2022 June 17
According to PortNews, shipbuilding enterprises can receive financial support from the Russian government, similar to the support provided previously to the aviation and road building sectors of the country. The measure involves an increase of authorized capital of state-owned shipyards (nearly 40 enterprises) that are members of United Shipbuilding Corporation. This will require overall about RUB 130 billion. More than half of the funds will reportedly be directed to the North-West region based shipyards specializing in building cargo ships, fishing fleet and icebreaking vessels for the Arctic routes. Experts believe that the funds partially offset the cost of components and materials amid general inflation and sanctions.
The Russian Ministry of Industry and Trade is currently in discussion with the Ministry of Finance the issue of additional capitalization of USC’ shipyards, sources familiar with the matter told PortNews. It is reffered to a total of RUB130 billion, of which about 15 billion rubles may be allocated to Admiralty Shipyards and a similar amount to Vyborg Shipyard (VSZ). Another RUB40 billion earmarked to increase the own funds of Baltic Shipyard and Severnaya Verf Shipyard (about 20 billion for each enterprise).
The Ministry of Finance did not answer the question about budgetary funds for these purposes, redirecting the request to the Ministry of Industry and Trade. The relevant department declined to comment the information.
Admiralty Shipyards and Severnaya Verf, specializing in execution of the state defense contracts, do not disclose their financial performance results. In 2020, the two shipbuilding companies ended the year with profit. Severnaya Verf, which has significantly expanded its merchant ships portfolio in recent years, reported net income of RUB 173.3 million with revenue reaching 14.9 billion. Admiralty Shipyards, which is currently building two series of submarines for the Navy, patrol ships, as well as a series of fishing trawlers and the ice-resistant self-propelled platform North Pole, reported revenue of more than 39 billion rubles and net income of 3.5 billion rubles. The shipyard predicted comparable financial results in 2021.
According to the corporate release published on the company’s official site, due to restrictive measures in relation to Baltic Shipyard (Baltiysky Zavod JSC) and the risk of possible new restrictive measures in relation to individuals who are mentioned in annual reports, the company does not disclose information for the past year. In 2020, Baltic Shipyard loss rose 22%, to 7.9 billion rubles, compared to 2019. The company's revenue decreased by 8%, to 18.9 billion rubles. Net assets of Baltic Shipyard over the past two years have been negative and, as of the year-end amounted to 9.7 billion rubles, the Samovarova & Partners audit firm’s 2021 report showed.
In 2021 VSZ’s revenue nearly doubled to 7.5 billion rubles, while net loss remained at the level of 2020 – at RUB1.9 billion, the shipbuilding company said. Indirectly, the preparation for a possible additional capitalization is also confirmed by announcement that Vyborg Shipyard Board of Directors approved the placement of its additional ordinary shares in the amount of 15.3 billion rubles. The decision on this must be made by VSZ’s shareholder (96.7% of USC) at the AGM on June 30.
“The marginality of the state defense order in theory is in a range of 4 to 6%, but actually it barely reaches 1-1.5%. There is also a well-known problem with the price of high-tech civil contracts. If our rate of return is below 8%, then shipbuilders will have to go “with hat in hand” begging for support, Alexei Rakhmanov, head of USC said at the shipyard’s annual message in December 2021.
The state-owned shipbuilding corporation proposes amendments to the legislation, which will allow increasing the profitability of production. In particular, USC recommended using a deflator for indexing prices under the state defense order, which reflects the real change in prices for materials and components, reduced to actual inflation at the end of the year, as well as assigning to shipyards the right to include reasonable costs in the price of products, the growth of which for certain articles exceeds the approved indices. In addition, the corporation insisted on granting the Ministry of Industry and Trade the independent financial expertise institution status for determining the labor intensity of newbuilds construction.
Under the current conditions, the main source of funds for the shipbuilding industry will be the state order. It was budget funds that for a decade were the largest channel for financing the shipbuilding sector, says Sergey Zvenigorodsky, Director of Product Sales and Services, the investment company Vector X. He believes that additional funds will be required primarily due to the import substitution of equipment and the search for new ways to supply components.
Analysts of Freedom Finance agree with him. “The main need for capitalization increase is the rise in prices for components, construction and expendable materials in general inflation environment. Metal prices surged globally following the coronavirus pandemic, but this year the Ministry of Industry and Trade has limited surcharge for the domestic market to 10–12%, but given the high base effect, they still force USC to increase production costs. A long production cycle also poses a high risk of increasing costs and production expenses. And the concentration of activities in the domestic market reduces the volume of orders and potential profits,” the experts conclude.