Date of publication: 17 October 2013
«What we are building under a foreign contract is not a Zubr. Indeed, this is a genuinely Ukrainian project, codename 958. Although the project has a lot in common with the old Soviet Zubr, it is a brand new thing, completely rethought and improved. Design documentation is the property of the Ukrainian side. Soviet legacy in this case has served as a launching pad for Ukrainian know-how».
The enterprises of Ukrainian military industrial complex are facing hard times. The government is unable to provide proper financing to keep them running. Russia which has been a strategic partner for many years, is increasingly taking a hostile competitor position. European Union appreciates the quality of Ukrainian military produce but prefers to develop its counterpart projects. In a situation like this, each seeks its own ways to survive: one resort to maximum layoffs, other shifts to more in-demand products, and some are selling their intellectual property in order to stay afloat. To find out how the land lies with the industry in general and with More** Shipyard in Feodosiya, we contacted Roman Marchenko, Senior Partner at Ilyashev & Partners and the trustee in bankruptcy for More Shipyard.
Rehabilitation procedure in respect of More Shipyard is expected to end next January. What will happen to the company after that? Are there any positive changes resulted of rehabilitation?
At present, the company is undergoing administration (one of the stages of bankruptcy – Ed.). Over 6 years of bankruptcy proceedings we let not a single asset, a piece of land or a building go on sale. I cannot say, unfortunately, that the shipyard is running at 100% capacity, but we have been engaged in a number of small contracts and a major contract with Ukrainian Special Exports Corporation, UkrSpecExport (The contract is for building of 4 military ACLCs (air-cushioned landing craft) for China’s People’s Liberation Army Navy, with the estimated price of the contract being ca. 300 million US Dollars – Ed.). And we continue to show progress despite all difficulties.
How long did the shipyard idle?
The shipyard did not have any orders for almost all years after Ukraine proclaimed independence. And where it produced anything, it did operate at a loss. Bankruptcy proceedings were brought in 2008. The company was repeatedly passed into the management of various executive agencies, namely, the Ministry of Industrial Policy, the Public Property Fund, the Military-Industrial Complex Agency. Now, the shipyard was transferred to the National Military Industries Corporation, UkrOboronProm. UkrOboronProm is a state concern embracing UkrSpecExport and a number of other defense enterprises. Unfortunately, there is no active financial support from any of them. Though, obviously, they are not to blame: the tragedy is about shortfalls to the national budget.
What is the situation with company debts? Are they fully repaid?
I am afraid they are not. It is virtually impossible to date as we are talking about a really huge debt of the previous years. Only the «official» debt (i.e., the debt recognized by the ship) was about 180 million Hryvnias. To date, it has decreased by some 70%. This includes a full setoff on company’s arrears on salary, pensions and other social security payments.
Previously, the media widely discussed the chances of bankruptcy. Does the current state of company’s balance sheet indicate that it has actually avoided bankruptcy?
Unfortunately, it’s difficult to guarantee. There still remain some debts pending repayment. But the existing dynamics is pretty hopeful.
Based on these positive dynamics, we are going to convince our creditors to vote again for the extension of the rehabilitation procedure rather than proceeding to liquidation. This is our strategic goal. We believe that we have every chance to convince the creditors. Hopefully, they will not insist on the immediate sale and liquidation the company but rather be supportive of our strategy and wait some more time for the settlement. If we were able to convince the creditors six years ago, we hope it will be easier today.
What impact did the largest historical international contract for the building of 4 Zubr type ships have on the company’s financial position and operations? What is the progress with this order?
Contract with UkrSpecExport (UkrSpecExport acts an intermediary for the Chinese customer under a governmental guarantee – Ed.) at least enabled the company to reach a level where we do not have arrears on wages, providing living money for thousands of families in Feodosiya region where More is one of the major employers.
How many employees are now working at the plant?
I cannot say, however, that this contract is a cure-all solution, because it was signed very low profitability. Before signing the contract, the project owner did a thorough analysis into the poor state of co-contracting Ukrainian defense enterprises. And he knows how to bargain. Back in the day, he managed to negotiate as low added value as he could. Finally, we agreed on 3%. At the same time, I will repeat myself, we have taken up the contract not for the sake of money. The main reason behind it was that it would enable us to maintain the production base, to keep the people and recruit new professionals.
What was the result of a dispute with the Russian side on intellectual property rights to the technology of the craft? Did Almaz*** Design Bureau put up with the fact that More will give technical documentation on Zubr to a third country enabling it to launch its own production of these ships?
