Guidelines of State Industrial Policy and Its Implementation in the Ship-Building Industry

Main theses of the speech by the Minister of Industry and Energy of the Russian Federation Viktor Khristenko during Parliament Hour at the State Duma of the Russian Federation.

1. The place of industrial policy in the system of achieving the goals of social and economic development

The achievement of strategic goals of the country’s social and economic development increasingly depends on timely change in the basic sectors of the Russian industry. The present-day industrial policy is a system of active measures on the part of the state that make a difference to the competitiveness of tens of thousands of domestic enterprises both in the internal and external markets. The state should support the efforts of the enterprises aimed at introducing new effective technologies and putting out products with high added value. It is necessary to concentrate resources in a number of areas in which Russia can realistically be competitive.

2. Ship-building as a component of the country’s industrial complex

The President of the Russian Federation has identified three priority areas of industrial development. These are the aviation and ship-building industries and space activities. The issues of the development of aviation and ship-building industries were reported by the Ministry at meetings with President Putin of the Russian Federation three times in 2006 alone (June, October and December).

Traditionally, the ship-building industry caters to the interests of defense and security, marine and river transport and other spheres of the economy.  Its share in the total output of the defense industry is more than a quarter, in the export of military technical products, between 20 and 30%.

The sector employs about 200 000 people, and that does not include partner enterprises. Pursuant to the President’s directives on the development of the ship-building industry we have worked out a Strategy of Development of the Ship-Building Industry to 2030. The guidelines of the draft Strategy were approved at the Government meeting on October 19 last year.

Ship-building has a high multiplication potential. On the one hand, market demand for the products of the sector calls for a concerted effort to build up our own scientific and technical base. On the other hand, ship-building forms the internal market for the products of these sectors of industry. The greater the demand for materials on the part of ship-building, the more incentives there will be for increasing the depth of processing in the raw materials sectors. Ship-building can be seen as a sector that integrates high technologies and modern science-intensive production.

3. Agents in the ship-building market

Three “forces” influence the ship-building market:

  • ship-building enterprises proper which offer their products to the market;
  • cargo-owners: industrial, energy and commercial companies which determine the range of products and volume of cargo carriage;
  • carriers-ship owners: sea and river shipping lines.

Under the new Strategy we must take advantage of the chance that was missed in the previous years. While having our own and growing carriage capacity in absolutely all segments we unjustifiably permitted “external players” to dominate our internal market. The main thrust of the new strategy is to overcome the gap that has been formed, by concentrating above all on the development of civilian ship-building. Emphasis on development and serial production of high-technology and specialized vessels and technical means provides a solid ground for addressing the new tasks that arise in the sphere of building naval vessels.


The main segments of the range of products capable of supporting effective activities in modern conditions are as follows:

  • building of naval vessels (under the state defense order and as part of technical military cooperation);
  • research vessels and ice-breakers;
  • off-shore support vessels and equipment;
  • fishing fleet;
  • marine transport vessels; and
  • river vessels  and mixed sea-river vessels.

At present some segments are dominated by domestic ship-building and some by foreign products (very frequently, unfortunately, second-hand products). The Strategy determines the prospects and potential demand for each of the sectors mentioned. The pattern of interaction between market agents differs in each product sector. The role of the state consists in creating all the necessary conditions for implementing projects expressly catering to segments of the market in which there is demand.


3.1. The state as an agent in the market

The state commissions the building of ships and vessels for the needs of defense, research activities and the nuclear powered ice-breaker fleet as well as creating prerequisites for the development of ship-building in terms of energy and transport policy.

The state has estimated its needs for marine equipment. With regard to naval vessel building a State Armaments Program has been approved. There is a forecast of military technical cooperation. These documents adequately determine the medium-term perspective (to 2015) and the needs for creating naval vessels and equipment.



The next segment is the research fleet.

Because of a cut of budget allocations the building of new and modernization of operating research vessels was practically suspended during the last 10-15 years. If the state does not take urgent measures, by 2015 Russia will have no research fleet with all the consequences that entails.

3.2. Marine carriage

Let us take a more detailed look at the sectors of civilian ship-building catering to private demand.

The dynamics of the volume of cargo handled by Russian ports, in all types of marine carriage, reveals an absolutely steady growth.

The growth of cargo carriage makes it possible to develop the transport fleet assuming that it is our domestic cargoes. It is our common task to actively build up our presence in the carriage market.

