DECEMBER 1998

POST OF ORIGIN: ST. PETERSBURG

AUTHOR: MARIA CHERNOBROVKINA

1. Summary. The shipbuilding industry was traditionally one of the leading defense industries in Russia. Since the beginning of the defense conversion process, state military orders have been reduced from 60 percent of total production to 5-10 percent, and Russian shipbuilders have had to seek new markets and expand existing product lines. Faced by tough western and eastern competition, Russia must also introduce new technology and costruction practices to maintain its competitiveness. This report provides information on St.Petersburgs' three largest shipyards and their plans to modernize and consolidate their facilities. End summary.

2. In spite of all the problems faced by the defense industry, the majority of Russian shipyards have relatively good prospects, since they have:
-experienced personnel with advanced educations and unique technological know-how;
-workers with numerous specialities;
-cheap and competitive labor;
-cheap steel and equipment inputs, such as main engines produced under license of MAN and B&W;
-large and competent project and design bureaus;
-huge production capacities;
-high technology in welding, casting and production of equipment;
-long standing tradition of high quality work;

3. Russia possesses 40 shipyards, however only seventeen among them has the capacity to build vessels greater than 122 meters in length and only five among them has the capacity to build large ocean ships. St.Petersburg is the most important center of shipbuilding in Russia since three of the country's main shipyards are located here, as well as many supporting industries (machine building, compressor manufacturing industry, ship design bureaus etc.).

4. Admiralty Shipyard is one of three shipyards in St.Petersburg. It is a 100 percent state owned federal enterprise, whose position is relatively stable in the shipbuilding market. The shipyard has no debts to the federal budget and is busy with orders till the year 2002. The shipyard is pursuing two types of markets:

1) Military Shipbuilding- consists of orders from the Russian Ministry of Defense and export orders for foreign governments. The shipyard's military orders are primarily submarines, but also include non-military repair, modernization and building of other underwater technical innovations for oceanic development. Over the last 25 years, the shipyard has built 41 submarines. Those most recently built include Kilo type submarines (2,325 tons D/W) and the smaller Lada type (1,600 D/W). The shipyard's latest development is the Amur type submarine, which according to the General Director, does not yet have a customer. The construction of underwater vessels constitutes 70% of the total production volume of the shipyard.

2) Commercial Shipbuilding- Admiralty Shipyard started to build commercial vessels in 1989, with priority given to constructing sea tankers. According to General Director Mr. Vladimir Alexandrov, at present the shipyard has a portfolio of shipbuilding orders until 2002. This includes an order for five tankers for the Russian company LUKOIL and two chemical tankers for the German company Scholler Holding Ltd., with deliveries in 2000-2001.

Currently, two tankers are under construction. The shipyard's latest and most advanced model, with the ability to transport both crude oil and liquid chemicals, is for Scholler Ltd. The other tanker under construction is one of five arctic oil tankers ordered by the Russian oil company Lukoil. Powered by 11,000 horsepower engines, the tankers can operate in ice with a thickness of 0.5 m. at a speed of 2 knots. The steel for the tankers, measuring between 24-28 mm thick, is provided by Russian metallurgy plants (Cherepovets, Ural, Izhora, and Mariupol, which are considered to be very good in terms of quality and price). The engines are provided by Bryansk Diesel Factory, acting under license from Brumeister. The cost of each tanker for Lukoil varies from $31 mln. to $38 mln., and the total cost of the project (5 tankers) is $200 mln. For construction of the first tanker, the Admiralty shipyard received financing from Dresdner Bank ($14 mln) and Christian Bank ($14 mln). Much of the equipment will be provided by Norwegian and German companies, since German and Norwegian credit lines were opened for the shipyard, based on sovereign guarantees from the Russian government.

