Reforming Russia’s railway network: final phase

The restructuring of the railway, which has traditionally been a natural monopoly sector of the economy, is an important benchmark for the economic development of all European countries. Russia too is currently in the process of reforming its rail transport, in line with a government-approved programme that has now reached its final phase. Structural reforms are carried out under the close scrutiny of the country’s leadership, and reform issues are discussed at government meetings every year. Ongoing reforms on Russia’s railway network are also approved by experts from the European Conference of Ministers of Transport.

Russian Railways’ financial results provide the clearest indication of the success of this restructuring process, which began in 2001. In 2003, Russian Railways was created as a joint stock company on the basis of the Railway Ministry, with 100% of shares held by the government. This brought a separation of the roles of state management and economic activity on the railway.

The Ministry of Railways ran its operations at a loss, whereas Russian Railways makes a profit. Over the past few years, we have managed to improve the cost-effectiveness of our operations and the holding’s financial results are steadily improving. For 2010, the company expects profits in all areas of transport activity, including profit from locomotive traction services and infrastructure, to total 1081.2 billion rubles, which is 13% higher than in 2009. Compared to 2004, for example, profit growth exceeds 60%.

Within this relatively short period, railway transport has become an organic component of the market economy and set out on an innovative development path. Rail transport reforms led to the creation of the Russian Railways holding, in which all areas of activity are carried out by subsidiaries that are independent of one another, and all income and spending in each area of operations are managed separately.

Russian Railways is today one of the largest railway companies in the world, with colossal volumes of freight and passenger transport, engaged in infrastructure building and rolling stock repair, and possessing a powerful scientific base.

Within the enormous enterprise of Russian Railways, segments are singled out that can successfully compete on the market. More than 2,000 private operators are currently at work, and the freight wagon market is switching over to private businesses, as almost all of Russian Railways rolling stock has been handed over to the holding’s subsidiaries.

Controlling stakes in subsidiaries are sold to private investors, including through IPOs. In particular, in November 2010, a 35% stake in TransContainer was floated on stock exchanges in London and Moscow. The company became the second Russian public railway company. The market valued the company at $1.32 billion at the time of floatation, and the share price continues to show strong growth.

The method and timeframe for selling a controlling interest (of 75% minus one share) in Freight One is currently being coordinated. A notable event was the conclusion of work to attract Bombardier, one of the technological leaders on the market, to buy a stake in Elteza.

During 2011 as a whole, the Board of Directors and top management of Russian Railways have set a goal of raising at least 132 billion rubles from selling equity.

Restructuring passenger transport

One of the main elements of our passenger service reform is the separation of infrastructure and train operations. Global experience has shown that combining infrastructure and train operations is not an efficient model.

Historically, from the time of the Railway Ministry, lost income from passenger services was compensated for with profits from freight services. However, this internal redistribution of profits held back the sector’s development. In 2011, Russian Railways will cease to be a passenger transport company, and the company will not be able to provide cross-subsidies for the passenger segment.

The decision to end cross-subsidies was adopted with the aim of improving the efficiency of the rail business, and attracting private capital to the sector, which is essential to create a competitive environment. All long-distance services will be passed on to our subsidiary, the Federal Passenger Company, which will work on developing this area of transport.

In view of the social significance of passenger services, the government is directly involved in organising passenger services. Losses from passenger services resulting from tariff regulation on long-distance trains are 100% reimbursed by the state.

Suburban passenger services have been put under the control of 24 joint ventures set up by Russian Railways and Russian regional authorities. Local authorities take responsibility for organising transport services in their respective regions. They place orders for suburban passenger services, and the transport company in this case acts under the instructions of the local government. Local governments will now compensate transport companies for loss of revenue resulting from tariff regulation.

Unfortunately, rail transport is quite an expensive means of travel due to the inclusion in its price of infrastructure costs which do not feature, for example, in automobile transport. In European practice, there is therefore a mechanism by which regional and federal authorities compensate infrastructure companies for their outlays. In Germany for example, for every Euro spent by a passenger on the cost of a ticket, federal and regional budgets contribute another €6.

In Russia, the compensation mechanism is not yet fully operational. Of the 35 billion rubles of losses registered by transport companies in 2010, regional authorities compensated only 3.5 billion rubles, even though 1 ruble of budget funds for every ruble paid by passengers would be sufficient compensation to ensure normal loss-free operations for suburban transport companies.

