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Flags of convenience over Russian fleet
11/05/07

MOSCOW. (RIA Novosti political commentator Maxim Krans) –

Russian President Vladimir Putin said at the recent joint meeting of the presidium of the State Council and the Naval Board that the Russian merchant marine must work under the Russian flag.
Russian vessels flying flags of convenience is an old issue, and not extraordinary at all. In the past 15 years, the Russian merchant marine, once unrivalled in the world, has shrunk from 1,800 to 172 ships.
According to Putin, “Russia controls more than 1,500 vessels.” But can one use the word “control” when speaking about the property of other countries? It is a fact that Russian companies do not own the majority of their ships.
The overwhelming majority of Russian vessels fly the so-called flags of convenience, which means that they are registered in the ports of Liberia, Panama, Malta and other countries, which sometimes have no access to the sea.
They offer privileged terms to ship owners, such as bottom-low taxes and a simplified procedure of registering documents. They do not demand respect for crewmembers’ rights or the norms of the international law of the sea. Therefore, their services are in high demand, with shipping companies moving where the terms are better.
About 50,000 Russian seamen are working under foreign flags, and are treated accordingly, almost as slaves. They sometimes do not receive their wages for months or even years, are discharged for minor infractions and recruited for suspect ventures. For example, several Russian seamen spent two years in a Nigerian prison without a court hearing or ruling, allegedly for smuggling oil.
Neglect of navigation safety rules frequently results in tragedies. Relevant examples are the accidents with Arosa (flying the flag of Cambodia) and West (Mongolia) in the Sea of Japan, which claimed the lives of dozens of Russian sailors.
It is shocking that not only private, but also state shipping companies, including the sector’s leaders, Sovcomflot and Novoship, send their ships into “emigration.”
Set up as a result of the reform of the Novorossiysk Shipping Company, they took over dozens of new ships from the state and immediately registered them with offshore companies. As of now, all vessels of Sovcomflot and two-thirds of Novoship fly flags of convenience, paying taxes to foreign countries, so that the Russian budget gets mere crumbles of their huge profits.
Sovcomflot and Novoship will merge this year, in line with the strategy of the Transport Ministry aimed at establishing the world’s third largest tanker company in terms of capitalization. Unfortunately, nobody has proposed returning the Russian flag to their ships.
Paradoxically, while the Kremlin is re-nationalizing the economy, primarily its most important and profitable sectors, some state-controlled companies are acting contrary to the country’s interests. This makes one wonder if the state (or rather state capitalism) is always a more efficient and patriotic manager than a private owner.
To make matters worse, state officials appointed to lead such companies or elected to their boards of directors always face a dilemma of private and state interests, and usually make the choice in favor of the private purse.
Russian ship owners register a meager annual profit of $300-$400 million, although their freight revenues amount to $9-$10 billion. Foreign trade freight has doubled over the past seven years, but deductions to the Russian budget have not increased.
Direct losses are complemented with indirect damage. The average ship flying the Russian flag is 24 years old, whereas Russian ships flying flags of convenience were built less than nine years ago. In a few years, the dilapidated Russian fleet will have to be scrapped. Moreover, it has almost no specialized vessels, such as refrigerators, container carriers, and ferries, or super oil tankers, bulk ore, coal, grain and fertilizer carriers, or ships carrying liquefied natural gas and liquid chemicals.
Nothing has been left of the Baltic Shipping Line, once the largest in the country, and the Kamchatka and Sakhalin fleets have been decimated. The country’s marine gates are closing, one after another, whereas Russian shipping companies are increasing freight transportation to the ports of our next-door rivals.
These incredible facts have been discussed at numerous meetings and scientific shop conferences. The federal target program of reviving the Russian merchant marine, which was approved in 1992 but received only 0.3% of requisite funds, expired without much ado. The baton has been taken over by the Transport Strategy until 2020, but will it make it to the finish line?
The law on the Russian international ship register was passed in 2005, after being funneled from one bureaucratic and parliamentary office to another for seven years. International practice shows (preference of flags of convenience over national ones is not a purely Russian headache) that such registers, which stipulate major tax and customs privileges for ship owners, encourage many ships to return to homeports.
For example, this has helped Denmark to regain nearly all of its merchant marine and take the lead on the international market of refrigerator and container carriage. Norway, Turkey, Portugal and France have also gone a long way to regaining their marine prestige.
Russians, while sincerely wishing to do something well, often fail: the law on the register could be better worded and supplemented with requisite bylaws. But its drawbacks have cost the Russian merchant marine 19 more ships lost to flags of convenience last year, according to Mikhail Romanovsky, president of the Union of Russian Ship Owners.
Experts agree that the government must do something immediately to lure stray ships home, or Russia will lose its status as a marine power in a few years (it has not been a great marine power for a long time).
Peter the Great, who ordered building the first merchant ships at the Solombala shipyard in the Arkhangelsk Region in northern Russia 300 years ago, would turn in the grave if he knew about the grim future of his brainchild.

The opinions expressed in this article are the author’s and do not necessarily represent those of RIA Novosti. -0-