With the general elections due in early 2012, various political groups are trying to exploit rising the “great nation” aspirations for purposes of their own. Also present in the Russian society is a long-term interest that may unite this nation. This interest is to strengthen Russia’s control over a great part of Earth’s national resources by every means available. This would require restoring the Air force (in particular, its strategic airlift capability), and also building a new navy (with potent carrier and naval aviation components) and merchant fleet. These are necessary tools to extend the Russian sovereignty to the shelf territories in the North Atlantic, rich with oil and natural gas. And it is all about the big politics. 

That is why the Kremlin pays so much attention to restructuring its aged collection of shipbuilding enterprises. Moscow wants to turn them into a modern industry able to construct a required number of aircraft carriers and escort warships, submarines and merchant vessels. Restructuring commenced in 2007. 

Arguably, the largest challenge before modern Russia arises from the fact that the Kremlin wants control over the Arctic Shelf, and its part adjacent to the Russian northern coasts in particular. This huge territory measures about a million square kilometers. The Shelf is believed to contain one-fourth of the planet’s oil and natural gas resources. Without potent navy and purposely built merchant ships for operations in the cold and icy northern waters Russia appears inadequately equipped and up to this challenge. 

More than 250 thousand people are employed by Russian shipyards, and up to 700 thousand in the whole of shipbuilding industry, including vendors. Counting in all people involved in sea trade and sea port activities, the figure rises to several millions. Securing jobs for so many people is also a major consideration for Moscow politicians. 

At the end of the communist era, the Soviet Union has the capacity to manufacture warships with total displacement of 200 thousand tons a year, and merchant vessels with deadweight of 700-900 thousand tons. Soviet strategists believed this capacity would keep the Soviet navy at 4 million tons, similar to USN, and the merchant fleet at 24 million ton deadweight, close to that of the United States. 

Following demise of the Soviet Union, this industry had been neglected for some fifteen years. Shipbuilding, navy and merchant fleet degraded. Can they get their past glory back? The light of hope is shining from the office of Igor Sechin, deputy head of the Russian government. He is sometimes referred by the media as the leader of the powerful “siloviki” group (made up by army, navy and order reinforcement officers). In May 2008 Igor Sechin became chairman of the United Shipbuilding Corporation (Russian acronym OSK). In October 2009 his is protégé Roman Trotsenko, was appointed OSK president. 

Several months after Trotsenko spoke to the Russian media about first achievements of the new team. He said the Russian shipbuilding industry attained a 62% rise in 2009; it delivered “many new large ships” to domestic and international customers. The order book rose to 118 large vessels, with foreign orders exceeding 7.5 billion dollars. 

Kremlin’s strategic goals seem the following:

First is to ensure long-term control over the vast natural resources up north. Oil and gas fields of the Arctic Shelf promise to maintain Russia in the role of the world’s largest producer of fossil fuels. The Kremlin wants this situation to last long. Today, Russia is number one by the volumes of natural resources. Their value is estimated at 140 trillion US dollars. By comparison, World’s GDP is 55 trillion US dollars, Russia’s own 40 trillion Roubles (about 1.35 trillion). This country controls 23% of all known oil fields, 33% of the planet’s natural gas and 50% of coal. Besides, it has huge reserves of Iron, Cuprum, Aluminum, Nickel, Titanium, precious metals and diamonds. Furthermore, Russia leads in timber, with 23%. Sales of these goods generate the lion’s share of hard currency income. 

Second is to ensure Russian control over the Far East territories in the view of Japan renewing its interest to regain control over the disputed islands which include the Kuril chain and other lands washed by the northern pacific waters. 

Third is the demonstration of the flag in remote parts of the globe, especially where the Kremlin’s strategic allies ask for guarantees in the case of possible imperialist aggression (like it was in Iraqi and Kosovo). 

Fourth. The Kremlin needs a potent expeditionary force for participation in international peace keeping operations and local wars. The August 2008 conflict with Georgia gives an example. 

Finally, the Kremlin has a duty to maintain the nation’s nuclear deterrent component (that includes nuclear powered submarines armed with ballistic and cruise missiles), and keep some strength in the conventional naval forces. 

Arms export is also a consideration, both political and financial. But its scale fades in comparison with Russia’s oil income. Let us illustrate it. According to official statistics from Russia’s Federal Customs Service, the export in the first half of 2010 came to 188.8 billion dollars, including 26.6 billion to CIS countries and 162.2 to the rest of the world. Fossil fuels keep the lion’s share in the Russian export, at 71.9% (with that specifically to CIS at 50.2%). Using these statistics, one can calculate that Russia sold fuels for about 130 billion dollars. 

