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1 What is the current state of the shipping industry in your country?
The potential for shipping in Russia is determined by its location on the shores of three oceans and its 42,000 kilometre-long maritime border. This presently makes Russia a developing maritime centre. According to the United Nations Conference on Trade and Development, the country is in the top 25 ship-owning economies in the world. At the beginning of 2021, the total number of marine transport ships controlled by Russian shipping companies was 10,762 units with a total deadweight of 23.9 million tonnes including, inter alia, bulk carriers (256 units), container ships (110 units), offshore vessels (1,346 units), oil tankers (3,320 units) and general cargo ships (1,449 units). Russian vessels predominantly (64 per cent) sail under foreign flags, including flags of convenience.
Major shipping companies in Russia (in terms of deadweight) are Sovcomflot, LK-Volga, RPK Nord, North-Western Shipping Company, Rosnefteflot, Gazpromneft Shipping, Novograin, Volga Shipping Company, Palmali and Pola Rise.
Russia is one of the largest exporters of natural resources in the world. The cargo turnover in Russia is mostly focused on the export of coal, oil, natural gas and products of their processing. It is also important to note that Russia is a major exporter of corn, wheat and mineral fertilisers, making the country one of the largest food and agricultural product suppliers on the global market.
Over the past five years, the volume of cargo transshipment through Russian ports has gradually increased from 720 to 835 million tonnes. Before the start of the conflict in Ukraine, the port capacity of the country was expected to increase further.
Russia is currently experiencing a rapid development of the Northern Sea Route, which runs from the Bering Strait to the Barents Sea, where Russia borders Norway. Ships sailing through this passage save approximately seven to 10 days on the journey time, and it makes the Northern Sea Route both extremely important and profitable. As statistics reveal, the annual growth of cargo transportation volume in the Northern Sea Route from 2011 to 2020 increased drastically over the observed period, reaching almost 33 million tonnes in 2020 compared to 3.2 million tonnes in 2011. In 2021, the cargo turnover along the Arctic mainline increased by another 5.7 per cent.
Shipbuilding is an important part of the Russian economy. At the end of 2020, the total value of vessels delivered by Russian shipbuilding companies amounted to 230 billion roubles. Russian shipbuilding has been growing for the past few years, especially in areas of constructing commercial vessels and specific market segments, such as research vessels. Russian shipbuilding enterprises are capable of handling large-tonnage commercial projects that involve the assembly of large pre-fabricated sections. Nuclear-powered icebreakers produced in Russia are unrivalled throughout the world and are among the most highly sophisticated vessels with locally manufactured components.
In recent years, Russia has launched a project for the development of the Zvezda shipbuilding complex, which is of strategic importance for the Far Eastern region and the domestic shipbuilding industry. Zvezda is the first Russian shipyard of large-range shipbuilding capable of meeting the needs of Russian customers for the construction of various types of modern vessels. The shipyard produces commercial vessels for transporting goods as well as Aframax and Suezmax tankers operating on gas fuel and meeting all the latest environmental standards.
2 What are the prevailing shipping market trends affecting your country? What has been the impact of the covid-19 pandemic?
The global health and economic crisis caused by the pandemic has changed the maritime transportation and trade landscape and significantly affected growth prospects worldwide; Russia is no exception. Freight shipping was strongly affected, resulting in 5.6 billion rouble losses for seaports. Furthermore, in 2020, Russian inland water carriers lost 32.7 per cent of their annual revenue. Quarantine measures taken to suppress the covid-19 pandemic have led to congestion at most marine terminals and, consequently, disruption of the conditions and timing of cargo deliveries. Ports were slower to accept and release cargo, and delays occurred in customs clearance. Many voyage participants were forced to stay at sea without an opportunity to ‘go on land’ due to quarantine. Cargo was ‘held up’ at sea.
The most obvious negative consequences of the covid-19 pandemic to the industry have been the drop in sea freight rates (resulting in a sharp 15 per cent drop in prices), an excess of free containers and the rapid introduction of new environmental requirements.
The pandemic has also had a significant impact on trade in oil and gas, meaning that Russian exporters in this sector lost substantial income.