In fact, debates on the legacy of the Soviet Union can last forever. Whether the rights belong to an specific design bureau or to anyone who was involved, remains a question. At the same time, there is no such problem today as what we are building is not a Zubr, it’s codename 958 – and it is fully Ukrainian. Yes, it has a lot in common with the old Soviet Zubr, but this is brand new thing, completely rethought and improved. Design documentation is the property of the Ukrainian side.
I do not know whether Russia has put up with that. No actions have been brought so far. Almaz Design Bureau, which designed Zubr back in Soviet times, and holds the documentation to it together with More Shipyard, used to lend us money, but the debt was repaid in full and there are no claims to More.
Under the contract, a second pair of Zubr craft will be built in the project owner’s country. Will there be part of the Ukrainian side in their production?
Of course, these ships will actually be built in cooperation with Ukrainian technicians. So yes, we will participate.
Is the transfer of the project documentation and advantage for Ukraine? Does it mean that China will now be able to build this type craft on their own?
They will, I guess. But a trouble here is that any project will soon become outdated. One can not exploit the same project forever. Take automobiles. You can be own the documentation to an old Soviet mini and be happy with that, but what’s the sense? Nobody is making and buying it anymore, nobody wants it. So I believe that this kind of business decision was correct. The decision was made by an UkrSpecExport, an exporter authorized by the government, so of course this contract had all necessary government approvals. Yes, China will be able to build these ships at home, but there is little chance that there we will receive many orders for Zubr. It should be understood that Zubr-class are military vessels from the times of geopolitical wars. In fact, these are very expensive toys, a kind that was never going to be in high demand. Only the wealthiest powers like the Soviet Union could afford them. Now, apart from superpowers, they can be afforded by some rapidly developing countries claiming global or regional leadership. But no small country can buy them. Greece had to buy these ships (4 of them – Ed.) because they have numerous islands and problems with Cyprus. But still, they are not machineguns that everyone needs.
What is the current production load of More Shipyard?
I will repeat myself, the shipyard is working sustainably. In addition to codename 958, we work on a number of other orders, including the building of a small boat and a ship for the Coast Guard of the Border Protection Service of Ukraine. There are also negotiations with private European companies.
Do European companies buy warships?
No, we are talking about civil ships and boats, yacht hulls and superstructures for high tonnage vessels. By the way, we are constantly engaged in diversification. Civil vessels are a very good solution. Once, apart for military produce, More produced a number of river and sea hydrofoils. Back in Soviet times popular names were Raketa (Russian: Rocket), Kometa (Russian: Comet), Olympia and Voskhod (Russian: Sunrise). Unfortunately, today this market is mostly lost. But we see military and civil contracts as two complementary business opportunities.
What countries are interested in this kind of ships?
More Shipyard constantly negotiates with prospective customers worldwide, focusing on seafaring countries. As I have already said, interested parties include Greece, Croatia and China. Everyone who has an outlet to the sea is our prospective customer. We try to offer them both military and civil ships. It is an entirely different matter that we can not contract directly to sell warships as this is the competence of UkrSpecExport and its affiliates. What concerns civil vessels, we are entitled to promote and sell them directly. But, unfortunately, competition is very tough today, and looking for a niche is a very difficult job. But we keep looking, even though today the revenue from civil shipbuilding of More Shipyard is significantly lower than from military contracts.
Does Europe show interest in More’s ships? Do you expect more orders from European countries after the signing of the Association Agreement with the EU?
I can say that we have already had customers from the Netherlands and Scandinavian countries. They are very much surprised by our technologies, as some of them are truly unique. They made a one-time orders, but we hope that having got high quality ships, they will continue to order from us. In fact, we are absolutely open to work with European and Russian partners. We would like to contract for the benefit of Ukraine, but in today’s reality, our products are not demanded, one of the reasons being the lack of financing from the government.
What is the general state of affairs in the defense industry of Ukraine? Could you highlight any prospects and important challenges?
There is a potential, an enormous one. I admit that this potential is often based to the achievements of the Soviet Union. But where there is an efficient team of professionals and good management, there is a success. Let me bring a few examples from the clients of Ilyashev & Partners. State Enterprise Antonov, which in the absence of financial support from the government continues to finance projects and market new models of aircraft – AN-148, AN-158 and AN-70. Luch Design Bureau deals with military equipment, State Enterprise Aviacon works with helicopters, Civil Aviation Plant 410 recently successfully completed a contract to modernize Indian aircrafts. We expect much from UkrOboronProm as a structure that can ensure effective production and cooperation of enterprises on the one hand, on the other hand will also be able to promote these products through their companies, UkrSpecExport and its affiliates. We hope that this scheme will prove synergic.
