Stop this train! The rates are crippling

02.10.2012 — Analysis

The directors of Russian Railways, OJSC have proposed a change to the operating procedures for how cargo is shipped. Their proposals involve managing the freight traffic, as well as the cars owned by private operators. But experts claim that these innovations will only create additional problems for shippers. As this columnist for RusBusinessNews has determined, the railroad monopoly is trying to solve its problems at the expense of the consumers it serves. Its current status helps it do this - while it commands its own sizable fleet of rail cars, RR at the same time reserves its right to regulate the shipping market.

The reforms of the Russian railway industry, which began seven years ago, have clearly not taken root. Attempts to introduce competition to this monopolized sector were a train wreck from the word go and were followed by a shortage of rail cars and price hikes for shipping services. It wasn't just private operators who contributed to the situation by refusing to carry freight with a low profit margin, but also Russian Railways, which for some reason could not manage to deploy its entire fleet to ensure that cargo was delivered.

The monopoly's uninspiring work resulted in a surge in shipping costs during 2010 and 2011. According to Vladimir Zharinov, the commercial director of Zapaduralnerud, LLC, shipping rates changed every day back then - a rail car might cost 1,400 rubles on Monday, 1,500 on Tuesday, 1,700 on Wednesday, and hit 2,000 rubles by Thursday. And shippers had to put up with this because there wasn't enough rolling stock to meet everyone's needs.

Something similar could be seen in the passenger rail market. The board of directors of Federal Passenger Company, OJSC, (a subsidiary of Russian Railways) decided that revenue should increase by 6.3% per year. And revenue truly did grow in 2010 and 2011, but only because they played with the numbers. Frequent rail travelers complained that the only tickets available in advance were quite expensive, although many economy-class seats on trains were still vacant.

Russian Railways' policy forced Igor Artemyev, the head of the Federal Antimonopoly Service, to admit that industry reforms were headed in the wrong direction. He believes that several new, even more draconian monopolies have sprouted up where there used to be only one, such as the market sectors for container shipping, refrigerated cars, and other types of shipping.

Trying to salvage the situation, the Russian government decided at the end of 2011 to appropriate 106,000 cars from Freight Two, OJSC and lease them directly to Russian Railways. This confiscated rolling stock was dubbed as "owned and procured rail cars" (VSP), and their operating costs were calculated on the basis of a special pricing sheet that made an immediate impression on shippers. Vladimir Zharinov claims that in 2012 the rate for a single rail car fell from 2,000 to 1,100, and even down to 900 rubles.

Issues associated with exporting low-margin freight, such as lumber, gravel, grain, etc., were quickly resolved. And the industry "suddenly" discovered that it had 250,000 superfluous cars that were doing nothing more than clogging up the tracks. But neither the private operators nor RR were pleased with this turn of events. The first group began to complain about the low rate of return, which kept them from investing, while the second group made the objection that the VSP were uncompetitive and prevented them from hauling metals instead of the less profitable lumber.

As a result of this dissatisfaction, the government decided to standardize the rates for freight shipping, beginning in November 2012. Gleb Kinder, the head of the railway transportation commission of the public organization Opora Rossiyi, predicts that the greatest cost reductions will be seen in third-class goods, which includes ferrous and nonferrous metals, and that this will make the VSP competitive. This step was taken expressly for the benefit of Russian Railways, which will now acquire new shipping customers from the metallurgical industry.

The big private operators who will lose some of their customers once the rates are standardized have decided to make up for their losses in the traditional way - by reducing competition in the industry. Officials decided to establish a single, self-regulating organization, on the basis of the Non-commercial partnership the Council of Participants in the Market for Operators' Services in Railway Rolling Stock (SOZHT), membership in which would be a prerequisite for anyone wishing to ship freight. Experts predict that this decision will be followed by a sharp decline in the number of operators and greater influence for the major market players that remain. Those players are already using SOZHT's executive director, Dmitry Korolev, as a spokesperson to suggest that the owned and procured rail cars that are undermining profits for the private operators be returned to Freight Two.

Vladimir Zharinov is convinced that reducing competition in the industry and abandoning the current procedure will mean higher prices. He believes that the creation of this self-regulatory organization will quickly result in a return to rates at the previous level of 2,000 rubles per car, but with absolutely no improvement in service. This entrepreneur claims that neither the private operators nor Russian Railways operates with their customers' interests in mind. The "market" is run by mandates: the private operators force freight shippers to pay for rail cars that are destroyed through no fault of their own and to shell out for excessive unloading time, while Russian Railways compels shippers to accept broken rolling stock.

Russian Railways is supposed to be a market regulator, but sits idly by. Moreover, new initiatives are being put forward that entrepreneurs believe will further complicate the position of freight shippers. Vladimir Yakunin, the president of the monopoly, is asking the government to allow him to direct empty rail cars belonging to private operators, to charge a fee for cars that sit idle on the tracks, and to coordinate requests from shippers with Russian Railways. The monopoly also plans to abandon the continuous planning of shipments and to introduce calendar-based planning, i.e., one month in advance.

Yakov Remennik, the commercial director of Uralasbest, OJSC, claims that the introduction of a single, centralised operating procedure will mean that shippers will be misinformed, because no one can say in advance how many cars they will need. In addition, if there are many owners, the terms for supplying cars will become more complex, in which case the transition to calendar-based planning will complicate the lives of shippers and operators. It will be a huge step backward - a return to the way things used to be.

Yakov Remennik believes Russian Railways is operating completely at odds with the idea of a free market, i.e., by providing services that are profitable to the monopoly itself, rather than those needed by consumers. The entrepreneur insists that Russian Railways' proposals need to be discussed publicly and in detail.

Igor Artemyev supports the shippers, and the actions of Russian Railways' senior managers look to him like a policy aimed at destroying competition in the rail-transportation market. The FAS believes that the essence of the problem lies in the fact that government agencies lack the authority and opportunity to regulate the terms of service. The proposal to strip Russian Railways of its role as a market regulator is drawing a sharply negative reaction from the monopoly. Vladimir Yakunin thinks that no policing of the carrier's operations is needed - that everything is already quite tightly regulated, with the exception of the operators' activities. And that's what RR proposes to clamp down on by taking over the management of the rolling stock.

Gleb Kinder is convinced that this proposal will push rail transportation completely out of the reach of small and medium-sized businesses.

Vladimir Terletsky