Russian Railways is one of the three largest transport companies in the world, but its infrastructure is crumbling and standards dropping.
Since the early 1990s, the infrastructure of the railways has deteriorated dramatically. Many marshalling yards have been abandoned, 28% of bridges are more than a century old, whilst 70% of locomotives and 40% of freight wagons are showing signs of serious wear and tear.
From rail to road
The railway is still the main means of freight transport in Russia, accounting for over 40% of the country’s total transport turnover. However, between 2009 and 2013, train speeds decreased by 20%, and the number of late arrivals rose from 23% to 31%. At the World Economic Forum in Davos, in January this year, Deputy Prime Minister Arkady Dvorkovich, the man responsible for the sector, had this to say about freight transport: ‘It’s easier to grab a backpack and walk to Vladivostok than to travel by freight train; on average they cover only 18km a day.’ Many shippers are now opting to use road transport, with typical distances covered, a massive 1500-2000 km; in Europe the average is 700-800 km.
The average Russian freight train covers only 18km a day.
There are several reasons for the deterioration that has led to this exodus of freight from rail to road. The first is linked to reforms begun in 2003, with the aim of attracting investment to the sector. Russian Railways (RZD) was established as a joint-stock company that took over railway management from the Ministry of Transport, along with virtually all of its assets. As part of the reforms, the government approved changes to the pricing system; and rolling stock began to be sold off to private investors. A company that wanted to carry freight, paid Russian Railways the infrastructure and locomotive part of the charge, and paid the wagon component to the operators that owned the wagons. These operators, with the help of private investment, flooded the market with new wagons, creating a surplus. The establishment of a market rate for the use of wagons led to an inflow of investment and the upgrading of rolling stock. However, according to RZD, the resulting surplus of wagons on the tracks complicated logistics, and the transportation of goods actually slowed down; and, as a result, the main aim of the reforms – a reduction in the transport component of production costs – did not materialise.
A monopoly business
One phase of the reform of the railways was supposed to involve abandoning the fixed locomotive component of the charging system, and open the locomotive side of the business to a number of additional carriers. This market is attractive to carriers because the locomotive component of the pricing structure is higher than the wagon component. But RZD, with its monopoly, is not ready to allow other operators into the market, believing that the appearance of local carriers will affect its profits, and will entail either a price increase or additional government funding. Private carriers, it argues, would destroy established working practices and only take on the most profitable routes. RZD has submitted a list of routes to the Ministry of Transport, which it is prepared to offer to private freight train operators. According to the private operators, however, all these are dead-end routes with low volumes of traffic.
RZD, with its monopoly, is not yet ready to allow other operators into the market.
Nevertheless, large businesses such as Transoil, NefteTransService and Globaltrans have managed to gain permission to introduce their own locomotive fleets. They carry freight along looped routes on so-called ‘in-house rail services,’ and make an enormous profit from it. Formally, the Ministry of Transport sanctioned these services in 2007; and in theory any market competitor can obtain permission to introduce a similar setup. The reality, however, is that to get this permission you need to have lobbying power.
Lobbying power
Another reason for the unsatisfactory state of the railways is that according to virtually all of the market competitors, there is currently no clear and transparent mechanism for decision making: why, for example, does one factory receive a discount on its transport bill, and another does not? The system itself is poorly managed, and communication between the various parts of the shipping process inadequate.
Competitors also complain about RZD’s market monopoly, and the lobbying opportunities available to Vladimir Yakunin, head of RZD and close friend of Vladimir Putin.
RZD also owns scrap metal companies, tourism service providers, cafes, canteens and sports clubs.
These opportunities contribute, among other things, to the manipulation of railway transport tariffs. In September 2013, for example, the government decided to freeze RZD’s charges for the following year, with the aim of stimulating economic growth. People inside the company then began talking about the catastrophic consequences that would result, from staff redundancies to reduced infrastructure investment, which could affect safety. Many experts at the time said that RZD could, for example, simply refrain from purchasing non-essential assets – RZD currently owns scrap metal companies, tourism service providers, cafes, canteens and sports clubs.
RZD explored every possible way to recoup its losses. It attempted, for example, to be allowed to levy its transport charges on the basis not of the shortest route but on actual distance travelled. These changes would have affected some routes on the Oktyabrskaya railway, in northwest Russia, where, because of the launch of the high-speed ‘Sapsan,’ train, freight trains now have to make detours. Costs to shippers would have risen significantly, and many companies threatened to suspend shipments. But this option was rejected, and in the end, 13.5% of RZD employees were forced to apply for transfer to part-time working. That is how the company’s costs were kept down.
On 25 July, the government announced that it had approved measures to support RZD, which is expecting multi-billion-dollar losses for 2014/2015. The bailout includes such measures as price rises, tax breaks and compensation for loss of suburban shipments to other operators. Metallurgical companies, who still use the railways as their principal mode of transport, have already come out against the price increases. According to Russian Steel, the association of Russian iron and steel producers, the increase in rail costs has already led to the closure of a number of metallurgical operations, such as the production of cast iron for export at the Svobodny Sokol plant. If tariffs continue to be linked to inflation, other plants will also be threatened with closure, in particular, producers of semi-finished steel for export. The result could be that the reduction in railway traffic in favour of road transport will eventually lead to paralysis on the roads, the exact opposite of what the government intended.