Sea shipping lines are already integrated in the world market of transport services. The merchant fleet of the domestic cargo carriers today has about 1500 vessels with a total deadweight of about 15 million tons, which is about 2% of the world fleet, and it ranks 23rd in the world rating.

The share of Russian producers in the total orders from Russian ship owners (about 1 billion rubles a year) is so far negligibly small. In the past ten years it has hovered around 5%. Existing production capacity is capable of building, on commission from Russian ship owners, 30-40 marine transport vessels with a total deadweight of about 450 000 – 500 000 tons. And we do of course take into account the technical limitations, which make it impossible to build vessels with a displacement of over 70,000 tons.

3.3. River fleet

Carriage via inland waterways accounts for a significant part (about a quarter) of all carriage in Russia by ship. More than 20 million passengers and more than 100 million tons of cargoes are carried every year.

There are more than 20 river shipping lines operating in the country. Many of them provide the lifeblood of Siberian regions where the river is the only means of transport. Yet the plight of the river fleet is the most lamentable.

3.4. Fishing fleet

The third segment is the fishing fleet. The composition of fishing fleets is constantly changing. At present it consists of more than 2500 vessels of diverse  types and purposes.

The age of more than half of them is over 20 years. At present about 60% of the fishing vessels in Russia have outlived their service life. There is a need to renew the fleets of extractive organizations. At the same time a negative practice of buying second-hand foreign-built vessels, especially under bareboat charter agreements, has become widespread.

As you see in this slide, the domestic industry is practically excluded from building large and medium fishing vessels. And yet Russian enterprises are in a position to fully meet fishermen’s demand in this sector. At present it comprises more than 9000 vessels whose average age is over 28 years. Among the factors that impede the renewal of the river fleet one should single out the risks of seasonal work and, accordingly, the increase of payback period, as well as unsatisfactory state of waterways and hydro-engineering facilities.

3.5. Offshore development

According to the assessments of major companies which have resources on the continental shelf in the North, the Far East and the Caspian – Gazprom, Rosneft and Lukoil – offshore development will require offshore support vessels and equipment for up to 110 million tons of oil and up to 160 billion cubic meters of gas by 2030, with the necessary service infrastructure.


Considering that development has already started under a number of projects, and many customers are presenting their consumer demand, the problem of full participation of the domestic industry in this work is pressing.

The total demand for extractive platforms and floating facilities to perform the predicted amount of work in the period to 2003 to extract and transport offshore hydrocarbons in Russia is put at 55 units, and the demand for specialized transport vessels at 85 units and the auxiliary fleet at about 140 units.

A successful example of interaction between state agencies and enterprises is the interaction of ZAO Sevmorneftegaz (a subsidiary enterprise of Gazprom), OAO Sovkomflot with the Federal State Unitary Enterprise (FGUP) the Admiralty Shipyard and with FGUP PO Sevmash in building technology for the development of the Prirazlomnoye offshore field. We see this as a pilot and a promising project and are therefore exerting and will exert vigorous efforts to organize such cooperation. We have thus identified promising segments of Russian ship-building. The common ground for almost all the above-mentioned sectors is that we intend to specialize in the production of hi-tech, sophisticated assets.

4. The state of the ship-building sector

What is the ship-building sector today?

Most of it is concentrated in the north-west of the country. Above all there are two centers of ship-building: St. Petersburg and Severodvinsk.

In addition to defense industry enterprises, the ship-building market has a significant number of enterprises capable of building and repairing ships with the deadweight of up to 5000 tons.

The ship-building sector in the defense industry comprises 160 enterprises. In addition to ship-building plants proper, research institutes and design bureaus, the sector also includes enterprises for building machines, instruments and electrical equipment for vessels.

The state controls about 70 enterprises in the sector, the rest being private. The structure of property in the ship-building industry spells the need to reform the sector on the basis of public-private partnership.

The domestic ship-building industry in recent years has registered a high rate of growth of output. The building of naval vessels accounted for 77% of this production in 2005 (orders under military technical cooperation schemes played an essential role in ensuring the stability of enterprises).

The share of civilian products in the structure of the sector is 23%.

5.Groups of problems

We have divided problems into three groups. The first group of problems stems from the character of Russian legislation and the financial terms of civilian ship-building. The current system of taxing and financing the entire cycle of ship-building puts domestic ship-builders and owners at an obvious disadvantage compared with foreign ones.