The suburban passenger sector is currently the area of greatest responsibility in Russian Railways’ work, and our passengers are showing increasingly high expectations.

The fleet of electric trains is undergoing continual modernisation through the Russian Railways investment programme. Each year, the company spends more than 10 billion rubles on these goals. From 2004 to 2010, more than 4,500 carriages were supplied to the rail network, and total investment exceeded 57 billion rubles. Many lines have been receiving 6-8 trains each per year, and Russian manufacturers have supplied the necessary machinery in full. Renewal of suburban rolling stock is carried out by Russian companies, meaning that these funds remain in the country and go towards the development of national industries.

However, we also pay close attention in this sector to cooperation with foreign partners. In 2009, Russian Railways signed a contract with Siemens on the purchase of 38 Desiro suburban trains with maximum speeds of 160km/h. This is a generation of modern electric trains for regional lines, which will meet all European standards for comfort, safety, environmental friendliness, and accessibility to physically impaired passengers.

The electric train is equipped with air conditioning and storage space for baggage, including winter sport equipment. Regular electric train services will be launched in Sochi in mid-2013, and after the Winter Olympics in 2014, the service area will be broadened. High-speed suburban trains are set to be launched in both the southern and central regions of Russia. We aim to maximise the compatibility of the Russian rail system with the European equivalents, and to improve rail transport quality in Russia. One of our main development priorities is the introduction of high-speed railway services. The most effective approach is to learn from the experience of countries that have already carried out such projects – for example France, Germany, and Spain – and to plan accordingly.

High-speed rail is the most efficient means of modernising the country’s transport network, improving transport links between cities and regions, and solving transport problems in the largest cities. Journey times will be cut, allowing additional passenger flows to be attracted to the railway from air and car transport, thereby reducing transport’s environmental footprint.

In late 2009, the company launched the high-speed Sapsan electric train on the Moscow–St. Petersburg line, and since the summer of 2010 this train has linked Moscow and St. Petersburg to Nizhny Novgorod. The Sapsan, created by specialists from Siemens with the involvement of specialists and scientists from Russian Railways, has proved a success on the Russian railway network. In 2010, the high-speed Allegro train (produced by Alstom) was launched on the St. Petersburg–Helsinki route.

High-speed rail is a priority of the Rail Transport Development Strategy up to 2030. The pilot project will be a new high-speed line between Moscow and St. Petersburg. The journey time between the two cities will be 2.5 hours, on a 660km line. A tender for the construction of this high-speed line is planned to be held by the end of 2011.

Innovative development

The technology needed for the development of rail transport is important for the national economy as a whole. As the largest national transport company, Russian Railways plays a role in creating the infrastructure conditions necessary for the development of the entire economy.

Work is underway on satellite navigation systems, energy saving systems, and on creating new rolling stock and train traffic control systems. One of Russian Railways’ priorities is to switch to intellectual rail transport based on satellite technology, primarily Glonass.

We create globally competitive technology that will in the future allow us to promote Russian products on foreign markets. We place a strong emphasis not only on innovative engineering solutions, but also on fundamentally applicable developments capable of improving the safety as well as the economic and environmental efficiency of rail transport.

In 2010, the company increased financing for research and development by 21%, reaching 5.75 billion rubles. Spending on research and development represents 0.46% of Russian Railways’ income, which is one of the best figures in Russia for this area.

Working alongside aerospace specialists, Russian Railways has developed a gas turbine locomotive with capacity of 8,300 kW/tonnes, powered by liquefied natural gas. Tests of this locomotive have shown its unique capabilities in hauling extremely heavy freight trains.

A contract has been signed with the joint venture Urals Locomotives, established by Siemens and Sinara Group, for the supply of 221 electric freight trains with 2ES10 asynchronous traction motors, which are unique in the 1520 Area.

A contract has been signed with the companies Transmashholding and Alstom for the supply of 200 EP20 dual-system high-speed passenger locomotives in 2012-2020, which can travel 2.5 times as far. Cooperation with our partners at Bombardier is also developing.

As previously mentioned, Russia is carrying out an ambitious programme to develop railway transport up to 2030, backed by substantial government investment. This programme is opening up a huge range of possibilities for the global business community – for example, the creation of engineering and production centres, the development of large terminal and logistics facilities with multi-modal transport hubs, and the development of capacity to repair and service rolling stock.

