Leveraging the Trans-Siberian system would see more Far East freight hauled through Russia to Europe
Economist Intelligence Unit
May 21, 2013
By Robert Stowe England
Can Russia be a rail superpower?
Trans-Siberian Railway aims for heftier share of East Asia’s freight
- By: Economist Intelligence Unit
- From: EIU
- Date: Tuesday May 21st, 2013
The Russian Federation’s vision to improve its vast transcontinental rail network is ambitious by any standard. It hopes to divert 10% of European-bound cargo shipped by sea from Asia-Pacific nations to a Russian overland route via an improved Trans-Siberian Railway. At present, much of that freight travels by ship across the Indian Ocean and Suez Canal to the Mediterranean.
This may change with planned increases in freight handling capacity and improvements of the performance of rail transport along the Trans-Siberian Railway. Last August Transportation Minister Maxim Sokolov announced the 10% goal at a meeting of Asia Pacific Economic Cooperation (APEC) nation ministers in St. Petersburg. Officials welcomed planned rail improvements but noted that significant investment in the Far Eastern portion of the railway will be required.Based on planned upgrades, Russia’s Ministry of Transport expects rail traffic in the Far East to grow 40% by 2020.
Most rail industry and shipping company observers are confident the Trans-Siberian Railway will capture more cargo shipments from Asia-Pacific, while some are not convinced the overland rail route can make so large a dent in the volume of cargo now traveling by ocean vessels.
A better rail system will, of course, help reduce product and materials transport costs for companies that currently ship cargo to and from Pacific ports to Russia and Europe. This provides an opportunity for exporters that ship from the West Coast in North America to enter the Russian market from the Far East and take advantage of lower tariffs on east-west traffic than the cost of shipping from west to east.
It also creates opportunities for North American makers of locomotives and rail car equipment, as well as freight and train management systems, to increase the speed, capacity and endurance of Russia’s freight trains. Planned rail upgrade actions include removing speed restrictions on trains, continuously enlarging train stations and implementing rapid container train handling systems, according to the Ministry of Transport. To pay for these improvements, the Ministry of Transport reckons it needs RUB 181 billion to upgrade the southernmost route of the Trans-Siberian Railway, and RUB 747 billion for the Baikal-Amur Mainline, a parallel route to the Pacific built north of the original Trans-Siberian line. Russia wants to boost capacity along that line to 100 million tons a year, up from 24 million tons today.
At the project’s completion, freight handling capacity should more than triple at the Eastward Vanino and Sovestkaya Gavan port termination stations of the Baikal-Amur Mainline, thanks to significant increases in sorting and classification yard capacities near both stations. Improvements are also expected on the Trans-Siberian route running south of Lake Baikal to terminating rail stations and ports at Vladivostok, Vostochny and Nakhodka.
Bolstering these efforts and plans to develop this under populated region is a new Ministry for the Development of the Far East, headed by Presidential Envoy to the Far Eastern Federal District, Victor Ishayev.
Rail Transport Upgrade Opportunities
Russia’s ongoing privatization of the rail system is now in its 22nd year. The challenges created by its earlier expansion in rail transport capacity have set the stage for new export opportunities. In 1991 Soviet Railways, which operated under the Ministry of Transport, became a joint stock company, Russian Railways. To attract investment, Russian Railways began privatizing its freight rail cars in 2003. Private owners have since built 117,000 new rail cars, greatly expanding the rail system’s capacity. “They’re all in private hands. Thousands upon thousands of companies own these cars,” says Marcus Montenecourt, general director, Transolutions CIS in Moscow and head of Russian operations for Chicago-based Amsted Rail. “Buying and leasing cars is a great business. They pay for themselves in five years. Afterwards, it’s gravy,” he says.
Opportunities exist for makers of freight tracking and train management systems to deal with problems that arose from an oversupply of some types of rail cars after privatization. After Russian Railways no longer owned the cars and knew where they were and what trains they were supposed to be in next, it needed a way to track cargo and cars to keep rail traffic flowing smoothly and efficiently. “Bottlenecks occur at train stations in the sorting and classification yards,” explains Montenecourt, “where these cars go through what we call ‘humps,’ where they get classified, get broken up and new trains get built and then sent out.” Centralized tracking and rail station direction and coordination can help alleviate these challenges.
The fact that the new rail cars built since 2003 have used “obsolete technology” and “have equipment issues” provides opportunities for rail car component makers in North America, says Montenecourt. Because the endurance of components in Russia’s rail cars falls short of what can be achieved with the latest technology, the rail cars have to be pulled out of the consist [car rolling stock making up a designated train, excluding the locomotive] more frequently and sent to a rail repair facility, Montenecourt explains.
