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. Last Updated: 07/27/2016

Frank Plans to Use Nation as a 'Natural Bridge'

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"Russia is the natural bridge between the East and the West."

This oft-repeated phrase is particularly popular at the Transport Ministry. Sergei Frank, head of the ministry, says transport services could become one of Russia’s main exports. He proposes that within 10 years annual receipts from freighting across the country could reach $10 billion.

The transport minister discussed the ministry’s global and local plans as well as the difficulties hindering their implementation.

Q:
Recently, there has been much talk of a merger between the Transport Ministry and the Railways Ministry. Under whose auspices and when would this be done?
A:
This question is not correctly phrased. It would be more appropriate to say that in Russia — as in the majority of countries — a unified Transport Ministry may and must be formed in the future. Until rail reforms actually start to be implemented, this question is premature.

Q:
Last year, the Transport Ministry conducted a major inventory of state property. Is this groundwork for reform? Or preparation for de-privatization?
A:
The inventory was aimed at determining the quantity and quality of port assets owned by the state and either leased or transferred to economic use. The integrity of property is important for any normal owner. If the right of private ownership is "sacred" then why should state property be any less sacred?

Yes, of course, cases have been brought to light when a company’s charter capital has included property that is not subject to privatization under the law. One of the ideas in conducting the inventory was for this kind of control. This was the case in Tuapes, Novorossiisk, Nakhodka and St. Petersburg. The corresponding representations have been sent by us to the Property Ministry and a number of cases are being heard in the arbitration courts.

Q:
But so far, it doesn’t seem that the transport sector is attractive to investors. For example, last year, foreign investment in the Russian transport system dropped quite sharply.
A:
The foreign investment dynamic for 1993 to 1999 is generally positive. The fact that the level of foreign investment fell in 1999 [from $535 million to $331.2 million] can be attributed to the caution exercised by investors after the August crisis of 1998. In 2000, we hope to attract $350 million in foreign investment.

If we imagine a strategic rating of investors in the transport sector, then foreign investors would be far from the top. In our opinion, investments in shipping and land transport should be made first and foremost by the transport operators themselves — naturally with the support of interested banks. As far as the development of the infrastructure is concerned — for example the freight terminals — then the cargo owners play an important role in this respect, especially those that are interested in creating stable export channels for their goods. The local banks provide another important source of investment. So far, they are insufficiently acquainted with the transport sphere as an investment object, but their interest is clearly growing.

Q:
So there’s no point waiting for financing from the budget?
A:
The budget must contribute to the process not by direct investment, but rather by subsidizing commercial bank rates. Such schemes are being developed and look very promising. Our calculations show that the budget would not lose anything from subsidizing investment projects that break even after five to six years, because the state subsidies would be covered by the additional tax proceeds.

Q:
How big might these subsidies be?
A:
We are talking about 3 to 5 percentage points. This is very little compared to the borrower’s risk on the principal debt and interest. But this 3 percent to 5 percent is a catalyst to increase Russian transport companies’ chances. It would also stimulate domestic shipyards’ orders.Q:
But what are the chances of Western banking capital being directly invested in our transport projects? Especially after the unsuccessful EBRD [loans to the Sakhalin Shipping Co.] and Bank of Scotland projects [loans for Vostoktransflot]?
A:
Of course, there are many projects we are studying that are ideally suited to attracting institutions such as the World Bank, the EBRD and the European Investment Bank, which was specially created for financing the transport infrastructure, but which, so far, does not work in Russia.

As far as the examples you quoted are concerned. … There were many more successful projects. Imagine a situation where everything develops in harmony, with no problems whatsoever — in business this is impossible. When creditors put their money into something, they are always aware that this money may not return. But investors are not always levelheaded in their approach to certain Russian projects. They have taken on more risk and have asked for interest rates that are too high, and now, they want to blame the Russian investment climate for everything. The investment climate must be improved, of course, but the projects you mentioned were too rigid from the professional point of view from the moment they were initiated.

Q:
The Transport Ministry’s plan is to develop Eurasian transit through the territory of Russia. How much is this worth? How much can be won on this market?
A:
Two Eurasian transport corridors use our land transport facilities — the Trans-Siberian and Sever-Yug, as well as the pan-European corridors Nos. 2 and 9. The growth of international transit through the territory of Russia may become highly lucrative for this country. Transportation fees could be levied that do not depend on the fluctuating raw material market. The total has been put at $8 billion to $15 billion annually for our transport services. I believe that it is worth working toward rewards such as these.

It would be quite realistic to raise the number of containers transported on the Trans-Siberian railway to 200,000 per year after 12 or 18 months, with the prospect of increasing this figure to 400,000. This would account for 5 percent to 7 percent of Eurasian trade [at present it is no more than 1 percent].

Q:
And in terms of money?
A:
If we take the country as a whole, then in the short term, we could receive about $2 billion in additional income from transit through Russia in the short-term and $8 billion to $10 billion over the next 10 years. This would bring the export of transport services to fourth or fifth place in the overall structure of Russian exports.

Q:
That sounds over optimistic. There are alternative transport routes — TRACECA [the Transport Corridor Europe-Caucasus-Asia program to create a transport corridor on a west-east axis] for example.
A:
This project has a number of serious drawbacks. The main ones are that when using this route, the containers have to go through 10 customs checks and be reloaded four times from one form of transport to another. Everyone in the business says it is fundamentally flawed. When shipping through Russia there are none of these shortcomings.

Our problems lie elsewhere. Container shipment operators lack the stimulus to make serious investments or propose new approaches. The key to resolving this problem would be the emergence of through-shipment operators that would consolidate this service and sell it both in Europe and in Asia. The second problem is the exceptionally high rail tariffs in the European segment of the transfers outside Russia. Therefore, we will expand the delivery of cargo shipments into Europe by sea through the Russian ports of the northwestern region.