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Excerpts from transcript of meeting on developing shipbuilding industry

President of Russia Vladimir Putin: Good afternoon, colleagues.

Today we are continuing a series of meetings on developing key industries and sectors in the national economy.

We will review the situation in shipbuilding, today. We will discuss the challenges faced by Russian shipyards, ship builders and customers and, of course, the strategic goals of the industry, primarily its civilian segment.

I will not point out again the importance of a stable and reliable shipbuilding industry for increasing production in fishing, domestic exports, for building up the entire cargo transport system, the loading of adjacent industries, and the development of engineering education in our country. I know that all of you understand this perfectly well and know all about it.

I must note that recently Russian shipbuilding companies have faced difficulties with supplies of foreign equipment and parts for civilian vessels. We know the reasons for this: our Western partners are failing to comply with their commitments for purely political considerations.

We have discussed similar difficulties in other industries. We agreed to take specific measures in response to the unfriendly actions of foreign suppliers.

If you recall, we raised this subject at a meeting on developing the agro-industrial complex in the spring. This meeting was followed by specific instructions – to allocate an additional 7 billion rubles to produce Russian equipment for the fishing fleet. I would like to hear today how these instructions are being carried out.

I recognise that the replacement of foreign equipment and components in the production of fishing and other civilian vessels may affect the parameters of current projects. This is obvious. I am referring to the schedules and costs of redesigning, which is very important and affects existing ship orders and businesses. Our colleagues in the field are already reporting delays in shipbuilding schedules and changes in other indicators.

I would like to point out, to those in the Government and, of course, the directors at shipbuilding companies, the need to do everything possible to implement our production programmes and to reduce to a minimum – obviously, reducing to zero is impossible – the influence of the current negative factors, and to avoid them in the future. I hope to hear the business community’s and sectoral companies’ positions on this issue, including the potential measures to expedite required shipbuilding at Russian shipyards.

In general, let me stress that, as you know, the situation in the world and the actions of our Western partners have shown once again that we need be proactive in developing our own competences in shipbuilding. I have said this many times. It is impossible to substitute every imported part, and there is no need to do this, but it is necessary to achieve technological sovereignty in critical positions of ship equipment, and in the most significant production processes and technologies. We need to make sure that as many operations as possible to equip, retrofit and repair ships are carried out in Russia.

Let me repeat that Russia has everything necessary for the confident, long-term development of shipbuilding, including great experience and innovations in this area, a resource and industrial base, and the enormous potential of Russian engineering and design.

We need to set in motion the initiatives of Russian shipbuilders, their domestic suppliers and customers, to support the upgrading of our shipyards and offer convenient financial mechanisms so that new orders for high-quality, modern vessels, including ice-class ships, are completed in Russia in order to increase the capacities of the Northern Sea Route and our other Arctic projects. All this is necessary to increase the workload of domestic enterprises and to create jobs in this complex, high-tech industry.

It is especially important to set long-term guidelines for the development of shipbuilding, given the long cycle of ship production; and the orders must be set accordingly. It is necessary to set schedules for shipyards based on the needs of the customers in transport, fishing, energy, and others. Let me remind you that their assessment is the key criterion for the work of the entire industry.

And another thing. Construction of high-tonnage ships is one of the main prospective areas in Russian shipbuilding. We have already decided to subsidise part of the costs of these projects when they are connected with the localisation of plants and the creation of cutting-edge Russian technologies in this area.

Today we will discuss how the industry is progressing, and how your shipbuilding plans are being carried out, including at the Far Eastern Zvezda complex, where the leading centre of high-tonnage shipbuilding in Russia is being created.

I hope we will discuss all these issues in the most frank, businesslike manner.

Let us get to work.

Deputy Prime Minister – Minister of Industry and Trade Denis Manturov: Thank you very much.

Mr President, colleagues,

Civilian shipbuilding has been regaining the positions it lost in the post-Soviet era and has been learning to build new kinds of ships.

We have started building cruise motor ships PKS-180 and PV300, and upgrade the Kometa, Meteor and Valdai hydrofoils. This line was supplemented by electric twin-hull boats with Ecocruiser and Ecobus models, which are in high demand. We launched the serial production of cargo vessels for river-sea navigation and entered the segment of high-tonnage cargo ships, built at the Zvezda shipyard in the Far East, which you have mentioned. This shipyard has already completed the first Aframax-class tankers and is building LNG tankers and product carrier ships for the Northern Sea Route.

