. Last Updated: 07/27/2016

Railways Reform Is Right on Track

VedomostiBooming oil shipments to China are fueling RZD's expansion of cargo deliveries.
Russian Railways Co., or RZD, is looking to expand its dominant role in the cargo business by increasing oil deliveries to China and boosting container shipments between Europe and Asia.

With $50 billion in assets, the newly formed rail giant already moves 80 percent of the country's cargo shipments, excluding pipelines. But company president Gennady Fadeyev has plans to increase freight transportation as a way of supplementing $1 billion in loans to overhaul the network's aging infrastructure.

"Reinforcing our position on the cargo shipment market is of the utmost importance for the company and its business," Fadeyev said earlier this month.

Under Fadeyev's strategic development program, RZD plans to increase its cargo turnover by 22.5 percent, to 2 trillion tons per kilometer, by 2007, surpassing volumes reached in the early 1990s.

Eastbound oil shipments will make up a significant part of RZD cargo growth. By 2006 the company plans to increase oil deliveries to China by nearly 50 percent from current volumes.

Fadeyev's program, which is up for approval by the RZD board in June, aims for a 13 percent increase in the average speed of deliveries by 2010, up from the current 330 kilometers per day to 372 kilometers per day. Ninety-five percent of shipments would then be dispatched on time, on par with international standards, as opposed to 90 percent today.

RZD also plans to boost rail container shipments, which presently account for 2 percent of global turnover, to 10 percent.

As a first step in that direction, RZD has agreed on a 50-50 joint venture with Far Eastern Sea Shipping Co. in the second half of this year. The new venture will operate a fleet of 40-foot containers to ship cargo between Europe and Asia.

The booming Chinese market is a prime target for the company.

RZD has become the main mover of oil for Yukos after the oil major sealed a deal with China for a gradual increase of exports to 30 million tons per year but was stymied by the government in its efforts to build a private pipeline.

"If China were to invest into the pipeline, it would be one thing. But if it's Russian money it's another," RZD vice president Salman Babayev said in an interview. "With our infrastructure we are ready to transport 15 million or 20 million, even 30 million tons."

This year RZD is planning to transport 6.8 million tons of oil to China and aims to increase that amount to 10 million tons in 2006.

Babayev said that rail tariffs -- which are higher than pipeline tariffs -- will be adjusted to accommodate Yukos.

RZD aims to step up oil transports to China by filling capacity on the Baikal-Amur Railroad, or BAM.

"We think in the next five to 10 years oil should go through this route. It will be competitive," Fadeyev said.

BAM has the capacity of 16 million tons per year but is running at 6 million at present.

Fadeyev and Yukos CEO Simon Kukes will sign an agreement on oil shipments this week, Babayev said.

Yukos spokesman Alexander Shadrin said that Yukos is still negotiating a special tariff with RZD.

"If oil prices drop to $18 to $20 per barrel it will no longer be profitable to transport oil by rail," Shadrin said.

Babayev said RZD upgrade plans will not depend on revenues from oil shipments, but will be financed by international loans.

By June the company plans to receive an international rating and by fall it aims to issue five-year ruble bonds worth up to 12 billion rubles ($420 million). In total, the company plans to borrow up to $1 billion this year, Fadeyev said.

Nearly 60 percent of railway facilities are in need of an overhaul. RZD requires investments of 70 billion rubles per year to modernize its rolling stock, a process scheduled to begin next year.

By 2010 RZD will need 7,500 electric and 8,000 diesel locomotives, as well as 30,000 passenger cars to be operational. It will have to buy some 17,000 new freight cars every year.

Passenger operations have to become more effective with no more cross-subsidizing from cargo operations, according to Fadeyev's plans.

Passenger turnover will grow 2 percent per year under the strategy's targets, which Fadeyev said is achievable given that the first two months of 2004 showed an 8.3 percent increase.

Last year, RZD served 1.3 billion passengers with a financial loss of 60 billion rubles. Overall it reported a profit of 2.8 billion rubles on revenues of 144.6 billion rubles.

This year the company expects a profit of 8 billion rubles, which it hopes will rise to 35 billion rubles in 2006.