• To become leader of the world economy
• To reduce the state’s impact over the economy through privatization
• To consolidate railway transport and to develop industry by private investments
Russia will rank 10th worldwide according to the dimension of its economy compared to 12th two years ago and will become the 4th purchasing power, exceeding Japan, after ranking 6th in 2010, shows the Global Strategic Study 2030 elaborated by the Institute of Global Economy and International Affairs. In the next two decades, Russia will have to efficiently adapt the domestic and external strategies to the global development tendencies to avoid a marginal position (in the current international economic context) and to face future risks and the exploitation of new globalization opportunities. Under these circumstances, the development of new policies and the implementation of transport projects are essential factors which result in the integration of the global transport systems and growth of national economy.
In the first half of 2012, Russia’s economy held a good position due to the strong growth of domestic demand which was the main engine of economic growth, while the main economic indicators reached a record level. The Central Bank added on reserves, which helped consolidate the market trust. While many European countries struggled with very high public debts and financial deficits, Russia’s public debt stood at less than 10% of the GDP and the financial balance was positive. “The weak outlook means that strong, three-pronged policy action is essential to revigorate the economy. First, economic policies have to ensure stability. Second, Russia has to build buffers against the external volatility. Finally, the government has to unleash the growth potential of the economy. This means a better business climate resulting in more private investments, and higher competitiveness leading to the diversification of the economy away from oil and gas, and raising productivity. The government also needs to improve poor transport connectivity in line with its longer-term economic policy goals. Making headway on this agenda will enable Russia to lift growth above 4% and more,” said Michal Rutkowski, World Bank Country Director for the Russian Federation.
In this context, structural reforms are necessary for Russia’s economic consolidation and eliminating growth barriers will help sustain and sustainably vary the economy. The update of Russian Strategy 2020 elaborated by an independent group of consultants and presented to the government in March 2012 sets an ambitious reform programme for the next years.
Thus, Russia has a policy focused on reducing the state’s impact over the economy which can be achieved by implementing the privatisation programme (for example, the national budget for 2012-2014 includes a privatisation programme from 0.5% to 0.7% of the annual GDP) and the optimisation of governing to allow entrepreneurs to contribute to and to benefit from the economic growth. In this context, the Russian Government maintains its commitment for the privatisation programme which is considered essential for the country. “Ne-vertheless, privatisation is not a linear process, but a strictly economic instrument. We don’t need a state economy where most companies are state-owned although it does have the right to use these keys in the key industrial areas”, declared Russian PM Dmitry Medvedev in an interview for AFP.
The Minister of Economy estimates that the privatization of some of the companies by 2014 could bring revenues of up to EUR 26.5 Billion. As of 2014, the state would no longer be majority stakeholder in several domestic companies. According to the local press, 2013 would be a year of privatizations, since half of the sales proposed could be concluded this year. The companies whose stakes will be for sale are Rosnan – the Fund for Nanotechnologies (10%), VTB (one of the largest banks in Russia, 10-25%), Alrosa- diamond manufacturer (7-14%), Rosneft, the current world leader of oil manufacturers and reserves (6%) and Russian Railways. There is an essential condition for these privatisations: the value of the shares placed in London and Moscow should be at least equal to that considered in the acquisition of TNK-BP at the end of October (Rosneft signed an agreement with BP for the takeover of the 50% stake held by the British oil manufacturer in TNK-BP for around USD 26 Billion in money and shares. This is the largest acquisition of a company in Russia). Russian Deputy Prime Minister Igor Chuvalov presents this privatization as a sign that Kremlin “will progressively reduce control over Rosneft, but nothing proves that Moscow is ready to give up control over the company as the government will maintain more than half of the oil manufacturer’s stakes. The situation is quite the same with the other privatisations as well”, he said.
RZD’s privatisation is still uncertain
One of the most important companies, not only for the transport sector, but for the entire Russian economy, is RZD. Although, according to the secretary of the transport ministry Alexei Tsydenov, the sale of 5% of RZD was scheduled for October through initial public offering, in November, the company’s President Vladimir Yakunin announced the sale of 25%: “the sale of 25% of RZD’s shares could bring RUB 280 Billion (USD 8.89 Billion) to the company’s bud-get”. However, the company’s representative said that the company’s privatization could not be accomplished in 2013, as RZD would be priced at tens of billions of dollars in the next 5 to 6 years. “In 5-years’ time, the price of Russian Railways will reach USD 129 Billion, currently the value being 3.5 times smaller (USD 36 Billion)”, said Yakunin. Next year, the Government plans to sale 25% of RZD’s shares, but according to the company’s president, the sale of the stakes should be postponed up to 2015 due to the current economic situation.
As regards the sale of the 5%, the state secretary of the transport ministry Alexey Tsydenov initially said that 5% of the Russian Railways’ shares could be sold to Vnesheconombank, this being considered “a private transaction as the company was not ready for the initial public offering”.