5. Baltiysky Zavod (Baltic Shipyard) is another shipyard in St. Petersburg which used to be one of the leading enterprises of the defense industry. After the disintegration of the former Soviet Union, Baltiysky Zavod became the only yard in Russia capable of constructing commercial vessels with full displacement of up to 100,000 tons. Baltiysky shipyard is self contained and has the facilities of all necessary supporting industries: engineering department, woodwork production, marine machine building, power engineering, metallurgical production, research and development department and the shipyard itself with three slipways. An international commission which includes representatives of the international classification society Bureau Veritas, Quality International and the Russian firm Soyuizsert of the company Oboronsertifica, confirmed Baltiysky Zavod's compliance with international standards. Baltiysky Zavod became the third shipyard in North-West Russia, after Vyborg and Almaz shipbuilding yards, to obtain an international quality certificate.

The financial situation at Baltiysky is not as secure as Admiralty shipyard's, since it owes funds to the Federal budget. However, the state is indebted to the shipyard for the construction of an atomic icebreaker (Rb 65 billions) and an atomic cruiser(Rb 35 billions) which results in a kind of financial balance between them. Nevertheless, according to Mr. Shuliakovsky, General Director of Baltiysky, the enterprise will be able to finish FY 98 without debts, due to the number of shipbuilding orders that will stabilize the situation at the shipyard for at least five years.

Baltiysky will build four containerships of the Ecoship type for the Swedish forwarding company Siowalls AB. The total value of the contract is about $70 mln. with delivery in 2000. Another contract was concluded between Baltiysky Zavod and the Industrial Development Corporation of Scandinavia A/S for the construction of four, 5,700 dwt. chemical tankers. Due to the complicated composition of materials, in the past it was possible to build this kind of ship only in Portugal. The price for the chemical tankers will be $19 mln. Also, Baltiysky Zavod signed a contract with the Russian company Rosvoorujeniye (Russian weapons), which envisages the construction of three frigates with a deadweight of 4,000 tons for the Indian Navy.

6. Severnaya Verf (Severny shipyard) is the third and the youngest shipyard in St.Petersburg. Originally founded for military shipbuilding exclusively, it has constructed all kinds of vessels including scientific-research and passenger vessels, container carriers and Ro-Ro vessels, timber vessels, minesweepers, escort ships, destroyers, cruisers and antisubmarine ships. Currently, the shipyard has the capability to construct both military vessels and all of the above mentioned civil ships excluding passenger ships. The technical advantages of Severnaya shipyard include: -four slips in covered-in-births with the capacity to construct vessels with a maximum length of 170 m. and width of up to 20.5 m. Slipways are equipped with cranes with a lifting capacity of 50 tons;
-four open-air slipways with the capacity to construct vessels with a maximum length of 170 m. and width of 24 m., and are equipped with cranes with a lifting capacity from 30 to 100 tons;
-launch-hoisting facilities with floating dock that has a lifting capacity of 10,000 tons and a transborder, which is able to launch and hoist vessels from and to any slipway.

Unlike the other shipyards, Severnaya is not self-contained, but does possess some supporting industries, including metal-working and pipe-working shops, and welding facilities. It fulfills its other needs through contractors. According to the shipyard's officials, it has the highest capacity among St.Petersburg shipyards--two military and 4 civil vessels annually. However, the shipyard is only utilizing 40% of its capacity.

The priority market for Severnaya shipyard is military export to Asian countries (India, China, Vietnam). Currently, it has a military order from the Chinese Government for the construction of two naval destroyers. The cost of the contract is unknown, but according to some estimates it is one of the largest contracts in the Russian military shipbuilding industry. As for civilian orders, last year the shipyard built two bulkers for Poland of 109 m. length, 17.8 m. width and 7,000 tons deadweight.

According to Valery Venkov, the General Director of the shipyard, the financial situation of the enterprise is rather stable. He claims that the shipyard does not have any debts to either the federal budget or its own employees. However, the local media reports that the situation is more like Baltiysky Zavod's (i.e. the state owes the plant and the plant owes the state).