Second. The industrial slump of the 1990s affected ship-building. It affected the state of technology, the basic production assets, design solutions and the human resources.

Third: Russian ship-building enterprises in the past were geared mainly to military products. So, our logistics and the principles of organization of civilian production fall short of world standards. The objectively limited size of the defense order dictates the need to develop civilian ship-building both in terms of science and production.

Only such development of the ship-building sector can create an economically stable industrial structure capable of reproducing itself and developing in order to build competitive products for civilian and military use.

We are also mindful of the need to use civilian technologies in the military sphere and vice versa, which would help to cut the cost of military production.

So, the main guidelines of the Strategy envisage:

  • Providing laws and regulations for the development of ship-building;
  • Development of the scientific-technical potential, comprehensive modernization and retrofitting of the sector;
  • Structural transformations and optimization of the sector’s potential.

The high labor consumption at Russian enterprises is due to:

  • Lack of large prefabricated block construction technology (metal sheets are cut to the size of 8 x 2 meters as against the foreign standard of 12 x 4 meters, and the use of cranes with a capacity of up to 100 tons, versus 500 tons and more in the West);
  • Low level of automation of work;
  • Climate;
  • Significant excess capacity.

6. Description of Strategy and the range of measures

6.1. General description of the Strategy

Analysis of the state of the world civilian ship-building market, and the situation in Russian ship-building have prompted the main goal of the strategy of the ship-building sector development. It is creating a new competitive ship-building industry through optimization of production capacity, modernization and retrofitting, improvement of the regulatory framework in order to meet the needs of the state and business for modern products of ship-building.


6.2. Legal and regulatory support

We have studied and analyzed the experience of the leading ship-building powers which have in practice carried out measures to support the national ship-building industry. Our competitors are quite comfortable with the idea that the measures taken under these strategies have included and do include tax breaks, support of research, reduced customs tariffs and subsidies for ship-building and modernization of enterprises.

Legislative and regulatory support envisages the adoption of amendments and additions to certain pieces of Russian legislation as regards the creation of regulatory and legal conditions for the development of the ship-building industry. These measures are divided into the systemic ones, which are of a general character and apply to many spheres of industry with a long production cycle, and specialized ones aimed at the development specifically of the ship-building industry. Both sets of measures are of a long-term character, but they have to be implemented at the very first stage of the strategy.

Systemic measures include:

  • Adoption of zero VAT rates on imported equipment for which no analogues are yet produced in Russia.
  • Subsidizing interest on loans of domestic banks as well as costs connected with the use of other financial instruments in the building of ships in Russia.
  • Co-financing of investment projects connected with modernization of production capacity.

Specialized measures include:

  • Development of a set of measures to ensure for the Russian industry the preferential right in creating offshore support equipment.
  • A gradual scaling down of the use in coastal transportation and on internal waterways of foreign vessels or foreign-built vessels.
  • Creating a mechanism of incentives for building fishing vessels at domestic enterprises.
  • Promoting a system of leasing for shipping companies which acquire Russian-built vessels for the river fleet.
  • In order to implement the Strategy, the Ministry of Industry and Energy has developed proposals on legislative measures of development of ship-building which envisage the above mentioned areas.

6.3.Comprehensive modernization and development of enterprises in the sector

Comprehensive modernization and development of enterprises in the sector should proceed in five areas and envisage optimization of production capacity, retrofitting, the introduction of industrial critical and modern information technologies.

6.4.Structural optimization of the sector

Structural transformations in the ship-building sector must be based on five main principles. They are:

  • the priority of national defense programs,
  • no monopolization of intellectual potential,
  • creating incentives to joint development,
  • the merger of similar production facilities with due account of the regional factor,
  • equalization of the financial and economic conditions when fulfilling state and private orders.

In line with the principle of giving priority to national security while at the same time recognizing the need to develop civilian ship-building, systemic projects are currently being developed to create integrated structures which produce end products of ship building.

The main goal of the proposed structural changes is to make the sector more effective and create conditions for implementing pilot projects and effective interaction with business.


An objective historical basis for the formation of new integrated centers is provided by the geographical location of enterprises. These locations are: the North, the West, the Far East and the South.

Proceeding from this we propose to create in the field of science and design:

  1. the Krylov Central Research Institute as the head sectoral institute which pursues the main fundamental research.
  2. an engineering center consisting of bureaus which design submarines. The future specialization of this center is creation of the infrastructure for the development of oil and gas fields.
  3. an engineering center consisting of design bureaus for all types of surface vessels. In future its specialization may be design of sea, river and fishing vessels.


