Russia will consolidate its shipbuilding industry
16:39 | 03/ 04/ 2007
MOSCOW. (Viktor Litovkin for RIA Novosti) - Russia's shipbuilding industry, as well as its aviation industry, has launched a sweeping modernization program.
President Vladimir Putin has signed decrees setting up a United Shipbuilding Corporation (known by its Russian initials, OSK) to consolidate large federal companies engaged in shipbuilding. Within the next few months, three regional subholdings will be formed. One of them - the Western Center - will unite shipbuilding companies in St. Petersburg and Kaliningrad. The Northern Center will take care of all Severodvinsk plants in the Arkhangelsk Region, and the Far Eastern Center will bring together companies located in Komsomolsk-on-Amur, Vladivostok and Nakhodka. 100% of shares in the holdings will be federally owned, and by January 1, 2009, they will be contributed to the authorized capital of the OSK, which will be headed by Colonel General Alexander Burutin, a presidential adviser on military industrial affairs.
What will the OSK do? Putin's decree gives the answer: "[It will] develop, design, manufacture, supply, maintain, upgrade, repair and recycle military and civilian shipping and facilities for the development of the continental shelf in the interest of the government and other clients, including foreign ones, and also promote new technologies and developments in shipbuilding." Our analysis will be concerned with the reasons for this decision.
Over the past fifteen years the Russian fleet, and especially its navy, has suffered considerable losses. Its number of warships, for example, has dropped from 428 to 273, a fall of 37.5%, and that of active vessels at sea from 210 to 28, a drop of 86.7%. Sometimes even that number of ships is not maintained. Naval personnel have been cut by 60%, from 424,000 men to 169,000. The Mediterranean, Indian and Pacific squadrons have been abolished. Russian naval aviation has stopped flying over the oceans, having lost its air bases in Cuba, the Middle East and Africa. The navy has turned from an ocean-going to a coastal one. If this trend continues, experts forecast that by 2015 the navy will consist of not more than 60 warships (22 nuclear-powered and nine diesel-engined submarines and not more than 29 surface ships).
Recently, however, things with the Russian navy have been looking up. The state armaments program for the period until 2015 describes the development of the navy, as well as strategic nuclear forces of deterrence, as one of its main priorities. According to First Deputy Prime Minister Sergei Ivanov, the former defense minister, of the 4.9 trillion rubles ($188.53 billion) set aside for re-armament, 25% will be used to renew the navy.
By 2010, Russia plans to increase its construction of warships by 50%, including building a series of 40 frigates, not fewer than ten each for the Northern and Baltic fleets. Submarines are under construction: strategic nuclear-powered submarine cruisers such as the Yury Dolgoruky, Alexander Nevsky and Vladimir Monomakh, which will be armed with new Bulava-30 strategic missiles (NATO reporting name SS-NX-30), as well as many other multi-purpose nuclear and diesel submarines. In addition, India, China and Algeria have placed orders for Russian warships.
Military orders, however, do not guarantee the industry's survival. Any first-year economics textbook tells us that the building of war vessels, and generally any spending on military equipment, does not bring profits to the state. Production of equipment, especially for the army and navy, returns no profits. This suits no country with a market-oriented culture. So the need is to develop civilian products that are in demand and that contribute to the budget and create a basis for spending on military hardware (which is essential for defense) and on peaceful goods.
The new United Shipbuilding Corporation and its holdings are just the thing to strike a balance between military and civilian production, making them commercially acceptable, although there are certain snags. Russia has a good record of building warships, both surface and submarine ones: its shipbuilding industry is 80% military. In commercial shipping, however, Russia finds it hard to compete with other countries such as Poland, Spain and Italy, let alone South Korea, Japan and other leading countries whose output of this type is highly competitive and in huge demand on the world market. To be frank, in this segment of shipbuilding Russia is an outsider.
But the Russian shipbuilding industry, at least according to the plans announced in circles close to the OSK, is not going to compete with shipbuilding majors; rather, it is seeking a niche where its output will have guaranteed demand. And such a niche exists. These are ice-breakers - including nuclear-powered ones - offshore platforms, special vessels to develop the continental shelf, and other specialized equipment. Russia's ability to get lucrative orders here is clear from one fact: the floating radar that the United States recently moved from Hawaii to the Aleutian Islands, the world's largest and most powerful, is mounted on a platform built by a Russian shipbuilding yard.
The market for vessels to transport liquefied natural gas is even more appealing: currently it is the fastest growing and most capital-intensive segment of global shipbuilding. Its most notable feature is that the vessels are intended to cater specifically to the transportation of Russian gas. This is another real chance to pull Russian shipbuilding out of its hole, especially if the holdings being created will cooperate closely with foreign shipbuilding firms and banks long established on this market. In short, the Russian shipbuilding industry has been given a new lease on life. We shall soon see how well it takes advantage of it.