By Irina Konstantinova

The rail system represents the lifelines for the RFE southern territories, and especially, Primorsky and Khabarovsky krais, Amurskaya oblast, Jewish autonomous okrug, Sakhalin island, and Southern Sakha (Yakutia).

Rail enjoys a competitive advantage over underdeveloped aviation services in the RFE mainland’s vast distances and continues to be the dominant mode of freight transport in the RFE and in Russia as a whole. RFE railroads carry about 83% of the region’s freight and 40% of the country’s passenger turnover. A 100% electrified double track TransSib, a part of the RZhD, runs through Siberia and links Vladivostok to Moscow via Khabarovsk, Amur, and the Jewish autonomous okrug. In 2005, it handled 48.36 thousand tons of cargo. The 6 thousand-km-long Far Eastern railway affiliate of the RZhD with head office in Khabarovsk and four railway departments headquartered in Vladivostok, Khabarovsk, Komsomolsk-on-Amur, and Tynda (Baikal-Amur railway) is a part of the TransSib. Another affiliate of the RZhD, Sakhalinskaya railway headquartered in Yuzhno-Sakhalinsk is over 800 km long. The density of railways in Primorsky krai – 100 km/ 10 thousand square km – and in Sakhalin – 120 km/ 10 thousand square meters – is the highest in the RFE.

The Far Eastern and the Sakhalinskaya railways have access to major RFE ice-free sea ports – Vladivostok, Nakhodka, Vostochny, Posyet, Zarubino, Vanino, and Russian-Chinese border crossings. The RFE ports gained in national importance and became major gateways for international transit shipments via railway between the Pacific Rim and European countries via Russian territory. The railway heavily depends on the RFE ports’ smooth operation and vice-versa.

Baikal-Amur (BAM) is a part of the Far Eastern railway network and is 500 km shorter than TransSib. BAM provides an access to the Pacific at the Vanino port. Built in 1984, BAM is a 4.3-thousand-km single track serviced by diesel locomotives; BAM runs through Amurskaya oblast, South Yakutia, and Khabarovsky krai in parallel with TransSib, 300-500 km to the north from TransSib. Today BAM is utilized by 30-50% out of 27 million tons of the projected capacity. In 2003, 8 million tons of cargo was shipped by BAM, in 2006 – 13 million tons. The bulk of cargo shipped via BAM today is coal from Neryungri and Yakutia to Primorsky and Khabarovsky krais, and Japan. The Baikal-Amur railroad, which can handle up to one million TEU of transit cargo annually through Vanino port, may be engaged in Euro-Asian transit and domestic Russian freight flow, is underutilized today.

Railway in the Sakha (Yakutia) is a part of the Far Eastern railway network. With the tracks built in 1995, railway transport is relatively new to the Sakha republic. Still, today it ranks second by freight turnover, following water-borne transport, which handles 70% of all freight into the region. The coal industry is a major cargo-supplying sector and accounts for 9 million tons of coal transported by the Sakha republic railroad annually. In 2005, Yakutia’s railroad cargo turnover was 279.8 million tons per km. Operating all year round, rail transport holds much promise for the republic as compared to that of seasonal water-borne or expensive air transport. Previously, a railway connected BAM to Berkakit settlement in Southern Yakutia, and a 360 km rail line connected the Neryungri coal basin to Tommot settlement in Southern Yakutia. Today, there is a need to connect Yakutsk, the capital of the Sakha republic to the BAM railroad by building a 358-km railway Berkakit-Tommot-Yakutsk.

The Sakhalinskaya railroad was built in the beginning of the 20th century partially by the Japanese, when Sakhalin island belonged to Japan. The Sakhalinskaya railroad had a narrow gauge of 1 067 millimeters, while the Russia-wide standard requires 1 520 millimeters. Booming offshore oil development on Sakhalin had a direct impact on railroad re-gauging. The large cargo volumes for the Sakhalin oil project arriving by TransSib to the Vanino port are shipped by the Kholmsk ferry service to Sakhalin. In 2005, the Sakhalinskaya railroad handled 3.4 thousand tons of cargo. The major obstacle was that rail cars had to be re-gauged for further shipment via the Sakhalinskaya railway, and this was expensive and time consuming. Today, the Sakhalinskaya railroad reconstruction to meet the Russian gauge standard is underway. The five-year project was started in 2003, requiring USD 500 billion.

