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. Last Updated: 07/27/2016

Railway System on Slow Track to Restructuring

If your work in Russia involves shipping raw materials — oil, gas, metals, coal — there is no way to escape dealing with the Railways Ministry.

"There is no alternative to railway transportation in Russia," said Alexei Smirnov, senior vice president of MTC UniTrans Ltd., one of Russia's biggest forwarding companies with international services.

According to Smirnov, shipping by truck saves money only where distances are less than 1,000 kilometers, and is impossible on some routes because of Russia's limited highway network. Sending freight by sea is more expensive and takes longer than rail, he said, while shipping by air is not an option for very heavy goods.

But despite the Railways Ministry's tight hold on the freight industry, it is plagued by financial woes similar to those of other state-run industries: decrepit technical equipment, a bloated staff, a burdensome social infrastructure left over from Soviet times and money-losing sectors that must be subsidized from none-too-abundant profits.

By the start of next month, the ministry hopes to get government approval for a restructuring plan that would allow private carriers to take over some railway activities and would help the ministry supplement its income through fee collection, while stimulating private companies to invest in improvements.

According to its own data, the Railways Ministry is now a 300 billion ruble ($10 billion) a year operation. It carries 80 percent of all the nation's cargo — both domestic and international — and accounts for 90 percent of turnover on the domestic freight market. Net profit in 2000 increased 18 percent on the previous year to 42 billion rubles.

The ministry controls a sprawling 159,000 kilometers of track uniting 17 railroad branches in 85 of Russia's 89 regions, and employs 1.4 million people.

Last year, the railways transported over 1 billion tons in freight — an 11.3 percent increase on 1999 — and more than 1.4 billion passengers, 6.3 percent more than the previous year, according to the ministry.

At the same time, over half of all rail cars are damaged, and about 6 percent are out of commission altogether.

Ministry experts estimate that a full revamp of the industry — including new rail cars and the creation of a modern telecommunications infrastructure — would require investment to the tune of 760 billion rubles.

The ministry said it invests about 100 billion rubles each year. But this does not meet annual investment needs of about 120 billion rubles, Railways Minister Nikolai Aksyonenko told Interfax last month.

A week ago, after more than a year of wrangling, the Railways Ministry and the Economic Development and Trade Ministry approved a restructuring plan proposed by consulting firms McKinsey&Company and Sovremenniye Biznes Tekhnologii, or Advanced Business Technologies. The government is to consider the plan April 1.

According to the plan, management of the ministry's finances would be transferred to a state-owned company called Rossiiskaya Zheleznodorozhnaya Kompaniya, or Russian Railways Company, which would compete with private operators.

The first step of the plan would be to divide the ministry into five financially independent departments under the new company: one responsible for cargo, infrastructure and trains; another for local passenger trains; a third for long-distance passenger trains; a fourth for repair units; and a fifth in charge of social institutions like the railways' myriad hospitals and schools.

Because the profitability of these activities varies immensely, the plan stipulates the creation of a special fund next year, which would subsidize the money-losing passenger trains sector with matching funds from the federal budget and revenues from cargo.

Such a restructuring and ensuring "the total financial transparency of this [new] company will make it possible to attract additional investments into the development of the railways, including foreign capital," Interfax quoted Aksyonenko as saying.

Although the plan has yet to be approved, the ministry made the first step in the restructuring Thursday by giving 15 companies — Russia's largest railway carriers — the status of operator, giving them greater control over train types and schedules, rather than just acting as middlemen between commercial firms and the Railways Ministry.

The ministry plans to give the companies the right to own and operate 50 percent of all trains, First Deputy Railways Minister Alexander Tselko told Prime-Tass. They will also be allowed to build their own railway lines.

Tselko said he hoped the government would approve the operators' status by mid-year, adding that the companies have already pledged to invest $325 million in rolling stock. He estimated the new operators would handle some 50 million tons of cargo this year and the figure would grow with time.

Sergei Tugarinov, deputy general director of the ministry's center of transport services, said the Justice Ministry is helping develop the appropriate legislation. He called the creation of the operator companies one of the most important steps of the reform, which would stimulate competition.

"They [operators] will free us from expenditures on rolling stock, and it will be possible for them to carry larger loads with fewer trains for less money — and as a result have a good profit," said Tugarinov.

The companies that received operator status — including Smirnov's UniTrans, Russky Mir, Severstaltrans, Transgarant, Link-Oil-SPb, Balt-Trans-Service and others — have high hopes for the reform plan.

"The importance of forwarding companies will increase," Smirnov said. "The operator companies will develop the industry."

Vladislav Vershinin, a spokesman for Russian Aluminum, the nation's largest aluminum company and a UniTrans client, also sounded optimistic about middleman companies getting expanded rights.

Working directly with the ministry when you are "one of 100,000 companies" — and a railways employee with a monthly salary of $100 is responsible for $1 million worth of cargo — is neither safe nor effective, he said last week.

"But using an operator, we feel safe about our cargo and the speed of transportation," Vershinin said.