Previously, there was a repeatedly raised issue of the possible privatization of the company. Are you planning to put More Shipyard on sale at the moment?
As a court-appointed trustee in bankruptcy, I was supportive of this decision of the government. However, there has never been a line of buyers, and this remains the case now, when our country and the whole world are facing the global financial crisis. Shipbuilding industry was affected by the crisis as well.
Besides, not every privatization is beneficial. There are dedicated investors eager to develop the enterprise, and there are investor that buy the company for a token fee just to sell everything that could be sold for money, and the staff finds themselves in the street. This is not the way that More needs.
In recent years, the government has enacted a number of laws that were designed to revive the shipbuilding industry of Ukraine. How do they work in practice? Did they help More to survive the crisis?
To be honest, in real terms More enjoys no support from the government. Our main problem is typical to the entire Ukrainian market. It’s the VAT. We’re are speaking about a huge debt the state budget owes to More Shipyard. I mean that profits we earn, including the gain under the foreign economic contract with UkrSpecExport, gets leveled out due to the failure to refund VAT. To date, the arrears of the government is more than 100 million Hryvnias. Besides, the government’s attitude to its own company seems at least strange, when tax service lifts tax credit on VAT on the grounds of alleged violations which later prove fanciful in court. More wins all litigations and restores its right to VAT money, but it is still not paid and we are unable to get it from the budget. The reason why, More is not entitled to automatic VAT refund is because it is undergoing bankruptcy proceedings.
You said that Antonov is a client of Ilyashev & Partners. Recently, Viktor Livanov, Chief Designer of Ilyushin Aviation Complex, said that Russia is going to make improvements to the Ukrainian An-124 Ruslan****. Are they really entitled to do that?
No, they are not. It is common international practice that only a original designer, as long as it continues to be in legal existence, can enjoy these rights. In this case, Antonov carries on and is the sole owner of all rights to its designs, including the An-124. Any attempts by Russians to do anything without the Antonov Design Bureau are illegal and senseless because ICAO would not authorize the operation of such aircraft without the consent of Antonov. In fact, what is happening now is an attempt to exercise pressure on Ukraine thorough its state-owned corporation in order to force us to give up the negotiations. If Russia is trying to use force in order to influence our actions, I’m sure that Ukraine should and will oppose these attempts. If Russia decides to go the length of this adventure, the most that they can make is fly on these modified airplanes over their own territory. But I can say for sure that before sharing anything, one needs to create something shareable first. Today in Ukraine designing of aircrafts is an industry that is feeling significantly better than in Russia. Therefore, saying that the Russian side will be able to make something valuable of An-124 without the assistance of Antonov which had engineered it from scratch and made all of improvements is nothing more than idle talk. In fact, it is silly to exclude from the process a knowledgeable team of Ukrainian professionals. For it is evident that the quality of the aircraft will be worse without the «brain» of the Ukrainian side.
How do you feel about the relations between Ukrainian defense industry and Russia?
I understand the Russians in this matter. They are building a new superpower, and they do not want to depend on anyone on this way, especially on the country that is moving in the opposite direction. As long as Ukraine has chosen the European way, it should be ready to wind up its the cooperation with the CIS, particularly in what concerns the military complex. I believe that the government was aware of this possibility when making a decision to opt for the European Union and not the Customs Union, was taken into account.
Can Ukrainian defense complex rely on orders from NATO?
One of the most successful projects of the above said Antonov is Ruslan SALIS, a joint project of Ukraine and Russia for NATO. And NATO countries are willing to use Antonov aircrafts for their needs, as they know that no NATO country in Europe or America has nothing like them. By contrast, the project in which they have invested huge amounts of money, Airbus-400 M, is still a dead duck while Ukrainian counterpart, An-70 is already in operation and is not worse than what they are just trying to get into shape. There is an immense potential for cooperation. But NATO is in the same situation as Russia. For Russia, Ukraine is no more its part, and for NATO, it is not yet a member. That s why Ukraine has to stop tearing around like Buridan’s ass and decide in what direction to move. There are several poles in the world now, and we have to choose one to head for. If we prefer European values for Russian gas than we can bid to closer cooperation with both NATO and European Union.
* Russian: Wisent (Project 1232.2 class, NATO reporting name Pomornik)
** Ukrainian: The Sea
*** Russian: Diamond
**** A strategic airlift jet aircraft designed by Ukrainian design bureau Antonov