We have been paying more attention to fishing vessels lately. In this segment, we are working with the Ministry of Agriculture as well as the Federal Agency for Fishery by relying on the “under keel” quota mechanism [it requires fishing companies to order Russian-made vessels in order to obtain certain fishing quotas under a government programme]. Today, there are 70 ships for the fishing industry at various stages of construction at our shipyards.

We are proactive in expanding our icebreaker fleet, which is a top priority for us. We already commissioned two 60-megawatt icebreakers and will complete another one this year and two more after 2024. Rosatom has confirmed that we will need to build two additional serial nuclear icebreakers by 2030, as well as nuclear maintenance ships and four icebreakers running on organic fuel.

Overall, capacity utilisation within the shipbuilding sector is quite high. Some 300 ships and units of maritime equipment are currently at various stages of construction at 63 shipbuilding companies. There are also more than 700 ships of various kinds that state and private customers will need until 2035 according to a survey carried out by the Ministry of Industry and Trade, but not all of them have determined their technical parameters or funding sources, which means that they have yet to become firm orders.

The Government has instructed the interested agencies to clarify all the parameters taking into consideration cargo and passenger traffic projections. The primary purpose here is to get an estimate for the use of building cradles. The construction cycle for a ship is quite lengthy, so project costs tend to exceed the initial projections. Shipbuilding companies have faced this issue many times, especially when signing contracts with fixed prices while the project is not even ready. This way, in order to deliver the ship, they have to go beyond the initial budget and cover the difference from their own pocket.

In this regard, we decided to conduct an audit of the accumulated debt with the Finance Ministry. We will start with USC enterprises, and based on the results, we will formulate proposals for their possible subsequent financial recovery.

To rule out such situations in the future, I instructed the United Shipbuilding Corporation to avoid concluding any contracts without independent technical and economic expert examination. In the future, we expect to consolidate this principle at the legislative level for all enterprises in this industry, both in relation to state contracts and projects developed by companies co-owned by the state. Relevant amendments to the Federal Law On Industrial Policy have been submitted to the State Duma. They have already passed the first reading, and we expect them to be adopted at the beginning of the autumn session.

To ensure uninterrupted production and technological independence, we need verified ship equipment, especially taking into account the need for replacement components due to our foreign partners’ refusal to fulfil their obligations, as you mentioned today. Many shipowners, especially fishing companies, customers of large-capacity vessels have burnt their fingers when they preferred to include imported components and units in their projects even though Russian-made analogues were available at that time.

As you have already said, Mr President, we are now forced to redesign many vessels, including projects that are already under construction. For fishing vessels alone, the change will involve additional costs of over 2 billion rubles for all participants.

Shipbuilders are currently checking their remaining projects for components that require changes and adjusting the cost of redesigning them. This is an objective reason that will shift delivery deadlines to the right. In this regard, to avoid customer penalties imposed on shipyards, we propose to extend the construction deadlines by two years after agreeing on the final cost – a similar arrangement was made with respect to major construction projects. We will prepare the necessary legislative amendments if you support us.

As for new projects, potential customers will be offered a standard range of vessels for various purposes with maximum reliance on domestic equipment. This way we will streamline serial production, reduce the vessels’ cost, and most importantly, dampen the risks of supply disruption.

Today, the icebreaker fleet is perhaps the most independent segment technologically, and we will seek to achieve this across the board. We have defined the critical positions as regards hardware and units that have to be developed in the short term and put into serial production, including with account taken of the Zvezda shipyard’s large tonnage needs.

Mr President, thank you for supporting this year’s allocation of seven billion rubles for this undertaking. As regards deck machinery this will meet the needs of both the fishing industry and, as I said, all other important segments. The Finance Ministry has promptly responded to your instruction by including another 15 billion for the next two years in the draft three-year budget. We hope that the allocations will be approved.

The capacities of the plants themselves have to be upgraded and expanded considerably, if we are to implement several hundred new projects by 2030. In previous years, money for retooling was allocated solely to the military shipbuilding industry. Currently, shipyards are assessing the capital outlays and investment needed to implement civilian orders. Given that their cost-effectiveness is restricted by regulations, we will possibly need budget investment, but we have to finalise calculations in this regard.

