WITH Russian freight traffic gradually returning to pre-recession levels and balance sheets shifting from red to black, Russian Railways (RZD) appears to have emerged from the darkest days of the global economic crisis. President and CEO Mr Vladimir Yakunin, however, remains cautious about the future.
Yakunin told IRJ that while things have certainly improved in the last year, he does not think railways and other industries across the world are out of the woods just yet.

"We foresee more problems in 2012 and possibly in 2013 because the impact of the previous crisis will still be felt in those years," he explains. "It is the same for the economies of other industries. Still, I hope the fact that we got through the crisis in 2008 and 2009 will hold us in good stead. It taught us a lot and I think we will find in our anti-crisis programme how to cope with this challenge in the right way."

Yakunin's optimism is reflected in his company's performance in 2010. RZD currently has a 42% market share of all freight transport in Russia which, when pipelines are excluded, equates to an 85% overall share. End-of-year results are currently being finalised, but Yakunin says that early figures suggest that turnover reached €25 billion last year, with profits exceeding €1.5 billion.

Last year's figures are boosted by an 8.9% increase in freight volumes which was an improvement on 2009 results when volumes were down 15% on the record 2.4 trillion tonne-km achieved in 2008.

Yakunin says that budget cuts were inevitable following such significant declines - capital investment was slashed by nearly a half from Roubles 433 billion ($US 14.85 billion) to Roubles 257 billion in 2010. However, government subsidies have played a major role in the last couple of years, plugging the gaps and allowing RZD to push ahead with its major infrastructure projects.

Last December, RZD launched the new Allegro passenger service between St Petersburg and Helsinki while the Sapsan high-speed service between Moscow, St Petersburg and Nizhny Novgorod has performed well during its first year of operation. Work is progressing on new rail links in and around Sochi ahead of the 2014 Winter Olympic Games, with Desiro regional trains on order from Siemens to operate on these lines. The railway also plans to continue significant investments in infrastructure, locomotives, wagons and passenger rolling stock.

"We managed to persuade the government how the budget should be constructed and how to reward the positive influence of the railway on the Russian economic situation," Yakunin says, "and because of that they started to subsidise some of the infrastructure projects."

Inevitably with funds designated for investment largely being retained, RZD looked towards staff reductions to cut costs. RZD currently employs around 1.1 million people in Russia, making it the country's largest single employer, and Yakunin says that the level of savings required meant that he was being asked to fire 180,000 employees simply to make ends meet.

Instead he sought a way to reduce workload but to retain staff levels, meaning that around 500,000 of RZD's staff worked part-time for most of 2009. And despite initial misgivings from labour leaders, Yakunin says he managed to get them on board, preventing potential strikes and civil unrest.

"Throughout the entire year of 2009, 50% of employees were working part-time," Yakunin says. "That of course hurt them and hurt their pocket, still they accepted this. They supported me, and I promised next year that the first Rouble of profit I get, I would use part of that Rouble to restore their salaries and their losses."

The juggling act between retaining a strong investment programme and the staff levels to implement it reflects the future vision of RZD, and Yakunin, to maximise the railway's potential for the benefit of the Russian economy.

As a result, this year's investment programme has increased by 11% to Roubles 349 billion while Yakunin says the government has assured him that the current tariff levels will remain static.

With such extensive investment taking place across Russia, there is a growing attraction for foreign companies to become more and more active in the Russian market. However, due to Russia's desire to domestically manufacture its own goods due to customs regulations, and because it is not in the euro zone which drives up the cost of imports, this involvement is increasingly in the form of strategic partnerships between domestic manufacturers and their multi-national counterparts.

For example, Alstom and Transmashholding, which signed a cooperative agreement in 2008, recently announced the rollout of the prototype EP20 electric locomotive that is designed to be deployed on the Russian network and used for passenger and freight services. Sinara and Siemens also teamed up to secure a €1 billion deal last June to supply 221 2ES10 electric freight locomotives to RZD this year, with the prototype unveiled in December.

Further contracts covering the acquisition of 1250 locomotives over the next two years, for which the two joint ventures are likely to compete, have yet to be awarded, while Yakunin says other companies including Bombardier and Finmeccanica, Italy, are also working to establish similar agreements.

"In Russia we are in a position to drive the development of the industry in the country because we are seeking the best technologies and the best financial means to exploit such technologies," Yakunin says. "Nineteen industries are working in Russia to keep up our appetite for the best technologies in the world. That is why we are seeking partners who understand the intentions of Russian Railways and who would consider our demands to localise production.

"Despite what is said about the investment climate, you will not find a single successful western entrepreneur who wants to leave Russia."

If Russia is looking towards European technology to help improve the efficiency and productivity of its domestic network, it also has ambitions to boost international freight transit traffic in order to play "a greater role in the world economy."

Yakunin admits to having a Eurocentric approach to business from Russia and called for a demolition of the wall "between the railway and Europe, as happened with the wall in Berlin."

A major part of achieving this will be reducing transit time on the Trans-Siberian freight route to seven days, which includes adding 400km of new lines to bypass major hubs and 700km of trunk lines, and also extending 1520mm-gauge infrastructure west through Slovakia to Vienna. A feasibility study for this project was completed last year by Roland Berger on behalf of Planungsgesellschaft, a joint venture set up by RZD and the national railways of Austria, Slovakia and Ukraine, which concluded that the project is technically and legally feasible.

Such a route would help RZD to establish an efficient overland freight corridor from the Far East to Europe and would enable rail to compete more effectively with cheaper, but slower sea freight. But while the railway is looking to play a greater role internationally, including by setting up international research centres in conjunction with German Rail (DB), Yakunin does not see RZD adopting a European-type structure, specifically through a move towards privatisation.

"[We need] to be ourselves, not to try to copy anybody else," he says. "This means we can't follow the pattern of privatisation of the railways. And we have got a good reference. I have many, many friends in Britain and elsewhere in Europe, and for us it is essential to learn from their mistakes. This is now the culture of the railway company in Russia.

" While RZD is currently selling off shares in around 30 of its subsidiary companies, including First Freight Company, Second Freight Company, which was established last year, TransContainer and TransTelekom, Yakunin says that discussions are "ongoing" between the government and RZD about an IPO of the entire company.

Yakunin says that he favours selling segments of the company at different times, but admits in the current financial climate it would be premature to sell a package of shares now.

"A minor shareholder can bring a lot of technologies if they come in," Yakunin says, "but it would be a lot more efficient not to sell one package, but to sell 10% or 20% at different times to earn more money and to start the new technology of corporate management."

Certainly as the financial climate improves and the IPO looks more likely to proceed, there will inevitably be significant investor interest in RZD due to its enormous potential. This is already reflected in the foreign companies looking to establish their presence in Russia, which is something that Yakunin feels demonstrates the growing importance of railways in the 21st century. And inevitably as the largest country in the world with a substantial population, and an abundance of natural resources, it is a future that RZD is likely to play an important role in.

"For many years railways in Russia and all over the world were considered an obsolete means of transport," Yakunin says. "But now people in Russia and the West understand that this is not true, not only because it is a green type of transport, but because we are the only mode of transport that can carry that amount of freight without damaging society and without damaging the environment."