According to the state arms vendor Rosoboronexport, Russia’s weapons trade amounted to 6.46 billion dollars in 2006. It rose to 7.55 billion in 2007 and stabilized at 8.35 - 8.5 billion in 2008 - 2009. Equipment for navies accounts for roughly one-fourth of the grand total, meaning sales of 1.5 to 2 billion annually. Rosoboronexport says its backlog for that sort of wares stands at 5 billion dollars. 

Kremlin’s petrodollar income is the main source of funding restoration of the in-house shipbuilding capability, construction of the new navy and merchant fleet. This expense is seen as a necessary one, some sort of “tax” payable to ensure that would-be outside pretenders for the wealth of the north keep their hands off it. As per the Arctic, there is a need in the navy and merchant fleet, as well as Strategic Airlift Capability, to support a huge multi-tier effort the Kremlin is planning on exploration of the shelf. 

Meantime, the once grandeur Soviet navy and the merchant fleet have downsized. They are not capable of handling the challenges. Meantime, Japan and China, who used to be way down the league in the naval power, now can send more warships, and often more modern ones, into the northern waters, than Russia’s Pacific Fleet. The Japan’s Self-Defense Force commissioned the DDH 181 Hyuga destroyer with a flight deck, and looks to commissioning of her sister ship DDH 182. Two more such ships are under construction. China is about to complete the Shi Lang, formerly Varyag. Laid down in Nikolaev, the Ukraine, as a Project 1143.6 heavy aircraft carrying cruiser, it was sold to China in a 70% state of readiness, towed first to Macao and then over to Dailyan for completion. Two “Improved Varyag” vessels are under construction. Meantime, the Pacific Fleet lost its carrier component in 1993, when the Project 1143 sister ships, the Kiev and Minsk, were withdrawn from service. 

The Russian navy has many times asked the government for funds on new aircraft carriers. Plans call for launching a head ship of a next-generation series sometime in 2012-2014 in Severodvinsk. By that time the local enterprise Sevmash shall have its dock free upon delivering the Vikramaditya to the Indian Navy. The respective efforts call for rebuilding the Admiral Gorshkov, ex-Soviet navy aircraft carrying cruiser of the Project 1143.5 into Project 1143.0 aircraft carrier of STOBAR concept (Short Takeoff but Arrested Recovery). It will see MiG-29K/KUB fighters taking off from a sky ramp and landing with help by arrestor hook. 

The Vikramaditya took first lines in the news on 2 July 2009, when Russia’s president Dmitry Medvedev visited Sevmash (Northern Machinery-building Enterprise) in Severodvinsk. Official presidential site www.kremlin.ru informs: "The contract for cruiser modernization was signed with India in 2004. The ship was scheduled to be delivered in 2008, but because of the increased amount of work its delivery was postponed to 2012-2013". It further informs that "Medvedev questioned the management team in detail about the status of the project and insisted that they complete the modernization of the cruiser in the specified time frame and according to the conditions agreed." 

When the contract was signed five years ago, it amounted to 617 million US dollars. After a series of re-estimates, India agreed on 1.5 billion. More recently, in early 2010, the sides accepted “final price”, reportedly at 2.5 billion. Talking to Medvedev on 2 July, Sevmash CEO Nikolai Kalistratov confessed that his enterprise "miscalculated" the costs, but stated the Indians initially wanted rather modest performance of the ship, and now "demand for much more". Medvedev replied: We must complete the work and deliver the rebuilt ship to our partners, otherwise heavy consequences may occur". 

Chairing a Russian government meeting in Severodvinsk, Medvedev said that the Vikramadiya contract is "one of the key orders for our shipbuilding industry and a key element of our international cooperation. It is unique by both its volume and complexity, and uses decisions never tried before, including in the transformation of the original design. Such a contract is something we do for the first time. Certainly, it entails a large number of problems. Production preparations on the ship commenced in the late 1980s, and now this ship is being rebuilt into a fully-capable aircraft carrier". He further said that he had "negotiations" with his Indian colleagues and that "there were some discussable moments". "These disputes need to be closed, the issues remaining on the baseline parameters of the cooperation resolved, and the work completed. This matter is that of our prestige", he concluded. 