While all countries were still in the process of recovering from the covid-19 pandemic, the economic impact and the energy crisis resulting from the Russian-Ukraine conflict has had an impact on the shipping industry as well. This situation affects both the global economy and the structure of the world trade, as well as Russia’s relations with foreign states.
The consequence of the outbreak of armed conflict has been the imposition of a new wave of economic sanctions, primarily by the EU, US and the UK. The sanctions imposed on Russia are diverse in nature and include, inter alia, asset freezes and sectoral measures, such as export prohibitions. The particular targets of the sanctions are individuals and legal entities, mainly controlled by the Russian government including some companies from the shipping sector. For instance, Sovcomflot, Russia’s largest shipping company is designated under UK sanctions and is prohibited from engaging in any transactions with EU companies. In the meantime, the United Shipbuilding Corporation (USC) and its many shipyard subsidiaries are included on the SDN list (the Specially Designated Nationals and Blocked Persons List). Separate targets of sanctions are Russian banks including Sberbank, VTB and Gazprombank, which are often engaged in ship finance transactions.
In view of the sanctions, international logistics and other firms are suspending services in Russia. The reasons are potential reputational and liability risks. Namely, one of the largest shipping lines, Maersk, has now stopped all vessel and container operations in Russia and will close its Russian offices by the end of this year.
In order to deprive the country of the ability to effectively conduct foreign trade, Western countries have also imposed a number of import and export restrictions. The EU, US and the UK have also closed their ports to Russia’s entire merchant fleet, with limited exceptions.
At the same time, notwithstanding the imposition of foreign restrictions, shipping traffic in and out of Russia has remained relatively strong in the past few months. In April 2022 Russia was still among the leading export countries worldwide with an export value of US$494 billion. Now, six months after 24 February, it seems that Russian business has managed to adapt to the current circumstances and started to rebuild the existing supply chains. Many private Russian transport companies have found options to continue their business despite the current situation. To date, Russian ports have not stopped operating, and domestic companies continue to receive shipments from foreign countries.
Generally, experts forecast that both Russian imports and exports are likely to fall almost twofold this year. However, during the recent years of economic reforms, the country’s economy has shown flexibility. It appears that after the decline in relations with Western countries Russian companies will start cooperating with Asian and African partners (in markets that are not affected by sanctions against Russia). In particular, the North–South international transport corridor, which involves moving goods from India through the Suez Canal and the Caspian Sea to Russia, has considerable potential for development.
3 Are there any recent domestic or international political or legislative developments that may have an impact on your country’s shipping market?
As discussed above, the most important development this year has been the imposition of international sanctions that significantly affect the structure of the economy of the country. In the meantime, the Russian government has retaliated with various countermeasures that are compulsory for Russian companies and individuals.
In particular, on 15 April 2022 the Russian President signed Federal Law No. FZ-92 ‘On Amendments to Certain Legislative Acts of the Russian Federation’ which includes measures to support the transport industry amid the sanctions.
Law No. FZ-92 provides that in 2022 the Russian government may adopt special rules of performing lease agreements in respect of sea and river vessels. As of the date of writing, these rules have not yet been adopted. Based on our experience in the aviation sector, in the future such rules could potentially include a ban on payments in a foreign currency under lease contracts in favour of shipowners from the EU, US, the UK and other ‘unfriendly states’ that have imposed sanctions against Russia.
Another important rule of Law No. FZ-92 is that a foreign investor (or group of investors) owning more than 50 per cent of shares in a strategic shipping company (included on the list of such companies approved by the Russian government) must obtain permission from the government to maintain such controlling stake. Otherwise, the foreign investor should sell part of the shares so that it owns less than 50 per cent. If such investor fails to obtain permission and does not sell its shares, it loses its voting rights at shareholder meetings of the strategic shipping company until such permission is obtained.
After the imposition of sanctions in February 2022, many Russian companies decided to register their vessels in Russia. This increases the role of Russian law in ship finance transactions (eg their parties will enter into Russian law mortgages, and the shipowners will pay Russian taxes). The Merchant Shipping Code of the Russian Federation provides that there are now five ship registries in Russia, the main one being the Russian International Register of Ships (RMRS). Registration of a vessel in the RMRS provides the shipowner with a number of significant tax benefits (including zero per cent import VAT and exemption from property tax and transport tax).
