UNLIKE the United States' railway network which is geared up for railfreight, and Europe which is predominately a passenger railway, Russia's railway is designed to deliver high volumes of both freight and passenger traffic simultaneously.
At 86,000km Russia has the world's third-largest network behind the United States and China. However, according to comparative research complied by Russian Railways (RZD), it is the world's most intensely used system. Indeed the average distance of freight transportation in Russia exceeds the average performance in Europe by 5.6 times, while the network's traffic density is 2.2 times higher than in the United States and 7.6 times higher than Austria, Europe's most heavily-used freight network. Total freight loading in Russia is only 15% lower than the combined total across the entire European Union, while overall freight turnover is five times higher.
Along with high intensity of traffic, a major feature of Russia's railway network is the prevalence of freight transport over passenger; freight accounts for 75% of all rail operations in Russia and rail has a 95% modal share of the land freight market.
A primary goal of Russia's 2001 railway reforms was to separate state regulation from the organisation of economic activities. The reforms were also intended to improve the transparency of railway transport by supplementing government subsidies for passenger transport through revenues from freight shipments. In addition, separating non-core activities and reducing government support was intended to attract private investment to the sector which would encourage competition.
One of the key changes was the creation of a new market segment following the privatisation of the network's rolling stock. Russian Railways (RZD) divided the bulk of its wagon fleet between two new operating companies, Freight One (which was later privatised) and Freight Two (renamed Federal Freight in 2012), and private players such as GlobalTrans also entering the market. Locomotives remained under RZD's control and ownership apart from a few circumstances where private operators would own and operate locomotives, which is predominately for export of oil to seaports. Freight customers were subsequently required to reach agreements with this new breed of
operator to transport their freight before they could apply to RZD for transport services and access to the network.
Uniquely Russian
This uniquely Russian set-up has had its advantages, namely in the €23bn of private investments which has led to the procurement of more than 680,000 new freight wagons since the reforms were introduced. The rate for supplying a freight wagon peaked at Roubles 1500 ($US 22.82) per day for a single open wagon in the first half of 2012.
Railfreight traffic increased consistently in Russia from 2003 to 2012, apart from during the world economic crisis and recession of 2009. In 2014 freight traffic accounted for 2295.5 billion tonne-km, 42.3% higher than in 2003.
However, the crisis in Ukraine and subsequent international sanctions together with Russia's broader economic difficulties has led to a steady decline in traffic over the last three years. Traffic fell by 0.7% year-on-year to 1.12 trillion tonne-km in the first half of 2015 while volumes were also down 1.8% year-on-year to 588.9 million tonnes. In 2014 the network carried 1.2 billion tonnes of railfreight, the second year in a row that volumes shrank, and a fall of 3.5% compared with 2012 levels.
The impact on volumes following the recent international crises is partly explained by a rapid increase in export freight volumes from 20% to 31% and a decrease in domestic shipments from 79% to 59% of all traffic between 2000 and 2014.
The average transport distance increased by 40.6% to 1669.2 km during the same period, inevitably impacting freight traffic growth. Domestic and export traffic also increased by 22.4% and 42.5% respectively, however, the average distance of import freight and transit traffic has fallen significantly.
It is also worth noting that the profile of commodities transported by rail in Russia has changed fundamentally during this period. For example, the share of low-margin raw materials has grown significantly to reach 63.6% of all traffic in 2014, while the proportion of more profitable freight - iron, petrochemicals, machines and machinery equipment - has slowly declined to just 13% of all traffic. As a result the income rate of RZD, when adjusted for inflation, fell by 25% from 2009 to 2014.
The decline of more profitable freight is caused by a fall in the quality of service due to long delivery times, and difficulties with securing necessary clearance to transport freight by rail. And while new services have been introduced and different options for delivery now exist to combat this, the trend persists.
Reforms of the tariff system and a reduction in the price list 10-01 provided operators with the incentive to grow their businesses. This made private investments in the wagon fleet extremely attractive and allowed operators to purchase a substantial number of wagons in a short period of time, typically less than five years. As a consequence the demand for new freight wagons increased.
By 2014 the total freight wagon fleet exceeded 1.2 million units. The annual volume of new wagons supplied peaked at 89,100 units in 2011. However, since then numbers have dropped off, with 55,100 units delivered in 2014.
Market saturation and declining traffic has resulted in a surplus of wagons, with estimates of the number ranging from 220,000 to 230,000 units according to RZD, and 105,000 to 110,000 according to Brunswick Rail.
In response to the fall in demand, suppliers have cut prices in an effort to stoke the market. At present the average price of a freight wagon is approximately €27,000 which compares with over €50,000 in 2011-2012.
Between 2003 and 2014 freight traffic grew at a higher rate than the freight wagon fleet. However, from 2012 to 2014 following a slump in freight traffic demand, supply of wagons has outstripped traffic leading to the current surplus.
While the current condition of the Russian railfreight market suits freight customers - the cost of transport for some has fallen by five times since 2012 to as low as Roubles 400 per wagon per day - many operators and wagon suppliers now find themselves in a critical situation.
For some operators, earnings are no longer covering operating costs, repair of rolling stock and lease payments. Indeed some operators have now left the market in the face of strong competition with the share of the three biggest companies - Freight One, Federal Freight, and ZAO NefteTransService - increasing from 43.7% of the open wagon supply market in 2011 to more than 50% in 2013. It's also worth noting many larger corporations have established vertically-integrated holdings comprising sea ports, freight wagon operations and commodity production. For example, UralVagonZavod Corporation, traditionally a freight wagon manufacturer, has launched UVZ-Logistics, which is active in freight operations.
Wagon suppliers are similarly suffering and are currently reducing the volume of production of wagons. In the first half of 2015 the average cut was 55%, with some plants reducing output by 84%, which has led to falls in revenue, downsizing, losses and some now facing possible liquidation of production.
Suppliers have long advocated that legislation should be introduced requiring the replacement of wagons exceeding the recommended service life which would provide production guarantees for plants. However, some operators argue that this would lead to an increase in rates for new wagons, hurting their profits and for many whose fleets comprise a significant proportion of wagons deemed obsolete, this could even lead to bankruptcy.
The solution to this dilemma is yet to be formally agreed. However, one suggestion is the step-by-step replacement of 40-year-old freight wagons with new vehicles. Proponents of this approach argue that it will incite demand for wagons at the minimum level but without placing significant financial pressure on operators.
The Russian railfreight market is clearly at a crossroads. With new wagon models, and the availability of new services, the quality of service now on offer is improving. Yet red tape is forcing some customers to continue transferring more profitable freight to road transport. RZD president Dr Vladimir Yakunin admitted in 2013 that privatising the wagon fleet and splitting it between different companies was a mistake and that he wants RZD to once again operate freight services.
Yakunin observed that with private operators concentrating on more lucrative traffic, some customers have been left without wagons. He also accused them of occupying freight terminals for too long and causing congestion on some lines.
With the current difficulties emphasised by the huge wagon fleet surplus, Russia's economic problems and the corresponding negative trends in the railfreight market have created an environment in which a redefinition of operational rules for the industry is now essential for its long-term prospects.
But with the government yet to consider, let alone agree, to another restructuring of the railfreight market, it is unclear whether these reforms, which could provide the stability required for a return to positive growth, will be instituted.