Transit corridors and rail links

Geographically, Russia is a natural land bridge between Europe and Asia, cutting delivery time and cost. The estimated annual capacity of the 10 thousand km of TransSib is up to 1 million TEU. The Russian Federation government considers intermodal transport corridors to be an integral tool for a number of Russian industries and to be beneficial for improving Russia’s geoeconomical status. The strategic priorities of transport modernization aim at ensuring that in the future Russia will be a great transit-services-providing power. RZhD’s President Vladimir Yakunin said there has been prepared a specific program to last until 2010 targeted at the integration of Russian railways into the Euro-Asian transport system (transit corridor) and improving the technology of export-import transit traffic and optimizing the interaction with foreign railways. One of RZhD’s modernization priorities is the development of railway facilities on the borderline railway crossings and near-port stations and the creation of intermodal companies that will coordinate transcontinental container shipments. Today, the capabilities of TransSib are ready for transcontinental transit of 300 thousand containers a year, projected capability being up to 1 million containers a year.

The TransSiberian Land Bridge (TSLB) is a high-capacity double-track electrified line of 10 thousand kilometers in length, capable of carrying up to 100 million tons of cargo annually, including up to 140 thousand TEU’s of containers from the Pacific region countries to Europe and Central Asia. The Nakhodka Vostochnaya pre-port shunting yard handles cargo for the port of Vostochny. The handling capacity of the station is 9 million tons per year. There is a terminal to handle up to 120 thousand transit containers a year. Cargo can be consolidated into a simultaneous shipment in the form of a heavy-duty six-thousand-ton block train, and TransSib can manage such a train.

Initially, this particular corridor offered a transshipment route to move light industrial and consumer goods from landlocked Jilin and Heilongjiang, Northeast China to the U.S. West Coast, bypassing the over-utilized Dalian-Harbin route in favor of a shorter route via ports in Primorsky krai and saving 1 600 miles. Initially referred to as the East-by-West Corridor, the transit route was proposed by the Transportation Sector of the Russian-American Pacific Partnership (RAPP). According to preliminary findings, American companies would save an estimated USD 1 thousand per container. Over 350 thousand metric tons of cargo passed between the ports of the U.S. West Coast and Vostochny in 1997, but a large percentage of the containers returned to the U.S. empty, and the corridor’s operation was declared inefficient.

Today, the corridor creates a smooth, efficient, and cost-competitive route linking trading partners China, Mongolia, RFE (Vladvostok, Vostochny), and Japan. The Russian Ministry of Railways is actively involved in modernizing the TSLB infrastructure, reducing transit times, and improving service levels. In addition, the rail links to the seaports have been modernized. These improvements have resulted in container handling in accordance with international standards. The service rate at the Vostochny International Container Services (VICS) terminal is 25-26 containers per hour. Transit time from Vostochny to Moscow is reduced to nine days to Poland and Finland is 11.5 days, and to Germany and Hungary – 12.5 days. Container transit time from ports of Japan and South Korea to West Europe and Scandinavia via TSLB is 17-20 days, which is faster than by sea. High-speed trains (120 km/hour), and cars capable of carrying 2x40’ containers, started to run on Vostochny/Nakhodka-Brest route. Trains are processed via Brest for onward travel to destinations further west, and efforts are being made to centralize deliveries to Moscow, so that dwell times upon arrival are reduced. In 2002-2005, RZhD invested USD 1.5 billion into the Far Eastern railway modernization to increase its through capacity.

The Russian Ministry of Railways pays great attention to developing TSLD and other rail links with Southeastern Asia. In March 2006, the international conference “A Bridge between Asia and Europe” organized by RZhD took place in Vladivostok. Representatives of South and North Koreas, Japan, China, Germany, and Sweden discussed improvement and modernization of TSLB, tools for attraction of transit cargo to this transit corridor, and forms of mutual cooperation.

Simplified customs procedures. The State Customs Committee has simplified customs procedures for transit containers transported by the TSLB to all destinations by electronic submission of railway bills to Customs prior to the cargo’s arrival. This allows cutting customs procedures from five days to two hours.

Suifenhe-Grodekovo Rail Link is a 26-km single-track railroad between Heilongjiang province in Northeast China and the RFE. The proximity to China has naturally resulted in China’s becoming one of Russia’s major trading partners. Commerce between the two countries is characterized mainly by the export of Russian raw materials (timber, oil, coal) and the import of Chinese technology and consumer goods. Annually, this border station boasts an increase of 1 million tons of cargo. In 2005, the Suifenhe-Grodekovo Bridge handled 7.4 million tons of cargo. It is expected to grow to 16 million by 2010. However, slow train speed, stops, and the re-gauging process are major obstacles on this route, resulting in transit time delays.

