Russia using aggressive incentives to renew its fleet

At Seafood Expo Global in Brussels, Belgium in 2017, Ilya Shestakov, chairman of Russia’s Federal Agency for Fisheries, laid out his country's ambitious agenda to expand his country’s total catch and seafood production.

At this year’s event, Shestakov said that plan was running into headwinds due to infrastructure – in particular, the aging of the country’s fleet.

“[The] fleet is increasingly becoming a bottleneck to the industry’s development,” Shestakov told SeafoodSource at the 2018 Seafood Expo Global in April. 

In response, the Russian government introduced incentives intended to spur the country’s fishing companies to upgrade their vessels, many of which were manufactured in the 1970s and '80s. Coupled with a similar subsidy program encouraging the construction of new processing plants and initial eager interest from the country’s fishing firms, the incentives could have the impact of propelling the Russian seafood industry into a position of global leadership.

Big ambitions hindered by aging fleet

In 2017, Russia reported a total catch of 4.9 million metric tons (MT) of fish, its best result in the past 20 years. Of that amount, 2.1 million MT was exported – 12 percent more than in 2016 – reflecting the growing desire of companies to reap the benefits of a weak ruble in the global marketplace.

Since 2014, commercial fishing has gained in profitability in Russia due to a rapid and significant weakening of the ruble. The industry has thus become more attractive for investors. Simultaneously, demand for seafood from Russia’s domestic market has also risen due to a partial ban on imported food imposed by Russia in August 2014.

However, the industry’s growth has been hampered by the state of its fleet. The vast majority of more than 2,000 fishing vessels now deployed in Russia were built more than 25 years ago and are close to – or beyond – the end of their expected useful lifetimes. In fact, the average fishing vessel in Russia’s commercial fleet is 30 years old, according to the Russian Federal Agency for Fisheries.

As a result, dozens of ships have been scrapped annually. But just a few vessels have been built to replace them, and almost all of them have been built at foreign shipyards. Statistics shows only six new vessels were purchased by Russian fisheries between 2013 and 2016. 

Fishing captains voice concerns

Perhaps no one in Russia is more knowledgeable about the state of the fishing vessels than the 60 captains of large-capacity vessels surveyed by the Russian Public Opinion Research Center (VCIOM) in 2015. 

The results of the survey revealed just how bad things had gotten for the fleet. It found 49 percent of the captains rated the state of their ships as “satisfactory,” while 28 percent rated their ships as “bad,” eight percent said they were “very bad,” while only 13 percent ranked their ships “good” and two percent said the state of their ship was “very good.” A notable 78 percent of the captains surveyed were sure that “most of the fishing vessels are obsolete and need to be replaced by new ones.”

“No matter how deep and effective modernization can be, there is nothing we can do with metallic wear,” one of the survey respondents said in an interview, according to VCIOM. “In five to 10 years, ships will start just to fall to pieces.”

In addition to having more mechanical problems, older vessels cannot be equipped with modern technology to enable effective fish processing and production of seafood with added value.  They also have smaller capacities – the average annual catch of a fishing ship in Russia is 6,000 MT; in the United States, is 40,000 MT. 

Extra fish in exchange for investment 

In his interview with SeafoodSource, Shestakov said Russia’s fishing industry requires a minimum of 360 new vessels of all types over the next 12 years. But ambitions of Russia’s governmental authorities seem to stretch beyond that figure. The recently-approved Fishery Industry Development Strategy, which sets the country’s fisheries policy through 2030, calls for renewal of half of the fleet over the next dozen years.  

According to data from the Russia’s Federal Agency for Fisheries (Rosrybolovstvo), the total investment sum needed to achieve this objective is estimated to be a massive RUB 400 billion (USD 6.4 billion, EUR 5.5 billion).  Broken down by ship type, a large-capacity vessel is estimated to cost in the range of RUB 3.8 billion to 7 billion (USD 61.1 million to 112.6 million, EUR 52.2 million to 96.1 million), while a medium-sized vessel costs an estimated RUB 1.4 billion (USD 22.5 million, EUR 19.2 million).  

Undeterred, in 2016, the government introduced and approved the idea of investment quotas. The program reserves 20 percent of all national quotas over a 10- to 15-year period for companies that have new ships built at Russian shipyards or build fish processing plants in Russia. The program only applies to Russia’s Northern and Far Eastern fishery basin and is limited to Atlantic and Pacific cod, halibut, herring, haddock, squid, and plaice, but is open to vessels of all ranges.

The initial campaign for applications to the program began in 2017 and ended in late 2017, with its results published in March 2018. The government’s hope that fishing companies would rush to take advantage of the program proved to be true. A total of 68 applications were submitted, and 56 of them were approved by an intergovernmental commission. Out of that total, 33 were submitted for ship-building and 23 for building processing facilities. Of the 33 new vessels to be built under the program, 24 are slated for entrance into the Northern fishery basin and nine vessels are being built to fish in the Far Eastern basin. 