RZD manages 85,200 km of lines and has a market share of 42.3% of the overall freight traffic in Russia. Moreover, the company holds over 1 million freight cars and 20,227 locomotives (for freight and passenger traffic). Also, in order to meet mobility demands, RZD announced that it planned to buy a record number of locomotives next year, to renew the existing fleet, Minister of Transport Maxim Sokolov announced. RUB 85 Billion (USD 2.7 Billion) will be invested in this project. The company will purchase locomotives for long and short distances. “These data are considered of maximum capacity for the annual production of Russia”, the minister said. For 2013, RZD investment programme approved RUB 411 Billion (EUR 10 Billion), the minimum profit to be recorded by the company being estimated at RUB 1.1 Billion (EUR 27.4 Million). To increase the investment volume, the company will receive subsidies and will loan RUB 176 Billion (EUR 4.4 Billion).
These figures clearly show the value of the company and its importance in the transport and economic system of Russia and explain the many divergences of opinion between the authorities regarding the sale of the company. Although the President of the Railways does not agree with the sale activities in 2013, due to the low price of the shares and the current economic context, the Minister of Economic Development Andrei Belousov said in December that RZD’s privatization was necessary for the company’s investment programme since it didn’t have the necessary funds and the state budget would not be able to cover the entire financing of projects. “The company lacks funds and the state budget will not be able to supply for the rest. So, where should we take money from? From the sale”, said the minister.
Under these circumstances, financial constraints don’t prevent the investment plans of the company. The official web site of RZD says that the investment plan was increased by RUB 64 Billion (EUR 1.6 Billion) and funds had been directed to the infrastructure development projects aimed to improve bottlenecks and to reduce the wear of traction vehicles. Also, the investment budget increase will permit the company to buy new vehicles.
At the same time, compliant with the decision of the Russian Government, RZD will receive RUB 32 Billion (EUR 795 Million) to purchase the shares of the logistics operator Gefco, this being the most important strategic transaction of RZD. Therefore, at the beginning of November, the French Group PSA Peugeot Citroën and RZD signed the contract on the sale of 75% of the logistics division capital and, according to the agreement, the transaction is estimated at EUR 800 Million, the full sale of the shares being scheduled after Gefco will pay PSA Peugeot Citroën EUR 100 Million. The takeover of Gefco allows the Russian company an easy access to the European and Asian markets as Gefco covers 15 countries in Central and Eastern Europe, Central Asia and Middle East. Globally, Gefco’s turnover last year was of EUR 3.8 Billion, 13% more than last year.
The acquisition of Gefco allows Russian Railways to optimise the attractiveness of transit freight on the Europe-Asia axis and at the same time to offer competitive transport services on this route. The next step that RZD will take to consolidate its position in the logistics market is the development of a network of sales for the transit transport between the two continents.
Railway freight transport continues to develop
As regards railway freight transport, Rosstat data show that 43.3% of the freight volume in 2011 was ensured by the railway system and, pipelines excluded, the railway represented over 85% of the total freight turnover. The railway system has the most advantages in terms of competitiveness and distance which make the difference between railways and the other transport modes. “First of all, railways can deliver the most efficient, rapid and cheap long-distance services and in Russia these characteristics are crucial. Secondly, railways are capable to carry all types of freight, railway transport being widely used for the delivery of coal, oil products, cereals and construction materials. The market share of Russia’s railway transport has increased from 38.2% (in 2001) to 43.3% (in 2011)”, shows the analysis “Globaltrans: fast-growing acquisitive rail operator”, elaborates by SOVLINK LLC.
Since in the period 2001-2011 the turnover of railway freight transport increased by 4% and transport volumes by 2.7%, “we consider these growth rates as moderate; also, Russia’s economy increased much faster (by 4.7% in this period), compared to railway freight transport. According to estimates, this market is mature and will continue to grow gradually over the next years”, the report shows.
In this context, according to the types of freight, coal has the biggest freight share which was 24.9% in 2011. For the transport of coal, Russia’s objectives refer to the increase of the volumes exported to Asian countries, believes Sergey Shumk, deputy director of the coal industry sector within the Russian Ministry of Energy.
According to the announcement of the ministry (in 2012), Russia plans to increase coal exports to China by 50% reaching 15 million tonnes in 2013. To that end, Russia could propose the construction of a railway connection to China in order to increase export volumes. Russian authorities announced that funds estimated at RUB 252 Billion (EUR 6.2 Billion) will be allocated by 2030 for the implementation of the investment programme in the coal industry. Currently, at national level, the region of Kuznetsk Basin is the largest coal generator with a capacity of 192 million tonnes (in 2011) representing 57% of Russia’s total production of 336 million tonnes.
For the development of coal transport, Mechel Group has initiated the project for the development of Elga coal deposit which will help increase exports. The deposit has a significant importance for the development of the entire region of Far East and railway traffic. Another challenge was the construction of a railway section providing a link to Baikal-Amur line.