The Trans-Korean Rail Link would provide the port of Pusan with direct access to Europe via the Russian rail land bridge Khasan (Russia)-Tumangan (North Korea). The Russian Ministry of Railways plans to restore a 930-km stretch of the railway crossing North Korea from the Khasan station of the TransSib to the demarcation line with South Korea. This work is expected to take two years. Most cargo from South Korea to Europe is currently shipped via the Suez Canal, taking 40-45 days. It is believed that the new transport corridor would cut transit time to 10-12 days and decrease the rates by USD 400. The new corridor will be able to transport 200 thousand containers a year. With further development, the capacity could be increased up to 1 million containers a year.

Connection Between Sakhalin and Northern Japanese island. RZhD is considering several projects to expand its rail system in Southeastern Asia. A rail tunnel or bridge between Sakhalin and the mainland would link the island to the TransSib via the port in Vanino and attract cargo to the Baikal-Amur Railroad. There is also discussion of building a similar connection between Sakhalin and the northern Japanese island Hokkaido, allowing Japan to have a direct rail link with Europe via Russia. Annually, Japan sends to Europe 360 thousand TEU containers via the Suez Canal. In contrast, the TransSib carries only about 8.3 thousand containers from Japan. Today, the 80 miles between Sakhalin and Japan are connected by a ferry with a lifting capacity of 280 tons. In 2005, over five thousand tons of cargo destined for Sakhalin oil & gas projects were shipped by this route, and this volume has since grown substantially. According to newspaper publications, Japanese businesses are ready to provide financing for the project.

Rates. The upward jump of railroad rates caused a drastic slump in business for RZhD customers, freight forwarders, and RFE ports. In November 2005, RZhD approved new rates for the period of 2006-2009. The through rate for transit cargo shipped via TSLB from the ports of China and Southern Korea to Finland and Western Europe increased twofold and now stands at USD 2 000. Export-import cargo tariffs increased by 12%. Before the 2005 rate increase, RZhD introduced the concept of flexible commercial rates as opposed to fixed government-controlled rates. However, that liberalization of prices resulted in confusion for clients – the rates for a 20’ container shipment varied between USD 1 500 and

USD 1 900 in the Japanese-Scandinavian direction, and for 40’ container between USD 2 700 and USD 3 500. Today, the skyrocketing rates force many Asian freight forwarders to choose traditional sea borne traffic instead. Siberian and the Urals metal manufacturers were major cargo-suppliers for TransSib, exporting metal to the Pacific Rim countries; but they re-directed their export route to ocean shipment via western or southern Russian ports and the Suez Canal. Weak points and disadvantages of the new rate policy are obvious. Still, RZhD, taking an advantage of being a monopoly in the Russian railway market, does not plan decreasing the costs and states that the new high rates recovered the so-called “black corridor” concealed imports. Through a “black corridor,” import cargo destined for Russia was transported to Finland via rail under formerly low rates, then reloaded onto trucks and imported into Russia through an exempt tax and duty-free route via special importers in western Russia.

Market demand

Modernization projects. The Russian federal government retains ownership of the main railroad network and the infrastructure related to passenger and freight services, including infrastructure, railway data communication networks, traffic control systems, and locomotive stock. The concept for the restructuring of railways proposed a 49% privatization of companies providing freight forwarding services; the other 51% share would be state-owned. In 2003, a 100% state-owned company Russian Railways (RZhD) was formed out of the assets of the former Ministry of Railways (MPS) to carry out commercial and operational functions of MPS. Privatization procedures will also apply to enterprises engaged in the repair of rolling stock and the production of spare parts and other products for railway transportation. At the same time, the new reorganization confirmed that the railways were a true monopoly with direct control of the state. Given the fact that the restructuring concept was announced in 1998 and so far very little has changed, even limited privatization will be a long process. In 2004, MPS was restructured into the Federal Agency of Railway Transport within the R.F. Ministry of Transport. The Russian railway continues to be a “state within a state,” controlling the Russian economy, but there are indications that this status is beginning to change.

Priority projects include the upgrade of telecommunications systems, the improvement of traffic control and rail car tracking systems, including satellite systems. Currently, the Ministry of Railways is actively working with a number of American companies especially in telecommunications (IBM, Microsoft, Lucent Technologies, Cisco Systems). Other modernization projects include gradual rolling stock replacement. During 2003-2006, a massive campaign began to reequip and replace aging locomotives.