For the Northern basin, 14 vessels will be 80-meter trawler factories, nine will be medium-sized trawlers (58 to 70 meters in length), and one will be a 35-meter vessel. In the Far East, six of the nine new ships will be 108-meter trawler-processors of large capacity, while the other three will be 55-meter seiners. The six super-trawlers, costing more than USD 600 million (EUR 509.8 million), will be built by the Russian Fishery Company, which has already signed agreements with the Russia’s Federal Agency for Fisheries on securing and providing quotas for catching more than 170,000 MT of pollock and herring. 

Russian Fishery’s new vessels are designed to catch more than 50,000 MT of fish a year each. The ships will be equipped with a modern factory for processing of all the catch into high value-added products, primarily pollock fillets and surimi, the company said in a press release. 

"The construction of modern large-capacity trawler-processors and coastal processing facilities allows us to process up to 100 percent of the catch into high value-added products,” Russian Fishery Company CEO Andrey Teterkin said in a prepared statement.  

While encouraged by the interest in the quota investment program, Rosrybolovstvo head Shestakov noted its first round is not comprehensive, as it doesn’t cover all of the country’s fishing regions such as the Sea of Azov, the Black Sea, the Baltic Sea, or the Caspian Sea, though Shestakov said the need for fleet renovation exists there too. He said other mechanisms intended to spur investment, such as interest rate subsidization, are not effectively stimulate businesses to invest in new ships due to low profitability of operations in these regions. Shestakov also bemoaned a lack of interest in companies using the program to improve the country’s small-capacity fleet, which is mainly used for catching species not controlled by quotas. 

As a result of a lack of fishing vessels available, Russia caught just 500,000 MT of non-quota fish in 2017 – well below Rosrybolovstvo’s recommendation of 1.7 million MT. The gap in Russia between supply and demand of seafood products can be explained by this deficit, Shestakov said.

Looking into a back-up plan, Rosrybolovstvo, in cooperation with the Ministry for Industry and Trade, is seeking to introduce a new program to support companies purchasing new small-capacity vessels. The plan under discussion involve federal compensation of up to 30 percent of the total sum invested by a company into the building of a new ship, Shestakov said. The measures may be enacted as soon as 2019, and while the exact sum allocated by the state for the program is yet to be finalized, Shestakov said negotiations have started at RUB 500 million (USD 8 million, EUR 6.88 million). Provided this sum is available, it will take five to six years for companies to renew their fishing capacities by 40 percent, he said.

Russian shipyards booming

The quota incentive program has meant a surge in business for Russia’s shipyards. But an uptick in new-build contracts was already underway before the program went into place. In 2016-2017, contracts for more than 20 ships were signed between Russian fishing companies and shipyards, a likely result of higher demand for fish from importing countries and Russia’s domestic market earlier. Most of the contracts were awarded to the Vyborg shipyard, the Pella shipyard, and the Admiralty shipyards. The vast majority of ships under construction are fish and crab trawlers, and delivery of these vessels is scheduled to take place through 2022.

Even with that head-start, Russian shipyards are still not anywhere near peak efficiency, Nadezhda Malysheva, the development director at the information research agency Portnews, told SeafoodSource. Malysheva noted that, currently, most newly constructed ships in Russia are built according to plans developed by foreign shipyards. The situation is likely to change in three to five years, by which time Russian companies will have become more familiar with building fishing vessels – a specialty that’s rather new to them, Malysheva said.

“Russian shipyards are traditionally busy with military ships contracts, but recent years have seen growing interests from fisheries,” Malysheva. “Based on their powerful scientific competences, the shipyards are fast gaining new technical competences in building fishing fleet, so we’re going to see more contracts coming.” 

In total, there are 13 shipyards in Russia capable of producing fishing fleet, according to the Ministry for Industry and Trade. With the state investing significant money into its fishery sector, they are expected to quickly shift their capacities toward new lucrative market.

Alexey Rakhmanov, the president of the United Shipbuilding Corporation told Russian news agency Korabel his firm’s subsidiary, the Admiralty shipyards, will build six trawlers for the Russian Fishery Company. His company’s expansion into building fishing vessels is part of his a strategy to diversify itself beyond military contracts, he said.

Likewise, Ilya Panteleev, the project manager at Kaliningrad-based Yantar Shipyards, told Korabel his firm is now in talks to build ships for several additional fishing companies. Panteleev said clients from the fishery sector have become the top priority for the plant, which had previously specialized in production of military ships, with only 10 percent of contracts coming from civil segment. 

Yantar’s first new fishing vessel from this investment wave will soon be delivered to its owner for intial test-runs, Panteleev said. The 50.6-meter-long trawler-seiner, destined for for The Lenin Fishery Farm in the Russian Far East, is the first in a series of three purchased by the company.

“The contract ha[s] given new competencies to our specialists,” Panteleev said. “That’s a signal to our colleagues and clients that production of fishing vessels in Russia is possible.” 

Photo courtesy of Russian Fishery Company