Hefty state support is also required to carry out large-scale fleet modernisation. A preferential leasing arrangement is the key measure in this sense. Today, the arrangement works effectively and, properly speaking, is the main driver of the available orders.

We have drafted a programme which will be implemented, if we borrow from the National Welfare Fund at 1.5 percent annual interest. We have preliminary coordinated this approach with the Finance Ministry. Currently, the State Transport Leasing Company is specifying the amount of funding involved in bankrolling the draft programme. It is this pattern alone that will enable us to ensure transport connectivity, promote domestic water tourism, and develop new international routes and the Northern Sea Route transport corridor.

Apart from building new ships, we need to tackle repair and maintenance issues. Following up on your instructions, Mr President, we worked together with the Finance Ministry and found a way to offer zero-rate VAT for ship repairs, on the condition that providers sign investment contracts with us and undertake to invest the profit they make in upgrades, which in fact will pave the way to creating a new sector. We are now drafting corresponding amendments to the Tax Code with our colleagues.

In conclusion, I would like to mention companies in Russia’s Far East. We will need some 6 billion rubles to support this region’s shipyards over the next two years in order to offset their investment in building crab-fishing boats. Proceeds from crab auctions are expected to finance this subsidy.

Mr President, I am asking you to support our proposal and issue the relevant instructions. I do hope that all the initiatives will materialise in keeping with the objectives you have set.

Thank you.

Vladimir Putin: Ok.

Of course, we must support this proposal – I am referring to the last one you have mentioned.

As for the debts accumulated by the United Shipbuilding Company, where did they come from? Do you mean that you want to carry out an audit?

Denis Manturov: Yes, Mr President, this is exactly as you described it when talking about the way the market environment evolves when contractors cancel their orders for deck machinery. I said that there were no technological audits or project specifications when contracts were signed, but all shipyards were keen to launch construction, so they were ready to do this even without a quality review or determining a fixed price. As a result, they go over the budget.

Two years ago, you supported an initiative to help many companies, including the United Shipbuilding Corporation, improve their finances. I would like to thank you for this initiative. It focused above all on shipbuilding orders as part of the state armament programme. Today I was speaking about civilian shipbuilding. With this in mind, if you allow us, we will work with the Finance Ministry to carry out a detailed review by late November or early December at the latest, since so many companies are involved, and will offer structural proposals on what more can be done to resolve this issue.

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Director General of State Atomic Energy Corporation Rosatom Alexei Likhachev: The experts we invited as well as our specialists and partners have come to the conclusion that a new shipbuilding facility needs to be built for large-capacity projects, given the historical limitations of the Baltic Shipyard.

We believe that a joint project between Rosatom and USC, primarily represented by the Baltic Shipyard, is the most feasible option. It is a project proposed by the Shipbuilding and Shiprepair Technology Centre, a state research centre for shipbuilding.

The plan is to build a large-capacity shipyard capable of processing up to 300,000 tonnes of metal at peak capacity; it includes several stages. The first stage of the project involves developing a model of a distributed shipyard for semi-knocked down assembly specialising in nuclear-powered ships, ice-class vessels and floating nuclear power units.

The construction can comprise three phases. The ambitious goal is to complete the first phase of the semi-knocked down assembly facility in 38 months. We have roughly estimated the required financing. At the first phase, of course, the project needs to include elements of public-private partnership. We have worked out such arrangements with the Finance Ministry in other areas. We hope that further development of the project will allow us to largely finance the second and third phases with our own and borrowed funds, of course, with preferential terms for this financing, due to the consolidation of our contract.

Nearly all the speakers mentioned they have additional needs for ships, so it will be possible to secure more contracts, and not only those from the Rosatom state corporation.

It is important to emphasise that our main goal is cooperation with the existing shipbuilding facilities and maximum synergy in the use of resources, primarily with the Baltic Shipyard, with USC enterprises. And in this respect, we certainly need to expand and upgrade the existing Baltic Shipyard facilities, primarily adding a workshop for the manufacturing of large blocks and units.

We will continue cooperation with Zvezda Shipbuilding Complex. They are developing a series of the most powerful Leader-class icebreakers, from flagman to serial production. Also, our colleagues are now working on the launch of a domestic series of 40-megawatt diesel icebreakers for Norilsk Nickel and Rosneft.

