice-class LNG carriers Velikiy Novgorod and Pskov, which will operate on long-term contracts with Gazprom Global LNG. 

The use of foreign flags is also explained by international legislation in the part of responsibility for oil spills. It can differ manifold.

Organizational structure of the majority of international and domestic companies including public ones like Teekay (Canada) and Cosco (China) has historically been using the practice of "one-ship- company" arrangement. 

The flag of Russia should become a convenient flag if we want to bring all the vessels under RF flag. The other issue is if it meets the interests of the Russian Federation. Nevertheless, “mindless” transfer of vessels would result in lost competitiveness in the global market and even in the exit.

Nevertheless, the development strategy of Sovcomflot till 2018 foresees gradual reduction of the conventional fleet flying under foreign flags. Simultaneously, there is a plan to increase the number of specialized hi-end vessels flying the flag of the Russian Federation amid growing number of Russian offshore projects. As of today, the company’s fleet numbers 18 such vessels with total value exceeding $1 bln.

As Sovcomflot President and CEO Sergey Frank said at the Marine Board meeting, the company’s approach to all Russian tenders is based on the following principle: “Russian flag – Russian International Register”. “We hope the organizers of those tenders will also focus on Russian flag priority,” Sergey Frank said. 

The head of the Marine Board, Deputy Prime Minister of Russia Dmitry Rogozin, also thinks it is not right to “act bluntly” in transfer of vessels under Russian tricolour. He ordered the Board Presidium arrange a detailed consideration of this issue. 

Earlier, the same opinion was expressed by RF President Vladimir Putin.

According to the comment obtained by IAA PortNews from Dmitry Baranov, leading expert of Finam Management, Russia is not likely to create environment more attractive than those in the states of convenient flag and large-scale return of vessels to the country can hardly be expected. However, if the norms set forth by national legislation start working and at least part of the vessels return to the country, this should be regarded as success.

«Taking into consideration, that the concern about Sovcomflot business has been expressed at the governmental level, the transfer of vessels is not likely to happen or to be executed “mindlessly”, the expert says. We hope that all the activities will be undertaken after careful consideration of both financial advantage and preservation of the company’s successful business. There is no doubt that Sovcomflot with its long history and excellent reputation will retain the access to foreign loans and the company’s core activities will not be affected even if some of its vessels will fly the flag of Russia. Sovcomflot clients will not abandon the company as they know it for prompt, profitable and safe delivery of cargoes to any port of the world. And there is no reason to reject its services as it is the flag to change not the professionalism or responsibility of the company seafarers or other personnel».

In the shade of the flag

However, the problem of vessels transfer to the flag of Russia which is especially acute for Sovcomflot ocean-going vessels is more positive for river-sea vessels.

Owing to Law No 305 encouraging national shipbuilding and shipping, the number of vessels registered with the Russian International Register of Shipping is growing dynamically.

According to Konstantin Palnikov, Director of RF Transport Ministry’s Department of State Policy for Marine and River Transport, the share of vessels flying the flag of the Russian Federation in total volume of foreign trade cargoes exceeded 6% in 2013 against 5% in 2012. 

Konstantin Palnikov believes this growth was driven by the federal law No 305 on measures to support national shipbuilding and shipping. Total tonnage of Russian flag vessels has increased to 10.9 mln t this year 2013. As of December 17, 2013, the list Russian International Register numbers 718 vessels with total deadweight of 2.6 mln t against 340 vessels in 2010 and 566 vessels in 2012.

“I think, this is a good demonstration of the effect of the federal law No 305 which has improved the attractiveness of the Russian flag for ship owners,” Konstantin Palnikov said at the Marine Board meeting. 

As of December, 2013, average age of vessels flying the flag of Russia has decreased to 22 y.o. against 28 y.o. in 2012. Average age of vessels registered with the Russian International Register is 16 y.o.

The conclusions of the Transport Ministry representative were also confirmed by Aleksey Klyavin, President of the National Shipping Chamber. “The law on measures encouraging national shipbuilding and shipping has begun working and the vessels are being attracted to the Russian flag, not as fast as we wish but we continue this work. The most important thing is that this law together with other regulations facilitates the development of Russian shipbuilding and ensures orders for domestic shipyards,” Aleksey Klyavin said at the Marine Board meeting.

However, he says there are some non-industry-related regulations interfering with the shipping and shipbuilding laws, often in conflict with international conventions. This creates uneven playing field for Russian and foreign ship owners which leads to registration of vessels under foreign jurisdiction. NSC President believes this issue requires specifically careful examination. 

Vitaly Chernov