Linking continents

By virtue of its unique geographical position, Russia provides a natural trans-continental transport bridge between Europe and Asia. Russian Railways is interested in making fuller use of the country’s transit potential.

The European part of Russia, Siberia, and the Pacific coast were linked 100 years ago by the world-famous Trans-Siberian Railway. Today, the Trans-Siberian is a powerful dual-track line, stretching from the Pacific to the Atlantic Ocean. It is electrified throughout its length, and equipped with modern automation equipment, communications, and information technology.

The Trans-Siberian is the main international transport corridor from East to West, providing intercontinental transportation between East Asian countries (China, Japan, and North and South Korea) and European countries.

In recent years on the Trans-Siberian, the quality of transport services has improved, problems involving cargo security have been resolved, and a simplified procedure has been introduced for declaring container freight. The use of information technology allows us to monitor the movement of carriages and containers in real-time.

We are developing our partnership with the largest European and Asian industrial producers and forwarding companies. The Eurasian railway community is working intensively to expand trans-continental freight volumes, and this means highly promising projects. Working groups of specialists from Russia, China, Germany, Turkey, and Central Asian states are drawing up numerous proposals for creating a Eurasian freight link between China and Europe.

A joint venture, Rail Container, has been created by Transcontainer and the China Railway Container Transport Corporation. This project reflects a qualitative shift in perspectives concerning transit via the Trans-Siberian on the part of our Chinese colleagues, and their willingness to engage in logistical cooperation via the three-way format ‘Russia–China–Europe.’

On its part, Russian Railways is developing the infrastructure of both the Trans-Siberian itself and its continuation within international transport corridors. These projects include the Trans-Korean Railway and the project to extend the broad-gauge network to Central Europe.

The idea of building a broad-gauge line from Bratislava to Vienna has received vocal support from the leadership of the European Union. An investment feasibility study has already been completed, and the conclusion was reached that the project is technically and legally workable, and will bring substantial economic benefits not only to the four countries involved.

Extending broad-gauge tracks from the Slovak city of Košice to Bratislava and Vienna will allow transit freight flows from Russia to Europe to increase by 60%. The shared gauge will enable the railway system of Central Europe to be linked to regions on the Trans-Siberian Railway. We are attracting freight flows to the Asia–Russia–Central Europe route, and are raising the global competitiveness of railway transport compared to sea and road transport.

By raising the standard of logistical services, Russian and European countries will be able to attract freight to the railway that was traditionally shipped by sea. The volume of trade between Russia, Asian countries and Europe is vast, and will continue to grow intensively. If, in cooperation with our European and Asian partners, we manage to attract just 10% of the total freight volume from Southeast Asia to Europe, this will create a market worth 50 billion dollars.

The creation of a unified transport space, independent of differences in rail track gauge and standards, is a powerful instrument for overcoming the economic crisis and reducing the threat of economic recession.

We consider coordination between participants in the global transport system – coordination of strategic issues in the development, reform and provision of transport services – to be a vital factor behind our successful operations. Ultimately, such decisions are aimed at realising the strategic goal of strengthening the railway’s positions on global transport services markets.

Only by coordinating the actions of participants in the global transport system do we gain the opportunity to improve the system of agreements and contracts, technical and operational issues relating to cross-border transport, financial and economic calculations, and international tariffs and informatisation, and to address many other essential issues.

About the Author

Vladimir Yakunin was appointed President of Russian Railways by the Government of the Russian Federation in June 2005.

Mr. Yakunin graduated from the Leningrad Institute of Mechanics as a Mechanical Engineer in 1972 and began his career as a Junior Research Scientist at the State Institute of Applied Chemistry. After completing military service in the Soviet Army, he worked as an Engineer and Senior Engineer at the Administration of the State Committee of the Council of Ministers of the USSR for Foreign Trade and was also Head of Department at the A. F. Yoffe Physics and Technical Institute of the Academy of Sciences of the USSR.

Between 1985 and 1991, Mr. Yakunin was Second and then First Secretary of the USSR’s Permanent Representative Office at the United Nations. He was then Chairman of the Board at the International Centre for Business Cooperation before becoming Head of the North-Western Federal District Inspectorate of the Senior Control Department of the President of the Russian Federation.

Mr. Yakunin became Deputy Minister of Transport in October 2000 and first Deputy Minister of Railways in February 2002. In October 2003, the Board of Russian Railways unanimously appointed Mr. Yakunin as First Vice-President of the Company.