In recent years, the Russian authorities have also made some attempts to increase the volume of sea trade with Asian countries. For example, seven years ago, as part of the implementation of plans for economic cooperation with Asian countries, Federal Law No. FZ-212 ‘On the Free Port of Vladivostok’ of 13 July 2015 entered into force. It provides tax benefits for its residents and a simplified free customs zone regime. According to Resolution No. 1792 of the Russian Government of 7 November 2020, the creation of a special economic zone in ports of the Caspian Sea is planned. As mentioned above, the search for new partners in Asia will be a trend for the Russian market in the near future, so further legislative developments in this direction are expected.
Notwithstanding the geopolitical situation, the government will also continue reconstructing existing ports and vessels and building new infrastructure. In order to attract additional sources of financing for federal-owned ports, Federal Law No. FZ-261 ‘On Sea Ports’ was amended in 2017. The new law introduces an ‘investment port fee’ for the construction and reconstruction of seaport infrastructure classified as federal property. This fee is imposed on cargo ships on a foreign voyage once during their port entry or exit. The maximum size of the fee is determined by the Federal Antimonopoly Service of the Russian Federation. The collection of the fee began in 2021.
4 What are the key regulatory and compliance issues for your country’s shipping market? What’s coming up in the near future?
The key issue for our shipping market is, naturally, compliance with foreign sanctions and Russian counter-sanctions as we expect that, at least in 2022, many Russian companies will require professional sanctions advice.
In addition, since importing Western goods and services for the shipping industry is probably no longer possible, the Russian government will increase investments in local products. This means that the role of public procurement and PPPs in the industry will grow. It will be important for transport companies to follow all required procedures in order to obtain public funding for their projects.
5 What are the shipping industry’s current sources of finance? How do you predict they will develop, and what are the advantages and challenges to financing a vessel in your country?
One of the major sources of financing of the shipping industry in Russia is public funding, and its role is expected to grow. Major players in the market are traditionally state-owned corporations that use state funds. The main transport infrastructure is financed mostly from public funds or through state-controlled companies. In addition, in the past 15 years, the practice of using concession and PPP agreements between the government and private investors has been developing, including in projects related to the development of seaport infrastructure.
Most private sector participants use their own funds to finance investments. Bank financing in roubles and equipment leasing are also popular sources among investors. On the other hand, the attraction of debt and equity funding in the public market (through the listing of stocks and bonds) is not yet sufficiently widespread in the Russian shipping industry.
The Central Bank of Russia is currently implementing additional measures to support credit institutions against the background of sanctions imposed by Western countries. These measures have already shown their effectiveness: they have at least temporarily strengthened the rouble and allowed transport companies to keep access to financing in Russian banks.
Before 24 February, M&As in the Russian transport sector were quite active. For instance, in June 2021, French energy company TotalEnergies signed an SPA with Novatek to acquire 10 per cent of Arctic Transshipment LLC, a wholly owned subsidiary of Novatek, which owns and will operate two liquefied natural gas (LNG) transshipment terminals being built in the Murmansk and Kamchatka regions of Russia.
Another interesting deal was closed in January 2022: Loko-Bank shareholder Mikhail Rabinovich acquired a blocking stake of FESCO Transportation Group, having increased his share package to 26.52 per cent. FESCO is one of the leading private transportation and logistics companies in Russia with operations in ports, rail, integrated logistics and shipping business.
From time to time, market participants conduct an initial public offering. In 2020, it was PAO Sovcomflot that went public and placed 16 per cent of its shares on the Moscow Exchange with a value of 43 billion roubles.
The advantages of financing a vessel in Russia are a relatively professional but inexpensive workforce, an accessible resource base and a favourable dollar or euro-to-rouble rate. Before covid-19 and the conflict in Ukraine, respected financial institutions, such as the International Monetary Fund, noted signs of economic recovery in Russia.
