Overview of Stevedoring Sector in Russia in 2016 With the support of: Table of Contents Introduction 1 Current Market Positions of Russian Seaports 2 Steady Growth 5 Cargo Turnover Trends in Russian Seaports 5 Major Market Players in Russia, 2016 7 Cargo Turnover Across Russian Sea Basins 9 Development Prospects 11 Sources of Financing 16 State Support for Private Investments 20 Public Private Partnerships 20 VAT Breaks 23 Tax Breaks for Investors in the Free Port of Vladivostok 24 Constraints 26 Railway Infrastructure 27 Relations with Customs Authorities 30 Conclusion 32 Contacts 33 Introduction The stevedoring sector is an integral link in the international trade chain. Around 60% of Russia’s cargo imports and exports are processed in seaports¹. The balanced and timely development of port infrastructure should improve the competitiveness of Russian exports on the global market. The stevedoring sector has been developing impressively over the last 16 years: between 2000 and 2016 the cargo turnover of Russian seaports increased almost four-fold. Moreover, it is forecast to increase by another 14%-18% by 20202. EY closely monitors the current processes. We prepared this report with the support of the Association of Commercial Seaports in order to analyze expert opinions about further development of the sector, key constraints, and sources of financing for investment projects. We conducted a market survey for this report to learn respondents’ opinions on a number of key issues. The survey covered 26 companies, including stevedoring holding companies, stevedoring operating companies, and raw material suppliers who own cargo terminals in seaports. Among respondents were top managers, including CEOs, CFOs, Sales Directors, Strategy Directors, and Logistics Directors. We thank all the participants for sharing their opinions, and we hope this overview will be of use to both them and a wider range of investors. 1 https://customs.news/porty-rossii-obespechivayut-60-ved-strany/ 2 According to Federal Target Program “Development of the Transportation System in Russia (2010-2020)” as amended on 27 February 2017 Overview of Stevedoring Sector in Russia in 2016 | 1 Current Market Positions of Russian Seaports International trade is the main driver Foreign Trade Turnover of Select Countries, 2016, trillion US dollars behind the development of the port 4.0 industry. Around 90% of cargo is 3.7 3.7 3.5 transported by sea3. The US and China were the leading countries in terms of 3.0 2.3 foreign trade turnover in 2016 ($3.7 2.5 trillion each), while Russia’s turnover was 2.0 around $0.5 trillion. 1.5 1.3 Trillion dollars USA dollars Trillion 1.0 0.8 Foreign trade turnover in Russia declined 0.6 0.5 0.5 0.4 by 11.4% YoY in dollar terms in 20164, 0.0 which was mostly due to the reduced China USA Germany Japan Canada India Russia Australia exports in monetary terms because Sources: The Central Intelligence Agency, CBR of low raw materials prices. In volume terms, however, exports of Russia’s main products, coal and oil, increased by 9.6% Cargo Transhipment Structure in Russian Seaports by Cargo Destination, 2016, % and 4.2%, respectively. Since raw material exports account for the majority of cargo 10% turnover in Russian seaports, the positive 7% trend in volume terms helped sustain the Exports growth in overall cargo turnover. 4% 722 Imports million tons Transit Cabotage 79% Source: Seaports, No. 1, 2017 3 https://business.un.org/en/entities/13 4 Central Bank of Russia 2 | Overview of Stevedoring Sector in Russia in 2016 As well as foreign trade volumes, the cargo Cargo Turnover of Major Seaports in Europe, million tons turnover and concentration of seaports in any particular country are impacted by 445 Rotterdam 466 the length of the coastline, the location of 461 the manufacturers, and internal logistical 199 routes, which determine whether transit Antwerp 208 214 cargo flows can be serviced. Despite 146 comparable foreign trade volumes, the Hamburg 138 coastline in China is 37% shorter than that 138 of the USA (14.5 thous. km vs 19.9 thous. 