The increasing freight transport in Russia is closely related with exports to CIS countries where, “the rate of freight traffic growth is maintained at an annual growth level of 3% and growth is also expected in exports in the future. Also, to meet transport demands, infrastructure development is essential and helps freight transport develop.
The electrification of railways in Ukraine and Belarus, the construction of new lines in Central Asia and the optimisation of the Trans-Siberian and Baikal-Amur lines, as well as that of other lines providing access to the ports in north-west and the regions in the Far East help increase freight volumes and the development of the railway system. This has a positive influence on freight rolling stock production demands and increases the efficiency of locomotives and the capacity of wagons”, declared AndreyPekanov, Marketing Director of Transmashholding.
The market demands railway industry development
As Russia’s budget capacity is limited, partially due to the global financial crisis and also because there are no alternative financial resources and no legal mechanisms to accelerate the development of the transport infrastructure, by 2020, the authorities plan to attract RUB 200-300 Billion (EUR 5-7 Billion) for each transport segment using private investments. These figures can be realistic as private companies have invested over RUB 800 Billion (more than EUR 20 Billion) at the beginning of the Russian railway system reform and “private companies are interested in improving the efficiency of freight transport as they notice that this process is focused on the regulation of mechanisms for the interaction of all market players. This is one of the priorities to be implemented over the next years”, declared in December Sergey Maltsev, President of the Council of Rolling Stock Operators.
The increase of the freight transport market rate in Russia will inevitably involve the railway industry as well which has to deve-lop its rolling stock production to meet the challenges.
In this context, an important point is Russia’s railway reform initiated in 2001 to attract foreign investors for industry development projects. Private operators have initiated rolling stock acquisition projects. In 2011, RZD sold First Cargo Company, the owner of more than 190,000 wagons (18.5% of Russia’s total fleet) and the first phase of the wagon market liberalization was thus completed. “Consequently, the share of the private wagon fleet increased from 22% (in 2003) to 73% (in 2011) which increased the interest of private investors in the railway transport market. In 2011, over 70% of the total number of wagons in Russia was owned by private companies due to the railway market liberalization reform. According to the initial plan, we expect the liberalization of the fleet of locomotives to be initiated in the next 1 to 3 years”, shows Sovlink analysis.
These results increase the demand of new vehicles and encourage the conclusion of strategic partnerships between manufacturers to deliver performing rolling stock not only in the domestic but also in the international market. For example, RZD plans to buy a record number of locomotives in 2013 to renew its rolling stock fleet. “RZD will invest RUB 85 Billion (USD 2.7 Billion) in this project and will purchase long and short distance locomotives. These data represent the maximum capacity for Russia’s annual production”, declared the Russian Minister of Transport. As the railway transport has known a strong development, the vehicle manufacturers elaborate strategies to meet the demand. For example, “Transmashholding policy to meet demand for 1520mm gauge rolling stock products is based on three development lines: 1) continuous deployment of innovations, never-ending development of new products 2) improvement of in-house capacities and sophistication of production engineering, including: deployment of state-of-the art engineering solutions, quality management, etc. 3) diversification of sales markets, including establishment of new joint ventures on regional markets”, explains Pekanov (Transmashholding). The company implements several JV projects to manufacture new vehicles: for example, with Alstom, Transmashholding builds EP20 locomotives at Novocherkassk plant in Russia to deliver them to RZD. Under the contract, the two manufacturers will deliver 200 such locomotives.
“Transmashholding’s collaboration with Alstom has a beneficial influence on 1520 mm gauge railway industry. Furthermore, Alstom renders assistance in optimization of TMH current manufacturing sites. Certain market requirements, demand rate, customers’ requirements to machinery and suppliers govern our cooperation on regional markets”, pointed out AndreyPekanov.
For the same purpose of railway industry development in Russia, RZD, Sinara and Siemens have signed a memorandum to manufacture and deliver locomotives. Under the contract, RZD has confirmed its intention to purchase 221 2ES10 electric locomotives from Ural Locomotives based on a delivery agreement signed by RZD and RZD Trading House. Also, 675 electric freight transport locomotives manufactured by Ural Locomotives and equipped with asynchronous engines will be purchased. They will be delivered in the period 2016-2020. Funds necessary for annual deliveries will be set through delivery contracts to be signed by 2014 in conformity with RZD’s investment budget parameters.
Market challenges boost industry and stimulate the development of new pro-ducts that meet standards. “This inevitably requires upgrading of production engineering. Russian development tendency of the recent years contributes to the production of more powerful mainline locomotives with asynchronous drives, more cost-efficient double diesel and hybrid shunting locomotives, output of freight wagons with increased axle loads”, added the Marketing Director of Transmashholding.
Partnerships between the Russian railway industry and the European railway industry have generated the development of technologies and of the products launched in the market and have significantly stimulated the optimisation of freight transport performance, cost reduction and increa-sing rolling stock efficiencies, characteristics which form new transport requirements and the customers’ shift to railways resulting in the increasing railway transport market share.
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