For Amsted Rail, the fact that new rail cars used old technology provided an opportunity to sell to Russian rail car makers Amsted’s higher endurance wheel, axle and caster sub-assemblies. The components also allow Russian-made rail cars to carry a heavier load, reducing the number of cars needed for a given shipment. For example, the higher load capacity of wheel subassemblies can allow each gondola car to ship more coal. More than a year ago, Amsted won a big contract with Russian rail car builder Promtraktor-Vagon, a private company, to build its rail wheel components.
Today Promtraktor-Vagon is building 70 freight cars for Brunswick Rail, a Moscow-based private railcar leasing company. Brunswick, conversely, will lease the cars to TalTEK Trans, a freight transportation company in St. Petersburg.
East-West Cargo Shipments
Another opportunity has emerged out of the imbalance between cars chugging west to east, laden with lumber, coal, minerals and other raw materials for Asia to Pacific ports – and their empty return ride. High tariffs on East-bound routes have historically covered the cost of empty West-bound cars. Filling today’s empty cars will reduce the total transportation cost.
For example, Thunderbolt Group, a Novato, California-based exporter, chose Vladivostok in Eastern Russia as its local distribution base over Moscow or St. Petersburg to export U.S. automotive chemicals to Russia.
After “laying roots down there,” says Thunderbolt’s president, Jonathan Scott, the company began “slowly working westward” with product sales. Warehouse storage and distribution by rail to all of Russia “is a whole lot easier doing it from the east,” explains Scott, noting lower east-west freight rates and business costs when shipments originate in the east, rather than in, say, big western Russian cities. ”They’re hungry to fill empty cars going back to Moscow,” Scott explains.
Thunderbolt has gained entry into Russia via the east with both industrial and consumer products. Despite an initial failure to introduce California wines into Russia, Thunderbolt remains committed to introducing more products into Russia from its eastern ports and sees it as an important opportunity for U.S. and Canadian exporters.
China’s Emergence as Rail Freight Superpower
Russia’s effort to improve its system is partly driven by the rapid progress it has seen in rail cargo shipping in China. The rail network in China has grown from 78,000 km at the end of 2007 to 98,000 km in 2012. With an investment of ¥750 billion of rail network expansion under way, China expects to add another 110 km of rail lines to its system by 2020. By contrast, the US has 226,427 km of rail lines and Russia has 128,000 km, according to the International Union of Railways. Even with a smaller rail network than that of Russia or the US, China has moved to number one in the world in freight shipments, with 2,947 billion ton-kilometers of cargo in 2011. China has 6% of the world’s rail network but ships 25% of its freight.
Russia is also investing in an international project to upgrade rail transport across North Korea to South Korea, to provide the latter with rail access to the Trans-Siberian Railway and to improve North Korean access. In October 2011 a pilot project rebuilding the rail line from Khasan at the southern tip of Far East Russia to Rajin in northeastern North Korea was completed and the first train ran the course on the rebuilt line. The second stage of reconstructing the Trans-Korean Railway infrastructure and integrating it into the Trans-Siberian Railway “is nearing completion,” according to Russia’s Ministry of Transport. Russia and North Korea are also collaborating on building a new rail terminal at Rajin harbor, to be completed later this year.
The improvements in North Korea can bring products from South Korea overland to Russia. When the enhancements are complete, North American exporters, with a nod from North Korea, will be able to enter the Russian market across a modern rail system via ports in South Korea.
Limits to Rail Expansion
There are limits to rail expansion in Russia’s Far East, however. Take Canada’s Kinross Gold. Today mining equipment bound for its Kupol gold mine crosses the East Siberian Sea by ship to Pevek port. After the ground freezes and snow falls in autumn, a 430-kilometer-long ice road must be laid for equipment transport to the mine in Chukotka Autonomous Okrug, at the Arctic Circle. The subsequent springtime thaw requires roads to be rebuilt every fall.
“The government is rightly focusing on the Far East,” says Lou Naumovski, vice president and general director of Kinross Gold’s Moscow office, “because it is well endowed with minerals.” Mining these minerals can greatly enrich the nation, he says. Further it can help counteract the ongoing depopulation of the already sparsely populated Far East by creating employment opportunities, he adds.
Rail lines are unlikely to extend very far North from the Baikal-Amur line into the northernmost two-thirds of the vast Siberian Far East “because railway tracks can’t be built on permafrost,” says Naumovski.