Mr President, together with experts we have analysed different options for locating the new production facility, and a special working group was created together with the Shipbuilding and Shiprepair Technology Centre; 13 sites were considered. In terms of the depths, communications and resources, especially, human resources, the most promising site is Kotlin Island near Kronstadt, where the city of Kronstadt is located. This issue was discussed both with local municipal authorities and the St Petersburg administration.

If you see fit to continue studying this issue, we would ask you to give instructions, say, to develop, by December, everything related to production, technology cooperation, a financial model and ways of financing this project, under the leadership of Mr Manturov, together with the Ministry of Industry and Trade, the United Shipbuilding Corporation and the Finance Ministry. Also, of course, to work through the issues of consolidating the contract as a state corporation in all areas of our activity, all partners in the Northern Sea Route, on the international stage, and the possible additional placement of contracts in the 2030s through the Ministry of Transport and the Ministry of Agriculture.

Thank you very much for your attention.

Vladimir Putin: Good. Thank you very much.

(Addressing Chairman of the Board and CEO of the United Shipbuilding Corporation Alexei Rakhmanov) Mr Rakhmanov, what do you think about this project?

And Kotlin Island is not near Kronstadt; Kronstadt is located on the island. On which side of the mole are you going to locate the enterprise? Inside?

Alexei Likhachev: Mr President, to the left of the bridge. If you have our materials, there must be a detailed map of the island.

Vladimir Putin: Outside the mole?

Alexei Likhachev: Inside it.

Vladimir Putin: On the inside?

Alexei Likhachev: Yes. It is literally 700 metres from the seaway. We checked the geography; we do not interfere with the Ministry of Defence project.

We were shown a similar site covering 150–160 hectares for the possible construction of company housing outside Kronstadt. At the other side of the bridge, eight kilometres away, there are the port of Bronka and railway tracks. So, in terms of various infrastructure elements and most importantly, human resources nothing is ideal, but this is the most promising site, in our opinion.

I do not want to foreshadow Mr Rakhmanov’s report, but the Baltic Shipyard is our main partner. To a great extent, we already think of it as our enterprise: we have been working there and providing them with assistance, and also depend on them a lot. Therefore, the boosting of cooperation within the renewed, advanced technological platform would be valuable, I think.

Vladimir Putin: Good.

Mr Rakhmanov, go ahead, please.

Chairman of the Management Board and CEO of the United Shipbuilding Corporation Alexei Rakhmanov: Mr President, colleagues,

We have examined this project from various perspectives. In fact, it is an iteration of the plan my predecessors presented back in 2010. We shelved this project, if I can say so, because we did not know whether there would be demand for large-capacity ships.

In the current situation, as we see it today, this project can be beneficial above all since the Baltic Shipyard has limited scope for expansion because of urban development: there is a lot of housing under construction near the plant. Of course, we can hardly expect a huge dry dock to be built on Vasilyevsky Island, even considering the city’s commitment to promoting industrial development.

It is also our understanding that this cooperation framework will enable the Baltic Shipyard to focus on building hull blocks and sections, while finishing construction in Kronstadt, at the initial stage. For that, we will use the Kronstadt Marine Plant. It has the Veleshchinsky dry dock where we have already serviced Arktika, our lead icebreaker.

This all shows that we understand the technological solutions and approaches. Later, if this is how things go, and subject to your approval, we will look at moving the entire Baltic Shipyard to this site by 2040 in order to retain the workforce.

But so far this is just thinking out loud. Today, we are talking about delivering on these ambitious projects by relying on novel technological principles.

Vladimir Putin: Can big ships cross the dam and the entrance locks?

Alexei Rakhmanov: Yes, we looked at the dimensions. To give you an example, the ships we build at Severnaya Verf shipyard can reach Handymax-class sizes. When you attended the keel-laying ceremony for frigates, we said that construction was expected to be complete in 2023.

However, larger vessels, with a length of 250 metres or more and about 40 metres wide, unfortunately, would not be the best choice for Severnaya Verf. Costs there will be higher compared to the site designed to handle projects of this size.