While in Severodvinsk, Medvedev also inspected the Yuri Dolgoruky (Yuri the Long Hands). A head vessel in the series of Russia's new generation nuclear strike assets, the submarine carries 12 Bulava intercontinental ballistic missiles. By that time Sevmash had completed 45 surface warships and 163 submarines including 128 nuclear powered. "The way we manage this and other enterprises of our shipbuilding industry shall determine whether we succeed in one of the key challenges before our nation, that on completion by 2020 of a new core of the Russian navy's sea-going assets", Medvedev said. He added that the government "has got the will to do it". Newly built ships "must be armed with most advanced weapons, and must be competitive, and, most importantly, must correspond or exceed their foreign analogues". Rather than finishing work on previous generation ships laid down in the 1980s and 1990s, Russia shall concentrate its resources on new designs. "Today, our goal is to launch new designs of warships into series production", Medvedev concluded. 

At IDMS’2007 Russian cabinet members said the importance of the carrier program for the nation is so great, and also so much expensive, that it should be given status of a special federal program, and run independently of the Armament Program. In 2005 the Russian navy spokesman said the service wants 2-3 new carriers. Two years after the figure rose to six, to be built “in the next 20-30 years”. Realistically, Russian industry can produce one or two ships by 2020, of a refined Project 1143.7 with full displacement between 65 and 75 thousand tons. The Shipbuilding program 2005 calls for construction of 30 corvettes, 20 frigates, six destroyers along with smaller combat and auxiliary ships for the Russian navy. This program alone requires rebuilding of the aged shipyards. 

But there is more they have to build: hundreds of special-design tankers, container carriers, ice breakers, various floatable drilling platforms and pumping stations – all this for exploration of oil and natural gas fields in the Arctic shelf and the northern pacific. Besides, there is a new word in the power generation business, floatable nuclear power stations. First such station, Project 20870, is already being built, for completion in 2012. A total of eight such stations shall be constructed to serve remote regions of Russia where natural resources need to be exploited. There is a separate program for five nuclear powered ice-breakers. 

Plans are grand. Will they materialize? Today, Russia is almost absent from the global market for large displacement ships. Roughly, it makes one large merchant ship (displacement over 30,000t) per three hundred built in the Republic of Korea. Reportedly, a ton of ship’s structural weight is three to four times more expensive to build in Russia than Republic of Korea. 

Situation with naval assets is not much better. Russia has not launched even a single first-class surface ship (destroyers and larger) since demise of the Soviet Union. Even the two Project 956E and two Project 956ME destroyers delivered to the navy of the People’s Liberation Army were laid down in the Soviet times. The Jaroslav the Wise frigate (Yaroslav Mudry), a second ship of the Project 11540, which was commissioned earlier this year and demonstrated at IDMS’2009, had her hull launched back in 1991. Russia’s only aircraft carrier Admiral Kuznetsov and the only operational nuclear powered surface combatant Peter the Great missile carrying cruiser were launched in 1988 and 1989 respectively. 

The fact that Russia did not produce any ocean-worthy surface combatant in the past 15 years makes it all the more difficult for the shipbuilders to manage restructuring of their vast Soviet legacy into a modern industry. President Medvedev said this about the situation: “We lost a lot in the 1990s. Sadly, we built very few ships since then. We need to make a move now, that to re-establish the very base for building aircraft carrying cruisers, and the navy as a whole. We need to reinstall the carrier component since without it our submarine force cannot fulfill all tasks that it must fulfill. Therefore, I think, we will put together a program on reinstallation of the carrier component and determine places where to build the new ships”. 

The Kremlin gave start to the restructuring campaign on 21 October 2007, when it declared the very intent to establish the United Shipbuilding Corporation (USC, Russian acronym OSK). Aleksandr Burutin, an army general who acted Putin’s military advisor before this appointment, formulated the strategy of the merger, but failed to attain mutual understanding with key industrialists. Yuri Yarov, then- Director of Severnoye Design Bureau, became OSK head in late 2007. He tried to find compromise solutions taking into account interests of various financial and industrial groupings, while strictly observing the state interests. Yarov was superseded by Deputy head of Rosoboronexport Vladimir Pakhomov, who worked in that capacity until October 2009. Then Roman Trotsenko came.

OSK was first declared “up and running” at IDMS’2009, “in strict accordance with the timeframe set in the respective presidential decree”. IMDS’09 was the first maritime show where OSK was exhibiting in full power, as a merger of 31 enterprises including nine design houses and ten large shipyards. The corporation’s workforce is 80 thousand people. Engineering arm of nine design houses (including Rubin, Severnoye, Almaz) employs 6 thousand engineers, including 4.5 thousand ship developers. Share of military orders take 85% of the corporation’s order book. 

