Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

Taxes Stifle Shipping Industry

The Russian shipping industry has had two good years in 1998 and 1999 but further progress is constrained by the government's failure to resolve tax issues, a senior official said Tuesday.

Cargo volumes processed in Russian ports increased 30 percent last year to a total of 138 million metric tons after increasing 8 percent in 1998.

However, the recent improvement represents only a small, even timid step forward after a decade of devastation, First Deputy Transport Minister Alexander Lugovets said at a Tuesday news conference.

"Recent talk about greater state intervention is nothing else but paying tribute to fashion," he added.

Russian shipping firms have seen their share of Russia's foreign trade plummet to 6 percent, down from 78 percent a decade ago, he said.

Rather than trying to regulate or renationalize the industry, the government should try to lower the tax burden, which is stifling growth in transportation volumes and lowering demand for new vessels, Lugovets said.

Since the collapse of the Soviet Union, annual ship construction has shrunk threefold to about 20 new ships a year.

The total dead weight on the books of Russian shipping companies declined from 15 million tons in the early 1990s to a mere 11.3 million tons, reflecting an increase in purchases of large vessels.

Meanwhile, the number of Russian ships with flags in offshore havens has bloomed to 54 percent of Russian ships. However, that figure is still far below the 80 percentlevel in developed countries like the United States.

"Foreign creditors insist on registration of the ships in offshore zones," Lugovets said. Foreign banks are eager to lend to Russian shipping firms in such cases, charging only 7 percent interest per annum on collateralized loans.

Russian shipping companies managed to raise $3.5 billion to build 120 ships in the past six years, with 76 percent of the funds coming from foreign banks and 24 percent from the shippers' retained earnings.

The government provided a meager 0.3 percent of financing, instead approving a program supporting construction of new vessels.

Positive changes in the shipping industry were too slow to compensate for the deteriorating economic environment and the public authorities' failure to address regulatory issues, Lugovets said.

As a result, most Russian shippers transport cargoes in faraway regions of the globe - such as the Volgoneft oil tanker seized by the U.S. Navy last week in the Persian Gulf on suspicion that it was transporting banned Iraqi crude oil.

However, the U.S. Navy is not the only organization that makes a practice of seizing Russian ships. Vessels are in fact more likely to be impounded by the Russian authorities, Lugovets said.

He cited as an example a case where a LUKoil tanker built in Germany was seized when it docked in Murmansk, where government officials asked its owners to pay $4 million in taxes on a ship worth $12 million.

LUKoil officials would not confirm Tuesday the information about the arrest, but they did complain of the punitive tax regime governing the import of foreign-made ships.

"We appealed to the government several times with no success," said LUKoil spokesman Igor Beketov.

Officials in the Union of Russia's Shipowners - a lobbying group for national shipping companies - said some changes to the tax regime were under way and they hoped that approval of the new tax code would untangle the most acute problems.