In Chelyabinsk they're digging a hole to China

06.02.2012 — Analysis

In February of 2012 the Russian Union of Industrialists and Entrepreneurs will consider a proposal by the Chelyabinsk region to build a transportation corridor from China to Europe, through the Ural Mountains. Experts say that putting in this new route will speed up cargo traffic, which is currently at a standstill because of the extreme congestion of the Trans-Baikal Railway, and will also create serious competition for the TRACECA corridor that bypasses Russia. As these columnists for RusBusinessNews have determined, the success of the Chelyabinsk project is directly dependent on the efforts of business and government, because it would be very difficult to develop a logistics infrastructure in the immediate future without their muscle.

Cargo traveling from China to Europe is currently transported in one of two ways: by water or by rail through Russia. Right now the land route clearly lags behind the sea passage in terms of volume, but experts see it as the more promising option. By creating high-speed routes, carriers have shown how containers of goods from Asia can reach Europe in two weeks.

But that kind of speed immediately led to an increase in the freight traffic traveling by land. TransContainer, OJSC transported 13.3% more cargo in 2011 than in 2010, and the rail division of FESCO delivered 30% more goods. The increased quantity of commodities that were being shipped had an inevitable effect on the operation of the railroad. The southern spur, which connects the Trans-Siberian Railway and China, is no longer able to keep up with the freight traffic.

The management of Russian Railways, OJSC got worried about the spur's traffic capacity back in mid-2000 and decided to make it an electrified, double-track line. But even that didn't help. Because of a shortage of locomotives and tracks, trains are standing idle in the rail yards of the Trans-Baikal Railway. According to the newspaper Gudok, in September of 2011, 1,300 out of 3,000 trains exceeded their established time periods for service at the Karymskaya station. Containers are even sitting idle in Zabaikalsk, which entrepreneurs are calling a bottleneck - it is almost impossible to predict what and when cargo will get stuck there. Not even high-speed trains can remedy the situation, because they need to reload in Zabaikalsk.

And there are no alternatives to the railroad in the Zabaikalsk territory - more than half of the region's highways are covered in potholes and almost none of them were designed to withstand heavy loads. The underdeveloped Zabaikalsk territory and logistics infrastructure makes the idea of a bridge linking the Asia-Pacific region to Russia, not to mention Europe, seem ridiculous.

Problems transporting cargo through the Zabaikalsk passage prompted Russian officials to pave some other routes. The Russian Ministry of Transport has proposed building a highway from the Chinese border to St. Petersburg, passing through Kazakhstan, the Orenburg region, Tatarstan, and a number of other Russian regions. Aleksei Ovakimyan, the lieutenant governor of the Chelyabinsk region, thinks it would be more logical to create a transportation corridor through the Ural Mountains, which would be shorter than the route through Orenburg.

Regional officials claim that a Urumqi (China) - Astana (Kazakhstan) - Chelyabinsk (Russia) transportation corridor would not only take some of the pressure off the Zabaikalsk transportation and logistics terminal, it would increase freight traffic between Russia and China. The two nations saw over $60 billion in trade in 2011. In addition, $381.4 million poured into the Chelyabinsk region, which was almost a 150% increase over 2010.

In addition, the shorter Urumqi - Astana - Chelyabinsk route would encourage development in the northern part of the Urals Federal District and the Syangan-Uygur region of China. An increase in freight traffic through the Bugristoye customs checkpoint in Chelyabinsk would create serious competition for the TRACECA project, which is proposing the creation of a transportation corridor between China and Europe that would bypass Russia.

The Shanghai Cooperation Organization Business Council has given the project to build the route proposed in Chelyabinsk "pilot" status - it has determined the areas where the multifunctional transportation and logistics terminals would be located and appointed an authorized representative (a management company) to implement the project. There are plans to build two complexes, 30-50 hectares each, in the South Urals, in the Troitsk - Yuzhnouralsk and Chelyabinsk areas. The design of the facilities will begin in 2012 and they are scheduled to begin operation by 2015. Initial investment is estimated at 2.5 billion rubles.

In addition to the construction of logistics terminals, there has been a proposal to expand some parts of the federal M5 Moscow - Chelyabinsk highway. This is an issue under the personal control of the governor of Chelyabinsk region, Mikhail Yurevich, who asked Prime Minister Vladimir Putin in the summer of 2011 to increase investment in the renovation of this transportation artery.

According to Igor Aristov, the vice president of the South Urals Chamber of Industry and Commerce, there's a lot of talk right now about taking advantage of the unique geographical, industrial, and infrastructure capabilities of the Chelyabinsk region. In the early twentieth century, Chelyabinsk was a transit point for tea shipments between China and Europe, and the city was home to the biggest tea-packing factory in Russia named after Vysotsky. The revival of the transportation route would help to revive the South Urals capital as a transit point. This expert thinks it would be illogical and economically unfeasible to bring goods through the no man's land below Orenburg.

Oleg Dunayev, the head of the expert group at the Russian Council of Federation, believes that the route through the Ural Mountains looks promising. A lot of money has been invested in northwest China, and if entrepreneurs can figure out how to offer better shipping options, Chelyabinsk could attract some of the freight traffic. But everything is waiting on the business community and the Russian government, and officials have not yet decided through what regions the transportation corridor connecting China to Europe will pass.

Vladimir Elin, the first vice president of Smart Logistic Group, CJSC, and Eduard Fedoseyev, the general director of Smart Logistic Group Operating, CJSC, believe that all the prerequisites have been met for cargo to pass through the logistics terminals in Chelyabinsk. Russia imports 40-60% of its goods, and although those numbers fell sharply during the economic crisis, in 2010 that downward trend reversed. With the creation of a customs union between Russia, Kazakhstan, and Belarus, manufacturers began to design new logistical systems for goods, and importers and exporters began to choose the best shipping routes for their cargo, in order to facilitate trade within that union. Experts estimate that up to 40% of the commodities in transit have changed their travel itineraries and customs logistics. The Kazakh trade route has picked up almost 30% of the incoming goods and the Belarus route has attracted almost 10%.

Experts are convinced that the Chelyabinsk project can be a significant factor in redistributing the freight traffic passing through Kazakhstan to Russia and can contribute much to the development of the region's economy. But the project will never materialize unless warehouse construction can reduce shipping costs and delivery time, and if it can provide superior logistics services and infrastructure.

Those experts feel that the project's success will largely depend on the technology and financial models that the business community will use to build the logistics terminals. It's quite difficult to find an investor in Russia - the government pays little attention to this segment of the market and banks are afraid to provide financing for logistics, because they cannot predict the risk for 5-7 years in advance (which is how long it takes to recoup the cost of building storage terminals in Russia). Thus, plans to buy the expensive equipment and technology used in modern logistics have a direct effect on the competitiveness of the logistics terminals and, consequently, on the amount of goods that can be processed.

History shows that the most favorable terms are offered by entrepreneurs with direct experience implementing logistics programs and projects. Logistics experts themselves are even more blunt, "It takes deep pockets to get goods moving". This is precisely why the government of the Chelyabinsk region is trying to convince big business to take an interest in the project. The Russian Union of Industrialists and Entrepreneurs is ready to consider a proposal to build a transportation corridor from China to Europe, through the Ural Mountains.

Valentina Mazharova and Vladimir Terletsky