122 Novorossiysk 127 km)5. The above factors explain why 131 most of the giant ports, including Ningbo, 95 Algeciras 98 Tianjin, Shanghai, and Qingdao (with cargo 103 flows of over 500 million tons per annum), 76 are located in China. Ust-Luga 88 93 Russia’s foreign trade volume is about 79 Marseille 82 one-seventh of China’s, while the coastline 81 is 54% longer (22.4 thous. km vs 14.5 80 thous. km). These factors in particular Amsterdam 78 79 explain why Russia has no giant seaports 78 with cargo turnover comparable to the Bremen 73 largest seaports of China. Nevertheless, 74 the scale of the main ports in Western 67 Valencia 70 Russia is comparable to the largest ones 71 in Europe, and Russia’s port industry as a 61 whole is extremely promising in terms of Saint Petersburg 52 49 opportunities for both increasing foreign 2014 2015 2016 trade volumes and developing internal logistics routes to service transit cargo Sources: ACS, data of foreign ports flows. The largest volume of cargo in Russia in As of year-end 2016, the Register of 2016 (131 million tons) was processed by Seaports in Russia included 67 seaports6, Novorossiysk commercial seaport, which located along the seashores of 12 seas ranked fourth amongst European ports. that lead to three oceans as well as the Moreover, the cargo turnover steadily Caspian Sea. In geographical terms, increased between 2014 and 2016. Russian seaports are located in five sea basins (Baltic, Azov-Black Sea, Caspian, The new port of Ust-Luga has also steadily Arctic, and Far Eastern). increased cargo turnover, having captured volumes from Big port Saint Petersburg, The three largest seaports in Russia in which, in turn, had recorded a declining terms of transhipment volumes in 2016 trend. It is worth noting that the combined were Novorossiysk (38.6 million tons of cargo turnover of Ust-Luga port and Big dry cargo and 92.8 million tons of liquid port Saint Petersburg increased by 1.4% in cargo), Ust-Luga (30.9 million tons of 2016, while the largest seaport in Europe, dry cargo and 62.5 million tons of liquid Rotterdam, posted a decline of 1.1%. cargo), and Vostochny (35.8 million tons of dry cargo and 32.7 million tons of liquid cargo)7. 5 https://www.cia.gov/library/publications/the-world-factbook/ 6 Source: Rosstat, http://www.morflot.ru/deyatelnost/morskoy_transport/reestr_mp.html Overview of Stevedoring Sector in Russia in 2016 | 3 7 Source: Seaports, No. 2, 2017 Largest Seaports of Russia in Terms of Cargo Transhipments, 2016 Azov-Black Sea basin 10 8 Liquid Dry cargo, 7 No. Seaport cargo, million tons million tons 9 1 Novorossiysk 92.8 38.6 2 Kavkaz 12.6 20.6 3 Tuapse 16.3 8.9 14 4 Taman 10.7 2.8 5 Rostov-on-Don 3.8 9.2 11 6 Azov 0.4 6.2 15 16 17 Baltic basin Liquid Dry cargo, No. Seaport cargo, million tons million tons 7 Ust-Luga 62.5 30.9 23 25 8 Primorsk 64.4 - 21 9 Big port Saint 6.54 42.1 19 Petersburg 13 10 Vysotsk 11 6.1 12 11 Kaliningrad 2.4 9.3 5 Caspian basin 2 Liquid Dry cargo, 4 18 No. Seaport cargo, 6 million tons 20 million tons 22 12 Makhachkala 2.8 0.4 1 13 Astrakhan 0.03 2.6 3 24 Arctic basin Liquid Dry cargo, No. Seaport cargo, million tons million tons 14 Murmansk 11.4 22 15 Varandey 8 - 16 Sabetta 2.8 - 17 Dudinka 1.2 Far-Eastern basin Liquid Dry cargo, No. Seaport cargo, million tons million tons 18 Vostochny 32.7 35.8 19 Vanino 2.3 27.9 20 Nakhodka 6.6 16.7 21 Prigorodnoye 16.4 - 22 Vladivostok 3.1 11.3 23 DeKastri 11.3 0.2 24 Posyet 1 7.2 25 Shakhtersk - 4 Sources: Seaports, No. 2, 2017, EY analysis. 4 | Overview of Stevedoring Sector in Russia in 2016 Steady Growth Cargo Transhipment Accumulative Growth Indices in 2009-2016, % Trends in Russian 180% 170% 169% Seaports 160% 150% 145% The increase in cargo transhipment 140% 141% 130% volumes across Russian seaports in 127% 120% 2009-2013 was largely in line with the 110% 110% growth of international sea trade. Further, 100% despite the negative Russian GDP growth, 90% it has even exceeded the global growth 80% 2009 2010 2011 2012 2013 2014 2015 2016 level since 2014. Moreover, the increase Dry cargo in Russia Global sea trade in cargo transhipment volumes across Liquid cargo in Russia Russian GDP (in real prices) Russian seaports has outperformed the Transhipment of all types Global GDP (in real prices) increase in Russian exports as a whole. of cargo in Russia Russian exports (in real prices) Thus, Russia’s stevedoring sector Sources: Rosstat, Oxford Economics, Clarkson research, EY analysis. demonstrated steady positive growth in cargo handling in 2009-2016. Over Cargo Transhipment in Russian Seaports in 2009-2016, million tons that period, cargo transhipment volumes across Russian seaports increased by 722 677 almost 1.5 times, from 496 million tons to 589 624 526 536 567 722 million tons. 496 386 331 364 315 334 301 It is worth noting that the increase in 298 314 dry cargo transhipment volumes has 292 312 336 significantly outperformed that of liquid 198 212 235 252 256 cargo. This trend is due to the more than two-fold increase in coal transhipment 2009 2010 2011 2012 2013 2014 2015 2016 in Russian seaports in 2009-2016, while Dry cargo Liquid cargo crude oil transhipments barely increased in Source: Rosstat Overview of Stevedoring Sector in Russia in 2016 | 5 2009-2015, starting to grow steadily only Cargo Turnover Growth across Russian Seaports in 2016 vs 2015 by Cargo Type, in 2016.