At present up to 90% of the load of the main design centers is the state order. Civilian vessels are mainly built according to foreign designs which envisage the use of foreign components. The working documentation for these projects is typically put out by the design units of the enterprises.

In this connection, the main task of development is to create so-called “competence centers” for the development of cutting-edge technology which ultimately would shape a market also for domestic producers of components, bearing in mind also the potential of medium and small enterprises.

To ensure the solution of these tasks the potential of design bureaus in the field of civilian ship-building should be consolidated and developed, while bearing in mind the specific features of the fulfillment of the state defense order.

In the production field we propose to create:

  1. The Northern ship-building center consisting of two centers that comprise the enterprises of the city of Severodvinsk. The future specialization could be the building of offshore support equipment. The center will also remain the base for the building and repair of nuclear submarines for the Navy.
  2. The Western Ship-Building Center consisting of enterprises of the Western region, in order to preserve the possibility of building general-purpose naval forces. In future the center can specialize in building transport vessels, including of the ice-breaker class.
  3. The Far Eastern ship-building and ship-repair center to produce a wide range of civilian vessels and offshore support equipment  as well as to preserve the possibility of building and repair of Pacific fleet vessels.

The issue of creating Caspian and Black Sea ship repair centers is also under consideration.

The financing arrangements for the Strategy from all sources amount to 48 billion rubles in 2007-2009 (including 29.5 billion rubles out of the state budget) and 171.2 billion rubles (including 117.1 billion rubles from the state budget) in 2010-2015.

The instrument of the implementation of the Strategy is provided by existing Federal Targeted Programs and the newly developed Comprehensive Program of promoting the products of ship-building enterprises to market in the period 2008-2015 aimed at building up a scientific and design headstart and maintaining the unique bench-test base of civilian ship-building.

The structure of the proposed new targeted program and the volume of budget (97.0 billion rubles) and off-budget (43.0 billion rubles) financing follows from the above analysis of the state of the research and design base of the sector.

6.5. Priority measures

To ensure competitiveness of civilian ship-building in the  context of a ship-building boom in the world and the load of the leading shipyards of the world we have launched work to organize state-private partnership to modernize production capacity. We tentatively called it “VIP projects.” What does that mean?

We are initiating work with the business community which has an interest in the ship-building industry and marine transport. Analysis shows that if Russia is to be competitive in the building of large vessels it needs to modernize and build new shipyards in the regions with well developed ship-building. We proceed from the assumption that the state will be prepared to share the risks connected with such pilot projects. Such projects can also provide the focus for further consolidation of the efforts of the state and private business in this area.

7. Results of implementation of the Strategy 

The results of the implementation of the Strategy will:

  • Unconditionally meet the needs of the Russian armed forces for ships, vessels and watercraft in accordance with the targets of the State Armament Program (SAP-2015) in terms of the range and quantity of the arms, military and specialized equipment  provided;
  • Preserve positions in the world market of military-technical cooperation;
  • Meet the needs of the growing economy for specialized sea and river vessels;
  • Gradual increase of the export of civilian ship-building products (to 2% of the world market).

The dynamics of change in the structure of production in the sector are shown in this picture bellow. By 2015 the output of civilian products should amount to 34% of the total marketable output (26% in 2005) with a steady trend for further growth (by 2.2 times by 2015). The total growth of output in the sector will be 2.2 times by 2015.


Esteemed deputies. The measures aimed at developing the ship-building sector combine regulation both at the level of the overall economy and at the sectoral level. In terms of industrial policy it is important to note that these two areas frequently overlap. What is needed today is precise and targeted measures – and this is characteristic of ship-building and indeed of other sectors of industry.

The creation of a new competitive ship-building industry will ensure that the goals of the state and business – output of modern hi-tech products – will be achieved. The new policy in the field of ship-building will meet the interests of national security of our country which will have a rightful claim to being not only an energy, but also a marine power.

Press-release by press-cutting service of The Russian Federation Ministry of Industry and Energy (MINPROMENERGO)
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Go to Index of # 1(19) 2007


# 1(19), 2007
Topical Interview

Minister of Industry and Energy of the Russian Federation Viktor Khristenko

Minister of Industry and Energy of the Russian Federation Viktor Khristenko