Russian rail sector moves towards recession this year

Image: Russian Railways (RZD)Russian Railways

The Russian rail and wagon-building sector are getting a hard hit from ongoing military conflict in Ukraine and the ever-tightening sanctions from West, and the situation is gradually deteriorating. This is according to recent statements made by some leading local shippers and analysts in the field of rail business in Russia.

The seven sanction packages of the EU and the US against Russia have already resulted in the suspension of supplies of various equipment and technologies, many of which are crucial for the wagon-building sector of the country. This, in turn, leads to the massive demurrage of rail cars, including the so-called innovative rolling stock.

Stop of supply

According to recent statements made by Sergey Popov director of department of repair and operation of rolling stock of the Russian National Transport Company (NTC), one of Russia’s rail transport holdings, in August, 7,000-7,500 innovative gondola cars were idle in Russia, including more than 6,000 of its own fleet. According to analysts, this figure could rise up to 9,000 units as soon as September, compared to only 1,400 cars in June.

Analysts said the main reason for this is the lack of supplies of the needed components and parts, particular bearings for the needs of Russian rail car builders. After Russian factories (which were previously owned by foreign companies) completely stopped the supplies of bearings to domestic customers in May, these products were not produced in Russia, although the annual demand for them from the local car-building sector is estimated at 195,000 units.

Among the possible options to solve the existing problem could be the increase of domestic production as well as the increase of bearings imports from China, which are currently a subject of big customs duties.

In addition to bearings, a similar situation is observed with other components for the Russian car-building sector. Prior to 24 February 2022, these were supplied to Russia from abroad, particularly Western countries.

Switching to China

At the same time, the current situation in the railways sector of Russia remains complex, as the ongoing attempts of the country to switch its rail cargo flows to Asian direction, particularly to China, are complicated by the lack of needed infrastructure for the implementation of these plans.

According to Zakhary Dzhioev, deputy head of the Federal Agency for Marine and River Transport (Rosmorrechflot), the reorientation and redirection of cargo from West to East was suggested before, however, after the imposition of unprecedented sanctions against Russia, it became one of the priority goals for the government.

Lack of infrastructure

As part of these plans, the Russian railway monopoly RZD, together with some leading domestic shippers, are taking measures for the implementation of these plans, which, however, could be complicated by the lack of needed infrastructure and capacities.

Currently the eastern part of Russia consists of only a single major corridor – the Trans-Siberian Railway (TSR). The shift of cargo from north-west and south directions towards the TSR, according to most analysts, will be impossible due to the current limited carrying capacity of the railway.

Increase of capacity

RZD, from its side, is currently involved in the implementation of a number of projects for the increase of capacity of the Russian Eastern direction. According to the Russian Ministry of Transport, there is a possibility that already this year the overall rail carrying capacity of Russia on the East route will be increased from the current 144 million up to 158 million tonnes.

RZD is also looking for other ways of increasing the network capacity in the East. For example, according to Alexey Shilo, head of transport service department of the company, this year the company plans to launch heavy trains at the Eastern training ground. For this, 132 locomotives will be delivered. Also, using the existing infrastructure, there are plans to transport more cargo with a smaller number of locomotives. As Shilo added, the number of heavy trains will be doubled this year.

Routes under development

Despite the sanctions, Russia is ready for the development of the International North-South Transport Corridor (INSTC), initially launched 20 years ago. It involves the increase of foreign trade transportation by rail transport to Asia, the countries of the Persian Gulf, the Middle East and India, using the ports of the Caspian Sea.

In addition to the INSTC, the government plans to continue implementation of the project for the building of the Northern Latitudinal Railway, a 707km long railway line in the Yamalo-Nenets Autonomous District. along the Obskaya – Salekhard – Nadym – Novy Urengoy – Korotchaevo route, which should link the western and eastern parts of the autonomous region.

Record loan

Funding of the project will be done from the recently approved record RUB 650 billion (US$10,75 billion) loan to RZD by the VTB bank. The loan should help to reduce the current pressure on the company and postpone a further increase of tariffs.

RZD already increased its freight tariffs by 11 per cent since June due to 620 billion rubles of lost profits this year. These funds are supposed to be allocated to the implementation of various investment projects of the company, as part of its overall investment programme of for the current year, which is estimated at more than 1.14 trillion rubles.

Decline of rail

Currently RZD has status as the main cargo carrier in Russia with a share of 85 per cent of the volume of all cargo transportations in the country.

Despite the ever growing volume of state support and measures taken by the government to prevent a massive crisis in the industry, according to estimates of the Ministry of Economic Development, the decline of rail cargo traffic in Russia this year may be 7.3 per cent on a year-on-year basis, 5 per cent higher than initially planned.

In order to stabilise the current situation in the sector, the government also considers the provision of more flexibility to RZD to respond to inflation and changes in traffic demand.

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Author: Eugene Gerden

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