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What Maritime Flags the Market Choosing Today and What the Key Factors Driving This Choice?

According to UNCTAD Reviews on Maritime Transport made in 2010, the number of sea vessels controlled from Russia was 1,987 units. According to the 2021 Review, this figure rose to 2,873 units, and to 2,917 units according to the 2022 Review the Russian fleet is growing slowly, and is also slow to respond to external changes.

Since 2010, Panama, Liberia, the Marshall Islands, Hong Kong, China, and Greece have been leaders in ship registration. They take under their flag more than 50% of the world tonnage.

For comparison, the tonnage of the Panama Shipping Registry in July 2022 was 239.4 million tons, and consisted of 8,587 ships, and the tonnage of the Liberian Shipping Registry in 2021 was 200 million tons, the number of ships was 4,750. In November 2022, Lloyd's List Intelligence has published a ranking of countries by the number and tonnage of ships, from which it follows that Panama and Liberia are the main competitors in the registration of ships.

The advantages of registering a flag in these countries are considered to be a low tax burden, a quick registration procedure, the neutrality of these countries with respect to international conflicts, permission for dual registration, the anonymity of owners, the possibility of registering ships by owners - non-residents, low responsibility to the staff (vessels' crew). The main advantage remains since the Second World War is the ability to conduct trade bypassing all the sanctions of the warring parties. Thanks to this commercial approach, FOCs attract customers from all over the world. This approach is very difficult to compete with.

Interestingly, China is among the top five world leaders in ship registration. And one of the innovations that contributes to the growth in the number of its ships is the abolition in December 2020 of VAT for companies when buying a ship in China and registering it in the port of Yangpu.

The second thing that helps China compete with flags of convenience is investing in shipbuilding. According to Clarksons, by the end of 2022, China accounts for about 50% of the total global shipbuilding market.

Russia is not the only maritime power that is in a difficult situation. According to UNCTAD, the US fleet in 2010 was 1,865 ships, by 2021 it has grown to 3,625 units, and by the beginning of 2022, the US controlled 3,636 ships. However, US internal statistics show completely different figures and speak of a constant decline in the size of the US fleet. So, for example, according to internal statistics, only 180 merchant ships owned by private companies sailed in 2021 under the national flag of the United States.

The reasons for this decline are as follows: high taxes in the United States, a high level of control over the observance of the rights of seafarers, investment in the construction of ships has decreased.

For example, in a recent MarineLink report dated 20 July 2023, MAERSK in the United States was ordered to pay a seaman $700,000 for wrongful termination due to the fact that the seaman submitted a complaint against the shipowner to the US Coast Guard. The company fired the seaman for informing about a number of technical violations on the ship without notifying the employer in advance. The company was ordered to reinstate the seaman at work and pay him wages for the period of illegal dismissal.

Experts say that it is extremely complicated to conduct maritime business in the United States due to the large number of trade unions that compete with each other.

It was the United States that in the middle of the 20th century initiated the creation of an open register of ships in Liberia. The initiative suited commercial interests so much that soon the United States began to think about how to return the fleet to its native harbor. This led to the creation of the U.S. Virgin Islands Open Registry in 2022, providing foreign companies with an American flag and American legal protection.

However, the decision to create this registry provoked a wave of criticism from American unions, since, according to the unions, this decision allows the operation of ships with foreign seafarers (author's note: which, apparently, puts American seafarers out of work) and leads to the erosion and destruction of fleets under the national flag.

In addition, since the mid-twentieth century, the number of shipyards in the United States has significantly decreased, as it became a financially burdensome to maintain them. Immediately after World War II, the US fleet accounted for 62% of the total number of ships in the world. But due to the fact that open registries have appeared (initiated by American companies), the tax burden and responsibility of shipowners within the United States has increased, and also due to a decrease in the number of US shipyards, today the United States in the total world fleet has a share of 0.4% (according to 2019 data).

The launch of the Open Registry of the US Virgin Islands is aimed at providing shipowners with access to US jurisdiction and legal protection of their interests, property rights under US laws. Thus, in the United States, shipowners are given access to their judicial system and numerous tools for alternative dispute resolution (mediation, arbitration, conciliation procedures).

In Russia, since 2018, there has also been open registry initiated. The Russian Federation offers a number of tax benefits to those who will be registered in such a registry. However, a detailed analysis of these benefits in comparison with the flags of convenience tax regime or China has not yet been found in open sources. It could be very useful for ship owners.

In addition, reforming the Russian judicial system, strengthening institutions for the protection of private property rights, the rights to a fair trial, and the promotion of alternative dispute resolution procedures could be a significant advantage for shipowners.
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