The first container ship at the Northern Sea Route

Anna Korovina – Deputy CEO, Eridana Group


Olga Kulikova – General Council member at Business Russia NGO and Adviser to CEO at Murmansk Shipping Company

On September 28 a ship which arrived to St Petersburg via the Northern Sea Route was unloaded. The project is an important event in the history of sea transportation since it was the first time ever a container ship travelled by the Northern Sea Route. The even could be a perfect advertizing for the Russian shipping industry, but the container ship is owned by Maersk line operator from Denmark.

A number of advantages can make the Northern Sea Route a true competitor to Suez Canal. The distance between Murmansk in the north of Russia and Japan, for example, is 13,000 nautical miles if travelling via Suez, and about 6,000 nautical miles if travelling along the Northern Sea Route. Therefore travel time is 15 days less while fuel and salary costs are lower. The route is far away from areas exposed to sea piracy. Besides, unlike in case of canals, vessels do not need to wait at any point. That makes the shipping environment there even friendlier.

The ice cover in the Arctic is now about half of what it was few decades ago, therefore the ice season when shipping is not possible is now much shorter. According to some forecasts, it will be possible to navigate along the Northern Sea Route year round by 2050.

Vitaly Ankov | RIAN

A major attention is now paid to the Arctic areas development. It may be called one of the most significant national projects as far as mineral resources extraction and vessels transit are concerned. The fact is evidenced by the Strategy of the Russian Federation’s Arctic Areas Development through 2020. Within its 2019-2021 state budget, Russia will invest over RUR 40 bln ($600 mio) in developing the Northern Sea Route and ports infrastructure and in building nuclear powered icebreakers. According to the forecasts by Rosatomflot (Russian Nuclear Fleet, subsidiary of the State Atomic Energy Corporation ROSATOM) and United Shipbuilding Corporation, the volume of cargos shipped along the route will reach 40 million tons by 2020 and 80 million tons by 2025-2030. According to the Suez Canal Authority (SCA), in 2017 56% of all cargos passing Suez Canal were container shipments. The development of the market of sea shipments along the Northern Sea Route may be advanced through container transportation.

For Russia, a unique transit potential can only be effectuated if there is a proper coordination of a faultless interaction of all agencies and companies.

First, ice-routing services optimization is required. The Northern Sea Route is above the Polar Circle, so in summer shipments are performed by the ice-class Arctic vessels, while in winter icebreakers are involved. Currently, the overall situation in the Arctic areas of the Russian Federation is far from being perfect as far as icebreakers’ availability is concerned. There are two operators of icebreakers, Rosmorport and Rosatomflot. Yet the powers recently granted to ROSATOM in managing government properties in the areas of the Northern Sea Route, distributing budget allocations and collecting state revenues will undoubtedly result in a monopolization which will most likely have a negative impact on the Arctic areas development. It may specifically bring about higher charges for icebreaker assistance. Rosmorport’s icebreakers lag behind because of an insufficiently expedite management which is vital for operating in the Arctic region. Rosmorport’s icebreakers therefore do not get enough cargos, and the costs of operating icebreakers and the losses through poor revenues have to be compensated with the port charges. The cost loading imbalance with major burden on consumers of services (ship owners and subsequently cargo owners) can already be observed and will only keep aggravating.

Second, in addition to the two said operators, since 2013 there is also Northern Sea Route Administration subordinated to the Ministry of Transportation. Its main tasks are navigation safety and protection of seas from shipment-caused pollution in the Northern Sea Route’s waterways. Still, the Administration is capable of arranging coordination for rational and balanced management of icebreakers and for ensuring safe navigation at the Northern Sea Route. With adequately organized functions, the Northern Sea Route Administration could hypothetically manage the entire icebreaking fleet, having only left to the owners of icebreakers the technical issues. In such a case, cooperation may be ensured while competition for freight will be preserved.

With the excitement over the Arctic exploration, importance of the Russian cargo fleet development has been much forgotten, even though it is a good source of revenues for the federal and regional budgets. Currently, Russian flag is absolutely noncompetitive in the global shipments market due to a high freight tariff which in turn is a result of government policies in taxation and finance. No large Russian container ships have been built or operated in the Northern Sea Route.

To stimulate Russia’s cargo fleet development, fundamental goals must be accomplished. National ship owners, in particular, find themselves in a less favorable position compared to foreign ones, as far as taxation is concerned. Foreign owners do not face additional costs such as VAT. Fueling companies, for instance, do not apply VAT to foreign ship owners, since under Article 164 of the Russian Internal Revenue Code, such transactions are not subject to taxation. Therefore, Russian flag is a disadvantage in transnational shipments or in projects involving foreign participants. That means a breach of the principle of equality and non-discriminatory taxation, stipulated in paras 1 and 2 of Article 3 of the Russian Internal Revenue Code.

Another major problem of Russia’s shipping industry is lack of funding. In the Netherlands, cost of money to build or buy new vessels is 1-2% per annum. In Russia, practices of moneylending to shipping companies are nonexistent, whereas the Central Bank is literally killing shipping companies when applying uniform rules to all borrowers. The only government support measures in Russia include a recycling fee and subsidizing 2/3 of a key rate for ships built at the Russian dockyards (government resolution No 383 of May 22, 2008). Russian shipping industry is in a desperate need of long-term loans (for 10-12 years) with interest rates of 2-3% a year (for hard currency borrowings) or of not more than 8-9% per annum (for ruble-denominated facilities).

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