7. The three shipyards, having a total capacity to process 90,000 tons of steel, are at present not able to compete with the shipyards of South Korea, China, Germany and other European countries, where during recent years modern robotic shipbuilding technologies were implemented. Russia is behind these countries in terms of level of production management, technology, construction period and prime costs. Due to this, Russia might lose its competitiveness in five or six years, unless the shipyards are modernized. Modernization of each shipyard will require not less then $500-600 mln.

According to experts, robotics and new technologies will not make the shipyards highly profitable if installed in old yards. Thus, the Council of the Ministry of Economy of Russia decided to create a modern shipbuilding complex and the investment project was included in the State program for the conversion and restructuring of the defense industry of the Russian Federation. This program, which is a Russian analogue to the U.S. "Moritex" program, is called "Russian Shipyards" and has received presidential status. The program envisages the joining of all three existing shipyards (Baltiysky Zavod, Severnaya Verf and Admiralty Verf), and creating a joint ship-assembly complex in the form of a joint-stock industrial corporation. The project of unifying the yard costs approximately $650 mln, of this, 30% will go for the transfer of a number of machine building workshops to other enterprises in St.Petersburg and to the redevelopment of 150 Ha of freed property in the center of the city. It is still rather unclear who is planning to finance this project. According to Mr.Alexandrov, the Director of the Admiralty Shipyard, the project should be financed by existing shipyards, customers, shipping companies and investors.

8. Shipbuilding in Russia is very different from other sectors of industry: very long terms of project completion (sometimes more than 30 months); very high project costs ($30-50 mln.); and
a need for high capital investments. According to some estimates, Russia needs annual fleet renewal of 150-200 ships, requiring an investment of $2.5-3.5 billion. However, Russian shipowners do not have money to finance the construction of new vessels. Under the circumstances, the financing for new ships would be based mainly on western loans against the mortgages, of existing vessels, at a rate of 60%-80% of the ship's value and pay back period of 8-10 years. However, due to the lack of legal security of refund guarantees in Russia, this scheme will not work here, and Russian shipowners are forced to register offshore companies in foreign countries, under the flag of convenience, where guarantees of foreign banks are available. As a result, Russian shipowners order ships from foreign shipyards, since foreign banks are reluctant to finance the shipbuilding orders at Russian shipyards.

9. These problems were discussed at the State Duma session on November 3, 1998. The session itself discussed the future of the shipbuilding industry in Russia--its possible restructuring, a reduction in the number of shipbuilding centers in Russia and stronger support for those that remain. Currently the problems in Russian shipbuilding could be solved in two ways:
-the creation of joint ventures with large foreign companies;
-the economic and legal infrastructure to attract needed investment.

10. Currently, it seems that the most active players on the market are Norwegian and German companies. This is due to both the good reputation of Norwegian and German equipment in the world market and the deep involvement of German and Norwegian creditors involved in the renewal of the Russian fleet. The credit line was opened against the Norwegian government's guarantee or, for some projects, against the guarantees of the Russian regional administration. Thus, in order to enter the Russian shipbuilding market it might be wise to engage U.S. financial institutions, such as the U.S. Eximbank.

11. U.S. equipment is typically not used for vessels constructed in Russia since it is seldom marketed to the Russian shipbuilding industry. The ship design bureaus, which are responsible for the project and selection of equipment providers, do not include U.S. companies in their lists of potential suppliers. Thus, the best way to enter the Russian market may be to introduce the U.S.-made equipment to the ship design bureaus.

12. For more detailed information on Russian shipbuilding market as well as for any assistance in this industry please contact the U.S. Commercial Service in St.Petersburg, Russia at:

25 Nevsky Pr., 191186
St.Petersburg, Russia
tel: 7-812-326-2560
fax: 7-812-326-2561/62
Contact: Maria Chernobrovkina

This report is provided courtesy of the Business Information Service for the Newly Independent States (BISNIS)