From this point of view, in terms of both the canal depth and approaches for building a covered dry dock, if we get the approvals, since as you know you cannot build any industrial or civilian structures in Kronstadt higher than the cathedral… We will focus on the technological capabilities.

Vladimir Putin: Good.

Mr Rakhmanov, why have you been entering into unprofitable contracts in the first place?

Alexei Rakhmanov: Mr President, you have actually partially answered this question. This problem stems from initial contracts in a series, when we begin developing a project with incomplete specifications and a resulting vague understanding of the planned vessel’s components. In such cases, when we work with the Defence Ministry, we rely on tentative prices. But the budget rule – unfortunately, in the case of Rosmorport contracts or, for example, with private owners, we always encounter two problems. Without complete project specifications, we cannot estimate its cost or rationalise our estimate at the initial stage of fulfilling the order. But we try to be customer-oriented, and while doing so, we have probably overdone it in terms of being flexible for our customers, deciding to build and deliver their ships before addressing money issues.

Maybe this was the wrong approach – I am sprinkling ashes on my head, but I always though the Motherland came first, and our finances came second.

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Vladimir Putin: Mr Rakhmanov, you said Motherland came first, and our finances came second.

I would like to draw your attention to the fact that the interests of the Motherland are directly related to financial discipline, and vice versa: violation of financial discipline does little to uphold the interests of our Motherland. I want you to keep this in mind.

As for the interests of the customer, here, of course, you need to work with your customers, to ensure their interests, but this does not mean that you need to act rashly and begin building, complete the project and leave financial issues until later, when you will adjust one to the other. As you said yourself, the Defence Ministry has at least provided approximate prices and approximate indicators.

All this can be done, and it is not a question of neglecting your customers’ interests, but of negotiating all the formal issues related to the contract in a timely and competent manner. Please keep this in mind.

Alexei Rakhmanov: Yes, Mr President. Accepted.

Vladimir Putin: All right.

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Vladimir Putin (To Sovcomflot Chairman Sergei Frank): What about your ships? Are Russian companies using them? There used to be some challenges and the ships did not operate at their full capacity.

Sovcomflot Chairman Sergei Frank: Mr President, taking this opportunity, I would like to express my gratitude and appreciation for your instructions, as well as for the responsiveness of the Government, primarily the Energy and Transport ministries.

In March and April, when we had this avalanche of sanctions and restrictions, we found ourselves in quite an alarming environment. However, with your instructions implemented, we got back to normal, and the entire fleet is up and running. Those who imposed these sanctions – this was not the first time they used this tool and they have targeted other countries before – clearly wanted to bring manufacturing, our everyday processes to a halt and create a monopoly for Western shipping companies, primarily from unfriendly countries. However, they failed.

Today, the fleet is fully operational, which has had a stabilising effect on the shipping industry. The situation has changed radically compared to April and March with the domination of Greek shipments, making foreign trade more efficient. Thank you for issuing your instructions.

Vladimir Putin: Ok. Thank you.

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Member of the Board of Directors and Chairman of the Management Board of NOVATEK Leonid Mikhelson: We have to take a decision on 2025–2026. Importantly, Mr President, of these 21 million tonnes [to be produced by the three LNG lines as part of Arctic LNG 2 project] 80 percent will go to Asia-Pacific countries, and 20 percent to the West. The fewer tankers we have, the more LNG will go to the West. This is wrong and creates additional risks. For this reason, this is how we must proceed: one tanker is one million tonnes [of LNG]. We must conquer the market over there. These 21 million tonnes will help expand Russia’s share of the LNG market by another five percent.

<…>

Vladimir Putin: Very well. Thank you very much.

(To Rosneft Vice-President for Localisation, Innovation and Energy Andrei Shishkin): Mr Shishkin, I understand the challenges which were just mentioned. We are all aware of them, and Mr Mikhelson talked about them. It is not just empty words that we are doing a lot towards the realisation of the Zvezda project. Among other things, this has to do with the orders. I have been talking about this all the time and have just referred to this subject yet again.

We need to do everything, and the Government must help Zvezda so that it can fulfil the customer’s expectations, because if NOVATEK succeeds in creating a new LNG production platform, we will need to ship it. What can they do?

For this reason, I am asking you to make every effort to ensure that these projects come to fruition. Let us consider what else can we do make this happen. We are ready to do whatever it takes for this.

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