During the show, OSK leaders announced that the corporation will soon expend. “Nearly twenty” more enterprises situated in Central and Southern parts of Russia, as well Privolzhie region (along Volga river), shall be added to the corporate structure by another presidential degree being prepared. When asked for details, OSK leaders said that out of their wish-list of twenty enterprises, 13 have been tentatively approved by the Russian government for inclusion into the corporation and three more are being considered. Some of these were actually added to the OSK member lists in 2009-2010. 

Today, OSK’s share in the industry is impressive. By the corporation’s own estimates, it holds two-thirds of the nation’s capacity in ship development and half that in ship building. According to the presidential decrees, OSK production facilities are being structured into three regional units: the Western, Far Eastern and Northern centers of shipbuilding. OSK head office in Moscow is trying to distribute workload between shipyards in a way it eliminates “unhealthy internal competition” and to specialize enterprises on making particular products or components. 

OSK faces many challenges. There is a pressing need to free space in the precious territory of St. Petersburg. The city expands rapidly forcing heavy industry out. Every fourth vessel built in the Soviet Union was built in St. Petersburg, and some half of first- class surface combatants (destroyers and larger) were launched here. The Admiralty Shipyards and the Baltic Plant are “first candidates” for being expelled from the city. Their total removal is scheduled for between 2015 and 2025, but not (as of yet) supported by firm plans on erection of new shipyards in a new place, where they could continue operating. 

Generations after generations of St. Petersburg citizens worked in the shipbuilding industry since Peter the Great built shipyards in the mouth of Neva river in the early 1700s. Many still have jobs in the sea trade. This prompts decision makers to look for new location of the shipyards – off the city fence but still within an easy rich for St. Petersburg residents. 

Creation of a new design house, of civilian shipbuilding is dictated by large losses in skilful developers specializing in merchant ships. In the view of most scientific and higher education establishments in the maritime trade situated in St. Petersburg, there is no alternative for geographic location of such a design house. The need for it is being In the Soviet Union all major design houses developing surface combatants had civilian branches. In the past fifteen years the workforce tended to dwindle and its remains centering on more lucrative military projects. OSK is considering moving skillful engineers with experience in merchant ships into this new design house so as to prevent the situation in which the nation may one day find itself unable to produce a competitive merchant ship. 

OSK says that creation of the civilian design house shall make the first step into reviving of a truly competitive shipbuilding industry in Russia. Next step will be erection of new shipyards that would specialize in modern merchant ships. But this issue has to be thought out well before practical steps are made. Some experts urge not to separate completely military and civilian directions, and, rather, develop new shipyards as double-purpose, able to build military and civilian cost-efficiently. They argue that Russia’s workforce and intellectual resources are not large enough to be spread over too many enterprises. 

Another challenge is shortage of specialists aged between 30-50 years, as thus aged left the Russian shipbuilding industry in the past 15 years, when workload there was low. Some left for work in Norway, Korea and UK. OSK does not see fit in having them back in home, instead preferring to hire younger university graduates.

The aircraft carrier program, if launched, might develop in conditions of financial limitations necessitating wider use of civilian technologies for lower costs. Furthermore, “merchant” ships are seen by some people in the Kremlin as instruments in the larger system that would explore the Arctic shelf, other northern and the Far East regions. The requisite “merchant” ships shall have respective design features to enable operations in the harsh environments of the cold waters and icing. Even though these may prove less cost-effective to operate than their close analogues built in Korea or China, they would be strongly built – this and more to be able to fulfill Kremlin’s strategic tasks to do with exploration of Russia’s natural resources that sell well in the global marketplace. From this viewpoint, having a capable, purposely-built merchant fleet is the issue of same importance as having a strong navy. 

Three plans for new “super shipyards” are being considered, in Kronshtadt (the island of Kotlin), Primorsk (between Vyborg and St. Petersburg), both on the Baltic sea coast, and one near Vladivostok (town of “Bolshoi Kamen” or the Big Stone) on the Pacific coast. A top manager with OSK source told us: “There are plans for Far East, Baltic and North. Each has its strong and weak points. I fear the costs of laying new highways and attracting sufficient number of workers in the remote regions of the north may appear too high to bear. These issues are easier if the place is on the Baltic coast”. 

