Forest Trap on the Railroad

The Ural Union of Lumber Manufacturers was the first to sound the alarm concerning the car supply deficit. Sergey Basmanov, the executive director of the union, informed RusBusinessNews that since April 2010 dozens of forestry enterprises in the Sverdlovsk Region have not been able to deliver their products to their customers. "The situation is on the edge of emergency. If it does not change, many companies will go broke ", he complained. 

Market participants agree with him. According to Sergey Kozmenko, a sole proprietor (Verkhnyaya Tura), in order to survive, a relatively large company must ship daily 4-5 gondola cars with timber to customers. However, two months ago, the Sverdlovsk Railways halved the car supply. "Stacked wood grew up to 10 meters at storage facilities (not more than 5-6 meters are allowed by safety regulations). The relations with partners were damaged, as we failed to supply the products on time. The key problem is that earnings dropped two times. I cannot make payments on the loans, because all the money is tied up in wages. And very soon I will not be able to pay even them", S.Kozmenko speaks out. 

At present, his enterprise is logging 100 thousand cubic meters of wood a year. Half of the products are transported by road transport. The other 50 thousand cubic meters have always been transported by the Sverdlovsk Railways. According to S.Kozmenko, the problem of insufficient car supply is not new to lumbermen - usually it arises in autumn when coal is transported to Russian regions. However, it has never been so severe. If lumber manufacturers could at least explain the deficit of "forestry" cars by the preparation for the winter season, they can only make guesses about the reasons for the spring deficit. 

Everything started with the announcement that railway authorities made in April 2010, concerning major repair of rail tracks. The freight traffic of the Sverdlovsk Railways was brought almost to a standstill. The repair works finished, but the problem with freight traffic remained.

As it turned out, it is lumber manufacturers who go through distress today. Steel manufacturers who encountered some discomfort in April due to the repair of rail tracks came back to their routine transportation schedules in May. According to S.Kozmenko, railway authorities have much more favorable attitude to steel manufacturers than to "lumbermen". 

The fact is that railway transportations of lumber are not profitable. The transport cost for metal products is substantially higher than that of the wood. Furthermore, Sredneuralsk lumber is usually transported for short distances; thus, its transportation becomes even less profitable. "We do not ship wood farther than Samara. Longer distances are not feasible, as there they have their own producers ", S.Kozmenko explained. 

Representatives of the Sverdlovsk Railways, in their turn, state that they "can't help it". The rules of the game are set by private companies. "Over the last three years, the Russian Railways Company has reduced its share on the railroad freight market from 55 to 30%. At present, the company owns only 280 thousand cars out of 1 million cars. 100% of transportations of oil cargoes, cement, feed concentrates, grain, fertilizers and other products are performed by private railcar owners", the Sverdlovsk Railway press-service commented. The company thinks that consignors should start looking for a substitution for the Russian Railways. 

However, lumber manufacturers actually have no alternative. More than half of the car fleet of the Sverdlovsk railways is in the hands of non-governmental affiliates of Russian Railways - the First Cargo Company (PGK) and the new Second Cargo Company (VGK). "We contacted PGK, but we were told that the company does not deal with lumber transportation. The tariffs set by small private companies are by 30% higher than the tariffs of Russian Railways. We are not able to pay such money. Lumber is not selling well at the moment. And we cannot deliver properly even the lumber that can be sold", Valery Palichev, Director of the Sverdles Production Association said. 

Private companies are guided by their own logic. "We can transport a car with lumber to any city, but who is going to pay for its return? - Igor Chushkin, Production Director of the NerudTrans Company asks. - The price for empty car mileage is included in the tariff when cargoes are transported by Russian Railway cars. If cargoes are transported by cars of private companies, the payment is made separately for the freight car and for the return of the empty car to the dispatch station. If lumber consignors are willing to pay more with consideration for empty car mileage, we are ready to give them cars. However, at the moment, it is more profitable for us to transport metal products, because the related freight charges exceed 4-5 times those that are effective for lumber transportations". 

In the meantime, Russian Railways assure that lumber producers are not cast adrift. There is one more affiliate of the national carrier - the TransLes Company - that specializes solely in lumber transportation. However, the Middle Urals can hardly rely on this company. Local lumber manufacturers remind that TransLes dispatches cars generally to the Far East, Western Siberia and North-Western regions - closer to borders with China and Finland. These countries are the major consumers of Russian lumber. 

In addition, lumber flatcars owned by TransLes are suitable only for transportation of long logs. Sredneuralsk enterprises generally deliver sawn trees or lump wood. These products can be transported only in gondola cars.

TransLes representatives state that "at the moment almost all the requests from Ural companies have been fulfilled". At the same time, the company executives agree that Ural forestry lacks attention from the "lumber affiliate" of Russian Railways. "Our presence in the Ural region is still not sufficient, because most of the lumber cargoes have been transported in gondola cars of Russian Railways. In 2009, we transported 44.4 tons of lumber out of 5.9 million by the Sverdlovsk railroad", Sergey Krivov, General Director of TransLes informed. 

Due to the re-division of the market, the entire industry of the Sverdlovsk Region can be destroyed. "I do not know how we are going to survive under the reforms", V.Palichev exclaims. 

However, lumber producers see rearrangements in railway transportations as a pseudo-market reform, as the division of Russian Railways into numerous affiliates means only de jure breaking up of the existing monopoly. In fact, the company is still controlling the market. The commercialization will provide it and its affiliates with additional leverage that can be applied to consignors. Generation of profit is much more important than sentiments and troubles of unfortunate lumber manufacturers. 

The authorities' objective is to prevent the misalignment. Unprofitable transportations can be subsidized (in the similar way that is applied to commuter services). The authorities can compel carriers to set quotas for delivery of products manufactured by industries that are socially significant for the region. There are ways - only the wish is wanted.

However, the Sredneuralsk authorities prefer to take a back seat in this situation. They do not seem to be concerned that due to this, the local lumber manufacturers will have to "keep the wolf from the door" in winter. For small towns and villages of the Middle Urals, lumber business in most cases is the only way to earn money. For example, Sergey Kozmenko's company employs about 300 people. Jobs are very limited in Verkhnyaya Tura. It is not difficult to imagine what will happen with several hundreds of families if their breadwinners are left without wages. 

In this case, the local authorities are also going to suffer, receiving less than expected tax revenues. The tax gap will also become wider in the already deficit-ridden budget of the Sverdlovsk Region. At the same time, the team of Alexander Misharin, the former head of the Sverdlovsk Railways and present governor, keeps generating projects like the construction of the Ekaterinburg-Moscow high speed railway and keeps indulging in unsubstantiated illusions.