Despite some factors that occasionally negatively affect the investment climate in Russia (eg, foreign sanctions, corruption scandals and administrative barriers), we understand that the overall economic development of the country will continue.
6 Have there been any recent significant domestic or foreign court decisions or arbitration awards that impact on your country’s shipping market?
The number of disputes resolved by Russian state (arbitrazh) courts connected with the shipping industry is presently quite low. However, there have been some interesting cases.
For example, in one of the recent decisions of the Arbitrazh Court of St Petersburg and the Leningrad Region (No. А56-3504/2021), it was stated that a seaport is not liable for damage caused by a sea carrier that negligently destroyed cargo during the delivery. The claimant claimed that the seaport had to secure the cargo on the vessel so that it would not be damaged during transportation. The court did not agree and argued that the seaport provided only transshipment services and was not legally obliged to deliver the cargo safely to its destination. As a result, only the carrier was held liable for damages (5.3 billion roubles) in this case, because it did not ensure that the cargo was properly secured.
In another recent case (No. А32-29444/2019), the claimants (the seaport – PAO NMTP and OOO Transneft-Service) sought damages from the defendants (the owner – Hamilton Shipping LLC and commercial operator of the vessel – MANSEL PTE. Ltd) in the total amount of 680 million roubles. Under the circumstances of the case, during mooring in the port of Novorossiysk, the defendant’s tanker, FOS Hamilton, collided with the port’s pier and a tugboat, as well as with a vessel belonging to Transneft-Service. As a result, the claimants’ property was damaged due to the accident. However, the parties entered into a settlement agreement where the defendant agreed to compensate all the damages. Eventually the trial was terminated.
As for significant foreign court disputes, in February 2022, the French customs authorities arrested Russian vessel Pola Ariake. The vessel, owned by GTLK Asia M7, a subsidiary of a Russian state-owned company JSC GTLK, arrived at the port of Lorient three days after the start of the conflict in Ukraine. The vessel’s seizure was connected with the imposition of an EU asset freeze on the Russian transport minister Vitaly Savelyev, a former member of the board of directors of JSC GTLK. However, Mr Savelyev resigned from his position on 5 March 2022. As a result, customs could not prove the link between Pola Ariake and the sanctioned individual. The French court ultimately ordered for the vessel to be released and for French customs to pay US$110,000 to the shipowner for damages caused by the delay in the port.
7 What is the outlook for your country’s shipping market? Which sectors are likely to grow, and which not?
One of the main difficulties for the maritime transport industry in Russia is the lack of development of the country’s rail infrastructure. The railroad is one of the main methods of delivery to ports (in 2020, 50 per cent of all goods arrived in ports by rail), and, for a number of goods (eg, coal), rail transport is almost irreplaceable. Therefore, plans for the development of the railway infrastructure are one of the factors on which the participants of the marine cargo transshipment services industry plan to expand their capacities.
The infrastructure of Russian seaports also remains undeveloped, and this is one of the reasons for the stagnation of exports. Their capacity is currently not sufficient. Before the conflict in Ukraine, Russian exporters had often used the capacities of the Baltic ports and paid extra fees. As such approach is most likely no longer possible, Russian companies will try to use local infrastructure.
As for the further development of the shipbuilding industry, the Ministry of Industry and Trade of the Russian Federation (Minpromtorg) has already been looking to reduce dependence on imports in the shipbuilding industry for a couple of years. To this end, the Russian government is expected to adopt further support measures for the shipping industry.
Owing to the withdrawal of Western container lines, Russia will soon need to advance its own container ship production. In the meantime, Russian shipyards do not have enough experience in building container ships. Today, about 90 per cent of non-bulk cargo worldwide is transported by containers, meaning that such domestic production will be essential for the Russian economy. Furthermore, Russian shipyards will continue to build competitive vessels for major natural resource and nuclear power projects for companies such as Rosneft, Novatek and Rosatom. We also note that as part of the governmental import substitution policy, Russian state-owned and private enterprises are conducting scientific research to produce components for ships of various types.