Kronshtadt is close enough to St. Petersburg for its citizens to consider having a job there. The plan for a super shipyard there has attracted attention of Russia’s large banks, most notably VneshTorgBank (VTB) and VneshEconomBank (VEB). OSK source continued: “There are two projects in the Baltic, of which OSK favors one in Kronshtadt. When we launch it depends on terms and sources of outside investments available to us and the sort of support we can get from the government. When clear answers to these questions are received, we can estimate how much it would cost us to build the shipyard”. 

He further said that, as of this time, there is no understanding whether this new shipyard be completely devoted to civilian ships. “Creation of a new large shipyard is a costly, complex issue, requiring understanding of the fact that, businesswise, building military and civilian ships differ in technologies and economics. When starting a new shipyard, we need to have a clear understanding what is it for, whether it be completely civilian or not. It may happen that the new shipyard will not replace, but rater supplement, the existing facilities”.

Since VTB and VEB are firmly under Kremlin’s control, the costs of the financial credits are not at issue, the source insisted. “OSK believes Kronshtadt project is a good one. The main challenge is to get necessary funding sooner, so as to ensure smooth moving of the Admiralty Shipyards into this new site. With that, the future of St. Petersburg shipbuilding school will be secured”. 

Some more light came on 17 July 2010, when the Administration of St. Petersburg and OSK signed a document calling for moving the Admiralty Shipyards manufacturing facilities out of the city. It says they will settle in the island of Kotlin, where OSK “is purchasing” a patch of land measuring 100 Hectares. The cost of moving was estimated at Rouble 20 billion. 

This announcement was preceded by an important meeting in Barvikha, a residence of the Russian president. On 1 October 2009 Dmitry Medvedev invited Igor Sechin to discuss restructuring of the Russian shipbuilding. His guest reported that a total of 37 enterprises had been integrated into OSK structure with three shipbuilding centers at its core. Sechin further said that the governmental team regained control over “previously lost” stake of 26% in Dalzavod enterprise in the Far East, and that OSK council of directors validated a program for development of the Far East assets that calls for construction of new modern shipyards with foreign assistance. 

Today, the Admiralty Shipyards employ 7 thousands, an average monthly salary at one thousand US dollars. Compared to China with a standard of 200 dollar monthly salary and better operating conditions for industrial enterprises, the Russian shipbuilders will have problems competing against the Chinese for orders of ordinary vessels. Management of the Admiralty Shipyards says to stay in the business they try to keep Russian navy orders (for Lada-series submarines), orders of foreign navies (Project 636 and 877EKM submarines) and civilian orders roughly equal, one-third each. 

Russia’s largest privately controlled shipbuilding group, the United Industrial Company (OPK), also faces the challenges of contracting its presence on the lands of St. Petersburg. Founded in 2004, it has assets estimated at 11.5 billion dollars. OPK controls Northern Shipyard, Baltic Plant and Aisberg design house along with smaller shipbuilding companies. Since foundation, it completed naval ships for 3.2billion dollars. Rather than moving out of the city, OPK plans a more effective use of the territory occupied by the Northern Shipyard. 

Andrei Fomichev, who acts general director of two enterprises, Northern Shipyards and Baltic Plant, told the media that the world-wide economic crisis “has had no effect” on OPK plans on rebuilding the Northern Shipyards for the purpose of creating, within the existing land site, a much more effective production facility that would have a larger capacity than both enterprises now possess. This shall allow to free the land (650 thousand sq. m in the Vasilievsky island) currently occupied by the Baltic Plant of land and hand it over to the city authorities and developers for construction of dwelling blocks and offices.

The world-wide economic downturn produced an effect on OPK to such an extent that its owners opened negotiations with Roman Trotsenko about selling it to OSK or the Russian government. Talks were still on as we went to press, with the sides having not yet settled about the final price. Meantime, Russia has received an offer from Ukraine, on sale of certain enterprises located on the Black Sea coast. The biggest of them are shipyards in Nikolaev (where all Soviet navy aircraft cruisers were built) and the naval turbine maker Zorya-Mashproekt. Negotiations on them are also going on with no certain date when a decision can be made. 

It seems the Kremlin has little alternative and will persist in restoration of its naval and air power as means of force projection in the northern and eastern directions. If Moscow fails to construct sufficient number of modern warships, aircraft and merchant vessels, it will fail in materializing its north exploration plants and, subsequently, maintaining Russia in the much-liked role of the mistress of the natural resources. There is growing understanding within the Russian elite that without making an all-out effort today, Russia may lose its superpower status sometime in future. The Russian aviation industry many benefit from this new development as it hopes for more state funding, which it may receive in the case the carrier program is launched since a carrier without aircraft makes no sense.