Install

Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

Railways Reform Off The Tracks

In a vast country with an undeveloped web of roads, waterways and airways, there is only one easy and relatively inexpensive way to ship goods -- by rail.

The problem, shippers complain, is that to get wares to the nooks and crannies of the country, there is only one agency to deal with -- the mammoth and notoriously bureaucratic Railways Ministry monopoly.

Often called a country within a country, the Railways Ministry runs a $10 billion a year operation that controls a sprawling 159,000 kilometers of track uniting 17 railroad branches in 85 of Russia's 89 regions. It carries 80 percent of all the nation's cargo -- both domestic and international -- and accounts for 90 percent of revenues on the domestic freight market.

Besides its core rail business, the ministry mines and refines raw materials like coal and metals. It owns hospitals, hotels and schools all over the country, as well as publishing houses, entertainment centers, stadiums and soccer and hockey teams.

And it is aggressively moving to become a national telephone operator.

The tsar of this country is Railways Minister Nikolai Aksyonenko. He estimates his assets at 1.4 trillion rubles ($470 billion) and employs 1.5 million.

But the Kremlin made it crystal clear this year that it is displeased with the way Aksyonenko has been ruling his kingdom. Corruption allegations began piling up around him, and tongues are wagging that he could lose his crown.

Aksyonenko's woes began earlier this year when the government started in earnest to put its house in order. The spotlight fell on the handful of untamed natural monopolies -- including the Railways Ministry -- that avoided privatization during the 1990s.

Aksyonenko, a career rail official appointed by then-President Boris Yeltsin in 1997, was asked last year to draw up a rail reform plan that would increase the transparency of its spending and operations while bolstering its profitability.

On May 19, the Cabinet approved his 10-year plan that envisioned the sacking of hundreds of thousands of workers and the eventual breakup of the railroads into separate, independent companies.

But then an Audit Chamber report about corruption in the ministry sparked an investigation. Aksyonenko was charged with abuse of office in October.

The ministry that Aksyonenko inherited was a dinosaur reeling from the collapse of the Soviet Union. Steep declines in industrial output had led to a drop in rail shipments at a time when the generous support of the state had dried up.

At the same time, the ministry could not make up its losses by increasing tariffs. That right rested with the Cabinet.

Tariffs were kept lower than inflation, causing producer prices to grow at twice the rate of tariffs from 1997.

Aksyonenko estimates that the ministry will lose 40 billion rubles ($1.4 billion) on passenger trains alone in 2001.

Meanwhile, a federal railways tariff commission was set up to deal with tariffs this year. To Aksyonenko's dismay, the commission decided to abolish a dual-tariff policy under which export rates were several times higher than domestic rates. On Aug. 1, domestic rates jumped 18 percent.

Aksyonenko says the increase resulted in losses of 8 billion rubles ($270 million) as companies opted for other means of transportation.

He is less than pleased with the commission's next plan to hike tariffs 39.9 percent across the board in the first quarter of 2002. The increase will cost the ministry more than 45 billion rubles ($1.5 billion) next year, Aksyonenko told Vedomosti on Thursday.

The commission says the increases were long needed and in line with the three-stage rail reform program approved in May.

The first stage, which was to take place in 2001-02, proposed the establishment of a 100 percent state-owned entity called the Russian Railways Co.

But that stage has stalled. The reason, Deputy Economic Development and Trade Minister Andrei Sharonov told a Cabinet meeting Thursday, is because the laws needed to provide a legislative base for the creation of the company have yet to be drawn up.

Still, the Cabinet decided to shelve the bills until January, even though they were supposed to have been approved by the end of this year.

The first stage also opens the door to the merger of the Railways Ministry and the Transport Ministry by 2003.

Under the second stage, the Russian Railways Co. is to be divided into several financially independent subsidiaries -- one responsible for cargo, infrastructure and trains; another for local passenger trains; a third for long-distance passenger trains; a fourth for repairs; and the fifth to oversee social institutions such the railways' hospitals and schools.

Also in this stage, which is to go from 2003 to 2005, the ministry hopes to attract $1 billion in loans, which would presumably be long-term credits for specific projects to develop the industry.

The last stage calls for a competitive rail market by 2010.

Aksyonenko says the reform process should ultimately lower tariffs.

The ministry hopes the reforms will allow it to implement a plan to significantly boost the shipment of transit containers along the Trans-Siberian Railroad on the east-to-west route. Moscow and Seoul have signed a cooperation agreement to link South Korea's largest port to a key rail hub in the Czech Republic via the Trans-Siberian, a project that could earn the ministry some $500 million per year in cargo transit fees.

Another pet project of Aksyonenko's that he wants to complete during the reforms is the construction of a $3 billion to $4 billion bridge from the mainland to the Far East island of Sakhalin. The Cabinet will consider a feasibility study early next year. The Railways Ministry reckons that the project will increase cargo transport via Russia by 500 percent and pay for itself in 15 to 30 years.

However, Aksyonenko may not see any of these changes on his watch.

Speculation has swirled about corruption at his ministry since his appointment in 1997. But his status as a member of Yeltsin's inner circle kept him from being called onto the carpet, said Yevgeny Volk, political analyst at the Heritage Foundation. "When Aksyonenko was a member of the Yeltsin team, he was untouchable," Volk said.

The Duma's anti-corruption commission said this fall that prosecutors should have investigated the Railways Ministry as far back as 1998, when corruption accounts were published by several major newspapers.

In 1999, the Audit Chamber uncovered what it called the massive misuse of funds in the ministry, including payments to nonexistent companies.

Still the Prosecutor General's Office did not act.

Then President Vladimir Putin came into office and matters changed. An investigation started when the Audit Chamber released a report this year that found the Railways Ministry had misappropriated more than 11 billion rubles ($370 million) in 1999 and 2000.

On Oct. 22, the Prosecutor General's Office charged Aksyonenko with abuse of office that resulted in the loss of 70 million rubles ($2.3 million) in government funds. The prosecutor's office also said that it was looking into the nonpayment of $370 million in taxes.

If found guilty, Aksyonenko faces three to 10 years imprisonment.

Prosecutor General Vladimir Ustinov said a criminal investigation would be completed by the end of this year. But this week his office said the investigation had been suspended for two weeks.

After being charged, Aksyonenko promptly went on vacation. He only returned to work full time Tuesday.

But, in what observers said was a sign of how far his star has fallen, Aksyonenko was recalled from his vacation for one day to attend a Cabinet meeting about his 161 billion rubles ($5.4 billion) investment program for next year.

Cabinet members then lambasted his plans. The Economic Development and Trade Ministry said the railroad was asking for twice what it needed and had not adequately explained how it wanted to spend the money.

Aksyonenko was told to present a reworked program in January.

Editor's note: This is the last of three stories about the country's natural monopolies.