August 25, 2015

New RZD president will have big shoes to fill

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THE news that Dr Vladimir Yakunin is to step down as president of Russian Railways (RZD) after 10 years will come as a shock to many both within Russia and abroad, especially as he has been so active in the International Union of Railways (UIC), where he has served as chairman since 2012.

Yakunin joined RZD in October 2003 as first vice-president from the Ministry of Transport where he had served as deputy minister since October 2000 and first deputy minister from February 2002. When Yakunin became president of RZD in June 2005 his fluency in English and his impressive knowledge of railways combined with his desire to see rail transport grow and prosper enabled him to quickly establish himself as a driving force in the railway world.

 

Some of his international successes include helping to revive Monogolia's railway and reducing transit times on the Trans-Siberian to boost traffic between China and Europe, as well as upgrading the rail link to North Korea to improve access to Pacific ports. However, RZD has only had limited success in improving links to Europe with the introduction of modern rolling stock on passenger services from Moscow to France, while an ambitious plan to build a 1520mm-gauge line to Vienna never got off the drawing board.

Yakunin's move to RZD coincided with its separation from the government as a stand-alone state-owned company. Yakunin successfully steered RZD through a major reform process and much-needed capital investment plan. The reform programme saw the formation of subsidiary companies such as Aeroexpress, which quickly established dedicated airport rail links to Moscow's three airports, and First Freight Company, which was subsequently privatised.

RZD adopted a unique solution for freight with only the wagon fleets being transferred to the new freight subsidiaries, while RZD retained ownership of the locomotives and responsibility for hauling freight wagons owned by either the new subsidiaries or the increasing number of independent private wagon owners. While this led to e23bn of private investment including the purchase of more than 680,000 freight wagons, Yakunin said in 2013 that he regretted splitting the wagon fleet between different companies and would like RZD to re-establish itself as a freight operator.

This is why RZD has not fully implemented the reform programme as originally intended, which was for RZD to eventually become an infrastructure manager tasked with upgrading the network, while the operating subsidiaries were spun off as either private or state-owned companies.

RZD also adopted a unique formula for investment in locomotives and passenger trains. This involved the formation of triangular partnerships between RZD, a Russian car builder and one of the major foreign rolling stock builders. These partnerships have enabled the domestic industry to make a much-needed leap in technology while RZD has started to make up for nearly a decade of stagnation during the Yeltsin presidency in the 1990s.

The reforms and investment led to a steady improvement in RZD's performance. However, the global economic downturn followed by the crisis in Ukraine and subsequent sanctions, coupled with a devaluation of the rouble and volatility in commodity markets have damaged the Russian economy leading to a steady drop in overall freight traffic during the last three years, with the result that RZD is now at a crossroads.

Russia needs to decide whether it wants to continue with private railfreight operation. Some of the private wagon operators are also involved in other forms of freight transport, so nationalisation could prove a messy business as well as a distraction at a time when Russian railfreight needs all the help it can get to boost traffic.

On the other hand, competition between operators is one way to stimulate traffic as it has proved in other countries. If private wagon operators are to survive and prosper, then consideration should be given to dividing RZD's locomotive fleet between them to turn them into fully-fledged railfreight operators able to offer a complete service, and ideally set their own rates. RZD has suffered in the past from political interference in the rates it can charge which distorts the market and affects its ability to compete with road transport.

The new RZD president, Mr Oleg Belozerov, will need to address RZD's deteriorating financial performance, where net profit has been on the decline from Roubles 74.8bn ($US 1.13bn) in 2010 to Roubles 200m in 2013, which turned into a loss of Roubles 44.1bn in 2014. In this climate, it will also be a challenge to keep the investment programme on track. RZD's major projects include the modernisation of the Baikal Amur Mainline (BAM) and the Trans-Siberian Railway, the Moscow transport hub scheme, and upgrading links to ports. RZD also needs to maintain momentum with the Roubles 1 trillion Moscow - Kazan high-speed project, for which a Sino-Russian consortium was appointed recently to conduct project planning and surveying.

As Yakunin leaves RZD to start a new political career, he leaves a much-transformed and modernised railway. RZD is the world's third largest railway and with 95% of land freight it is vital to the future prosperity of Russia, so it needs strong leadership if it is to maintain market share and return to profit, while keeping the investment programme on track.

David Briginshaw

David Briginshaw joined IRJ in 1982 as associate editor, and was appointed editor-in-chief in 2001. He has travelled the world extensively interviewing many of the CEOs and senior managers of the world's railways and transit systems which has given him an in-depth knowledge of the global railway industry.

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