Russia's struggling shipbuilding industry seeks Chinese partnership

Russia's struggling shipbuilding industry seeks Chinese partnership
Typical LNG carrier used to transport the liquefied gas from Russia's Arctic terminals. / bne IntelliNews
By Mark Buckton November 3, 2023

The struggles of Russia's shipbuilding industry have been no secret as it grapples with a series of challenges, including the impact of sanctions cutting off foreign components and expertise, workforce limitations, and delays in project deliveries. Faced with these issues, the Russian government is actively exploring new avenues for a solution. At the top of this list appears to be closer interaction with a long-time ally in Asia.

An important move in August that was missed by many saw the Kremlin transfer control of the state-owned United Shipbuilding Corporation (USC) to VTB, Russia's second-largest banking institution. This was done in the hope of orchestrating a turnaround in USC’s shipbuilding activity. VTB chief Andrey Kostin, the man now at the helm of USC, has since put forward an ambitious proposal: USC should forge a partnership with China, a global leader in shipbuilding, as he revealed in an interview with South China Morning Post (SCMP) this week.

“We are coming to China because it is the number one shipbuilder globally. We need co-operation with China," Kostin told the SCMP at a Belt and Road Initiative (BRI) conference in Beijing. "I’ll probably return in November to meet with Chinese companies, we might even look to build a new shipyard with China," he added.

Kostin then emphasised that in a bid to bolster the commercial shipbuilding sector, any potential partnership between USC and China would be exclusively centred on non-defence related projects. This decision comes as USC continues to thrive in the defence sector, despite its overall challenges, particularly in fields related to fuel transportation.

The Russian government, in its pursuit of self-sufficiency in the commercial shipbuilding industry, has long been actively promoting various initiatives. Notable among these is the government-backed fishing fleet recapitalisation project. President Vladimir Putin has also, sources suggest, issued a series of informal directives to channel business towards the revitalised Zvezda Shipyard complex near Vladivostok in Russia’s Far East.

While Russia's shipyards have previously collaborated with foreign partners, the landscape has been significantly altered by sanctions brought about after the invasion of Ukraine.

Notably, Novatek and Zvezda's 2019 agreement with Korean shipping giant Samsung Heavy Industries for a 15-ship LNG carrier project has encountered obstacles due to these restrictions. The project, which saw the delivery of the first three hulls for outfitting and the continuation of work on two more, has since "halted" progress on the remaining 10 vessels. This has been put down to sanctions on payment processing, according to the Korean language JoongAng Daily.

“The concurrent timing of Russia's sanctions has cast doubt on the progress of the 10 pending vessels for Zvezda,” a Samsung Heavy Industries official was quoted as saying in the summer. “Negotiations are ongoing to chart a way forward.”

But without a reliable flow of up-to-date LNG carriers, Moscow runs the risk of being hamstrung over efforts to maintain its flow of LNG out of the country to a dwindling pool of willing buyers.

Questions have also arisen regarding Russia's ability to outfit vessels promptly, particularly with the withdrawal of French company GTT from the country in 2022, which has hit Russian shipbuilders' access to crucial internal membrane technology.

In this context, Chinese involvement may provide both a short-term and even long-term workaround should the conflict in Ukraine drag on and sanctions remain.

However, while the potential entrance of Chinese shipbuilders into the Russian market may initially be seen as something of a much sought-after lifeline, it will also further intensify Russia's significant reliance on its ties with Beijing. China already holds the top spot as Russia's largest trading partner, supplying a substantial portion of Russian goods imports, which account for approximately half of the national total. Furthermore, China now stands as the primary destination for Russian oil exports and the leading purchaser of Russian pipeline gas, with Beijing having turned its nose up at Western-led sanctions on Moscow.

Of notable significance, Chinese energy interests have already emerged to bridge gaps left by the withdrawal of Western firms from Russian projects. This is most evident in the case of Novatek's Arctic LNG 2 plant, situated in the Russian Far North. It is a site at which Chinese LNG technology firms have played a pivotal role in facilitating the project's completion after Western engineering firms withdrew from the endeavour.

But the ease with which two global economic giants so frequently at odds with Western nations and their allies have come together is seen as worrying in other quarters.

It is something that has worried Japan, a common neighbour of both Russian and China, and, by extension, the US; so much so that the chargé d'affaires at the embassy of Japan in Washington, Tamaki Tsukada, claimed during the summer that Indo-Pacific democracies alongside Western nations must tighten their own ties. The unspoken line was that this firming up of ties in the Western world would serve as a counterbalance to Moscow and Beijing coming together on issues such as shipbuilding and energy projects.

Tsukada said: “I think by now there’s no doubt, very little doubt, about the inter-linkage and the commonality of security interests of the two communities, Euro-Atlantic and the Indo-Pacific,” putting it down to “the evolution or the deepening of the Russia-China strategic partnership.”

Speaking in the US capital with a number of other high-ranking officials representing the four leading democracies in the Indo-Pacific, he continued: “another important factor that I think Europeans or the Euro-Atlantic community is beginning to realise is that Russia’s war efforts in Ukraine [are] only sustainable if China continues to support Russia.”

“There is also recognition amongst all the players that the Russia-China partnership is going to stay for the foreseeable future,” Tsukada added in a report covered by Breaking Defense, before continuing more aggressively that “the threats we face currently are global and inter-connected,” and “we are all united against Russia.”

His solution was equally abrasive, saying the main “thing is that we continue to develop this gradual understanding” of different nations' “threat perception” vis-à-vis Russia and China and how to react.

For now, efforts to increase shipping production to boost LNG and oil transports from Moscow will continue, likely with Chinese help.

And this will continue to be monitored by the Western world.

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