Russian Railways’ Fast Train Hit Corruption Landmine

23.12.2009 — Analysis

The Joint Stock Company Russian Railways will make much more profit in 2009 than it was planning to. Meanwhile, as the RusBusinessNews observer established, the transportation volumes in the country keep falling. The lacking revenue of the railways is reimbursed by the state which instead of developing a mechanism of investing into the sector just moves the money from one pocket to another. This is of no help to the modernization of the country on which the country's President is so insistent.

Russian Railways have published the preliminary financial results for 2009. The net profit is expected to remain at the last year's level and will not exceed 2 billion roubles. Regardless of the total reduction of the company's revenues by 6.1% the profit made will be almost three times higher than planned.

OAO First Cargo Company (Russian Railways is the main founder of this company) has also reported excellent 2009 result. In 11 months of 2009 FCC has transported 205.5 million tons of cargo which is twice as much as in the same period last year. The Russian Railways' subsidiary, according to the data provided by its press service, controls about 19% of the cargo haulage market having a fifth of the Russian railway rolling stock at its disposal. Its market share has grown by about 11% in a year.

Olga Ivanova, the Head of the Railway Transportation Department of the JSC Ashinskiy Metallurgical Works, is genuinely confused about the reasons for the FCC's performance indicators improvement: "When you attend a few meetings you hear that everybody has falling transportation volumes. Stocking up coal for the utility energy sector is a seasonal affair, oil companies try to transport their products through pipelines. Even the waived fee for the urgent provision of rail cars does not help as this does not lead to the increase in the amount of cargo. How is it that the railways are increasing their profit I am personally at a loss. Maybe they are laying off staff?"

Oksana Butorova, the Head of the Media Liaison Department of the Sverdlovsk Railway, a branch of the JSC Russian Railways, informed RusBusinessNews that the staff optimization and reduced working hours are in the past, that today the company is in the processes of generally restructuring its work for the reduction of costs and the increase of the revenue.

Whether the Russian Railways' costs will be reduced remains unclear while the revenues are on the increase already now: industrialists claim that tariffs are increased every half a year. In 2009 they have grown rather tangibly, for instance the price of transportation of fuel, according to the data provided by the press service of the Sverdlovsk branch of the OJSC Territorial Generating Company № 9, has grown by 17.1% in comparison to 2008. According to Sergei Basmanov, the Executive Director of NPP "Urals Union of Timber Industry", the transportation of round and processed timber has grown in price by 15% which is very tangible for the sector where transportation amounts to roughly a half of the total cost.

The hauler's revenues are increasing while at the same time the transportation volumes are on decrease as the economy is continuing to show negative dynamics. According to Andrei Aladin, the Deputy Director of OAO Sukholozhskcement, the shortage of railway cars is in the past which resulted in additional expenses for business. Before the cement cars belonged to the state (the Ministry for Transport); when the Russian Railways company was established they were transferred to the OAO First Cargo Company and now those wishing to transport cargo, on top of tariffs, have to pay the rolling stock hire fee. The Second Cargo Company will be established soon and, as rumour has it, all open-top railcars, which are the key type of railcar for cargo transportation, will be transferred to this company. Russian Railways' clients, the expert reckons, will be paying more and more, and the money will just be split between different pockets by the railway companies.

Andrei Besedin, the Director General of CJSC Urals Industrial Equipment, says that the core problem in the relationships with Russian Railways is in that this company disregards interests of its partners. This is why he transports all cargo, including oversized items, by truck and only by truck. It turns out both cheaper and easier, according to the expert.

However, by far not all companies are able to stop using services of Russian Railways. According to Aleksei Moiseyev, the Deputy Director general of KGOK, despite the growth of tariffs, his company cannot manage without the railway because the enterprise has very large volumes of transportation.

Having well established clients Russian Railways do not have to worry about the consequences of raising tariffs twice a year. The inflation flywheel thus spinning faster and faster does not bother the railway companies much as the companies forwarding cargo will not stop the continuous flow operations and the expensive transportation will in the end be paid for by the end consumer. The financial standing of Russian Railways remains stable today due to budget money injections amounting to 106 billion roubles, 28 out of which went into the increase of the registered capital and the rest into the reimbursement for the declining amount of cargo.

The policy of the governmental support to the entirely non-market behaviour of Russian Railways renders meaningless the railways reform which was conceived for the reduction of costs in the sector. Russian Railways today seem to prefer the modernization through the tariff policies rather than through effective work or even bank loans.

Experts are convinced that this practice is a blind end as it induces the vicious circle - after raising the price for the transportation of ore the metal, electricity, petrol etc. prices must also be raised to follow. This kind of the economic model will inevitably require the establishment of planning bodies which will, by manual override applied so often in Russia today, liaise between the interests of consumers and suppliers. Finances in such economy will be mere sweets wrappers as it was observed in the USSR.

At the same time experts point out that even the today's banking system is not ready to become the regulator of market relationships. This may be due to the fact that the majority of credit institutions are not that and have only been established for cashing in and laundering of the budget money to which officials have access.

Corruption is the magic word which turns into dust any attempts to modernize Russian economy. It is obvious that the Government is not capable to conquer it by 2020 or 2050, but it may at least try to change the mechanism of the budget funding of the State Defence Contracts and other State owned projects. By the way, the Chinese, to whom Russian officials love referring so much, genuinely fail to understand why Russia needs so many private banks. Really, who needs them?

Vladimir Terletski