The near-term plans of the Zvezda shipbuilding complex include the signing of contracts for the construction of 10 tankers with JSC Rosnefteflot. The tankers are expected to be built for Vostok Oil, the world’s current biggest investment project in the oil and gas sector, which will involve resources amounting to more than 6 billion tonnes of oil. As part of this project, it is planned to build the Bay North transshipment terminal in 2024. The capacity of the terminal is intended to grow in proportion to the development of the Vostok Oil project – from the initial 30 million tonnes to 100 million tonnes in 2030.
Another good area for investment is transporting such agricultural products as mineral fertilisers, grains and food products. According to the state plan for the development of the production of mineral fertilisers, their production is expected to increase to 28 million tonnes by 2025. In the long term, the grain harvest is expected to increase as a result of global population growth, further urbanisation and rising global food consumption. According to the strategy for the development of the grain complex of Russia, grain production and export by 2035 should amount to 140 million tonnes and 63 million tonnes respectively.
Many people also note that the Russian inland waterway transport has potential for success and that there are a lot of opportunities for domestic and foreign investors in this area. Although Russian inland waterways are one of the longest in the world, they are not used to their full capacity and represent only 1 per cent of the cargo turnover of the country. The increase in Russian domestic freight transportation would be a huge step forward for the Russian economy. The government is now taking the first steps to develop this sector. According to the latest instructions of the President of the Russian Federation, it is planned to put up for auction federal facilities of river ports, which are in an unsatisfactory condition, with an initial price of 1 rouble.
We also believe that the continued development of the Northern Sea Route will inevitably attract international shipping companies conducting the transshipment of liquified natural gas and oil and will also increase the popularity of Arctic tourism. In the meantime, the increase in cargo turnover of the Northern Sea Route from the current 35 million tonnes to 80 million tonnes by 2024 directly depends on the implementation of major investment projects by four key companies: Gazpromneft, Novatek, Rosneft and Severnaya Zvezda. If all the plans are fulfilled and transit increases, the turnover could exceed 200 million tonnes by 2030.
Sustainable shipping, decarbonisation and ship pollution control remain priorities for the future society. More stringent environmental requirements continue to shape the maritime transport sector. Carriers need to maintain service levels and reduce costs, while at the same time ensuring sustainability in operations. Scientists are on constant lookout for more environmentally friendly forms of energy for ships. The International Maritime Organization is putting pressure on ship operators to reduce the volume of discharge into the environment, and is supporting the development of LNG-fuelled bunkers.
As the world proceeds into the high-tech era, the Russian shipping sector is no exception. Transport and shipbuilding companies need to develop internal electronic document management and e-commerce to reduce their transaction costs.
What are the particular skills that clients are looking for in an effective shipping lawyer?
An effective shipping lawyer has to combine strong logical thinking skills with an impressive knowledge of the law. The ability to understand the needs of the industry, a commercial mindset and advanced networking skills are also valued. Every legal professional working in shipping must easily adapt to all the technical and social innovations and be aware of every recent amendment to the current legislation.
What are the key considerations for clients and their lawyers when arranging finance for a shipping transaction?
Parties to a financial deal should understand each other’s interests and seek a balance between them. As a result of the transaction, the creditor should receive the maximum guarantee of the timely return of the debt and the debtor should, as far as possible, retain the freedom of its business activity. The best strategy for both parties is always a win-win approach to negotiations, but is rarely achievable in real life due to the differences between the respective approaches of the sides and the lack of information both of them have.
What are the most interesting and challenging cases you have dealt with in the past year?
In the past year, we have advised a number of shipping companies and their clients on issues related to international sanctions. Namely, we provided assistance in amending transaction documents related to financing the purchase of existing or construction of new vessels in connection with the application of sanction regimes.
We also supported several lawsuits following the imposition of sanctions. In particular, we are currently advising a Russian shipping company in connection with a lawsuit related to the arrest of a vessel by French authorities in the English Channel. The vessel was detained and redirected to the port of Boulogne-sur-Mer in northern France on 26 February 2022 as the French customs authorities suspected that it was owned by a subsidiary of Promsvyazbank PJSC. The latter was designated under the EU sanctions on 23 February. We are working on proving to the French court that our client had acquired this vessel before such designation and therefore it should not have been arrested.
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