OPPORTUNITIES IN THE RUSSIAN RAIL SECTOR 

by Marina Vigdorchik

Given its massive modernization needs, centrality to Russia’s economy, and considerable revenue flow (an esti-mated $1 billion in profits in 1999), the Russian rail sector represents one of the world’s largest markets for equipment supply (including rolling stock/locomotives, track maintenance, and other rail accessories), telecommunications, and rail management systems. Importantly, most experts agree that the United States offers Russia the best global model for freight railroading, based on technological factors related to distances, volumes, and climate conditions. Currently, the Russian Government is actively seek-ing ways to upgrade the railway network and rolling stock and to attract foreign investment.

Railway Operations

Railway transport is the leading means of transportation in Russia, carrying 84.8 percent of the country’s freight turnover and 37.5 percent of the country’s passenger turn-over. The Russian railway network includes 17 regional railways with a total length of approximately 86,200 kilometers. It is operated as an integrated system under the Ministry of Railways (MPS), established by presidential decree in 1992 as the legal successor to the All Soviet Union Railways. MPS’s responsibilities are limited to the ownership and operation of railways within the Russian Federation. It has its own budget and policies and is responsible for coordinating all railway operations, determining rail policy and the legal frame-work governing railway operations, and planning and allocating investments, including for construction of new railways. As a coordinating agency, MPS defines technical standards, sets tariffs, collects and apportions revenues among the regional railways, sets train schedules (up to one year in advance), and, in general, serves as the interface between the central government and the railway sys-tem. MPS is also the single decision-maker and buyer of rolling stock, track machinery, and other equipment for the regional railways. It does this on a contractual basis, with the regional railways financing their own purchases. For all practical purposes, surface transport in Russia, excluding pipelines, is by rail and will remain so for the foreseeable future, despite an expected increase in road trans-port.

The majority of coal, coke, ores, ferrous metals, chemical and mineral fertilizers, and grain and milling products in Russia are transported by railroads; in 1999, total freight transported reached 947.3 million tons. Thus, the efficiency of railway transport is important to the ultimate efficiency of many of the industrial sectors in Russia. Currently, the Ministry of Railways remains one of the largest revenue producers for the Russian federal budget. Although in 1996, it operated at a loss, in 1997 it broke even, and in 1999, rail transportation volumes increased. Results for 1999 show that freight turnover grew by 17.2 percent, and profit generated by the railways was about $1 billion. In order to satisfy demand for transportation services, however, the existing rolling stock needs to be modernized.

The rolling stock in use today is old, energy-consuming, and unreliable, thus needs not only significant modernization but also replacement. The average age of locomotives and wagons in operation is more than 20 years. More than one-third of electric locomotives, half of diesel locomotives, and 40,000 wagons need to be replaced.

Proposed Reforms

The Russian Government retains ownership of the main railroad network and the infrastructure related to passenger and freight services, including railway data communication networks, traffic control systems, and locomotive stock. A May 1998 Russian Government resolution presented a new concept for restructuring the railways, which provides for a new pricing policy with flexible and reduced tariffs, privatization of businesses, such as locomotive and car repair shops, and establishment of special rail passenger companies to improve service. The resolution also confirmed that the railways will continue to be under direct state control. The restructuring concept proposes a step-by-step separation of state operations into unitary state enterprises. Com-petition would be allowed in the area of freight and passenger transport. Once the proposed unitary state enterprises are set up under the auspices of MPS and engaged in freight de-livery and passenger transportation, they will have their own stock of cars and containers. They would also be responsible for maintenance and repair of railcars. Later, judging by the

results of their activity, these companies may be privatized. Privatization procedures will also apply to enterprises engaged in the repair of rolling stock and the production of spare parts and other products of railway transport.

Modernization Projects

The Russian rail sector represents one of the world’s largest and potentially lucrative markets for supplying equipment, namely rolling stock and components, track maintenance, telecommunications and information technologies, rail management systems, and safety equipment. Industry experts note that the United States can offer Russia the best model for freight railroading based on similar distances, volumes, and climate conditions within the countries. Priority projects include the upgrade of telecommunications systems, improvement of traffic control systems and wagon tracking systems, including satellite systems, and modernization of rolling stock. Currently, the Railways Ministry is actively working with a number of U.S. companies, especially in telecommunications (IBM, Microsoft, Lucent Technologies, Cisco Systems). Starting in 2002, the Ministry plans to begin a massive campaign for re-equipment and re-placement of aging locomotives and wagons. The consequences of the dissolution of the USSR and changes in Eastern Europe have severely affected machine building and manufacture of equipment for the rail transport sector. During Soviet times, Russia imported 60-70 percent of passenger cars (mostly from East Germany), and nearly 40 percent of freight cars (Romania, Poland) and electric locomotives (Czechoslovakia). Current domestic capabilities are not sufficient to meet demand in rolling stock and in components. Moreover, they cannot compete with Western manufacturers in terms of quality. Solutions to meeting the equipment needs may come from integrating foreign technologies into Russian manufacturing processes and management techniques in freight and passenger transportation. The need for new generation diesel loco-motives (with AC/AC transmission), freight wagons, and components to upgrade the existing rolling stock offers opportunities for U.S. firms to enter the market. However, the emphasis will be made on developing domestic production with participation of foreign partners. Moreover, an official delegation from the Russian Railways Ministry is expected to attend the International Rail 2000 trade show in Chicago,

Illinois, on September 17–20, 2000.

For a longer report on the Russian railway sector, including

key contacts and statistics on freight and passenger traffic,

visit BISNIS Online at www.bisnis.doc.gov/bisnis/isa/

000623rail.htm.

Marina Vigdorchik is a Commercial Specialist for the U.S.

Commercial Service at the U.S. Embassy in Moscow. She

can be reached via email: Marina.Vigdorchik@mail.doc.gov.