In 2004, the Far Eastern Shipping Company (FESCO) developed a partnership with RZhD to create the Russian company Troika LTD, which alone can handle up to 300 thousand TEU annually via the TransSib. In March 2005, Russian Troika LTD started delivering full block trains consisting of 38 80-foott fitting platforms accommodating 152 TEU with assembly parts from South Korea to a Hyundai automobile assembly works in the city of Taganrog on the Azov sea. In 2005, Russian Troika LTD handled about 28 thousand TEU.

Need in additional container fleet. In 1997, the Russian Ministry of Railways and Far Eastern Shipping Company (FESCO) signed a container interchange agreement allowing usage of each party’s containers, thus reducing shippers’ costs by USD 100-150 per 20’ container. In 1999, the Russian Ministry of Railways and Hyundai Merchant Marine Company signed a similar agreement. Also, in 1999, the Russian and Chinese Railways signed a container interchange agreement. The purpose of this agreement was to increase cargo flow between Russia and China, to use containers more effectively, and to reduce dispatch time.

Problem of attracting cargo volumes to the RFE Railroad. In 2002-2003, RZhD’s officials said that the container volumes had more than doubled, as shippers in Japan, Korea, and Vietnam opt for the land route instead of the sea and that the war in Iraq was driving cargo shippers in Asia to stay as far away as possible from the conflict zone. Federal rail sources reported that they had to add an extra third container train per day from the Nakhodka-Vostochnaya railway station alone. However, today, the volume of containers that can be shipped via the Russian railways transit corridors has decreased to 300 thousand per year. It is still minuscule when compared with ocean shipping capacity. The Vostochny port is designed to process over 50 million tons of cargo annually, but the single-track rail line serving the port has an annual throughput capacity of but 25 millon tons. RZhD itself states that its throughput capacity is utilized at only 60%, which influences the port’s productivity. TransSib turned out to be a bottleneck of the RFE’s rail system due to poorly developed rail spurs and limited throughout capacity in ports and boarder crossings, the shortage of rail cars, and uncompetitive rail rates.

Short supply and poor condition of rail cars and inappropriate fleet management result in erratic freight delivery schedules and unwanted delays in transit and generate dissatisfaction of clients and failures in delivering high-value and time-sensitive consignments. Over 50% of Russia’s rolling stock is considered to be operating beyond its effective service life; also there is a shortage in container platforms at stations, where demand is traditionally high (at ports). There are only 13 000 platforms in all of Russia, and 7 000 are processed monthly at Vostochny alone. The rail cars shortage may reach over 25% per day at the Vostochny International Container Services. Also, few of the RZhD container terminals have equipment/cranes to clear access to railways from cars in a timely manner.

Freight flows to and through the RFE are largely of a transit nature with a major imbalance depending on the raw-materials-export-oriented Russian economy. There is a problem of minimizing the volume of empty back-hauls in transit cargo handling – half of the containers are empty on the way back. The proportion may not be so extreme for transit traffic destined for other parts of Russia, but the situation is much the same.

Railway control standards and risk assessment. Cargo safety has always been a major concern of freight forwarding in Russia, and the RZhD had to develop solutions for protecting cargo, such as discovering insurance deficiencies; identifying reliable and cost-efficient container tracking/monitoring and security technologies and devices on port-to-rail and rail-to-destinations; quickly identifying time-sensitive shipments, and making sure that those shipments have priority. Also, every block train moving via the TSLB is accompanied by armed security guards. The former R.F. Ministry of Railway Transport created several Centers for Transportation Safety throughout Russia in order to secure door-to-door delivery, control cargo safety, and continually monitor cargo location. TransTelecom installed a digital communication line along the TransSib. Digital fiberglass telecommunication network through TransSib allows conducting a real time efficient container tracking/monitoring and implementing modern security technologies.

In terms of the Russian Federal Program on Enhancing Railway Safety, in 2005-2006, RZhD re-equipped over 70 (of 550 total) railway/highway crossroads on TransSib with crossing warning signals – electric signs, busy signals, and automatic road barriers to avoid collisions.

Best prospects

The Russian rail sector represents one of the world’s largest and potentially lucrative markets for supplying equipment (rolling stock and components), track maintenance, telecommunications and information technologies, rail management systems, and safety equipment. Industry experts note that the U.S. can offer Russia the best model for freight railroading based on similar distances, volumes, and climate conditions in the two countries.

Solutions to meeting the equipment needs may come from integrating foreign technologies into Russian manufacturing processes and management techniques in freight and passenger transportation. The need for new generation diesel locomotives (with AC/AC transmission), freight cars, and components to upgrade the existing rolling stock offers opportunities for U.S. firms to enter the market. However, the emphasis will be made on developing domestic production with participation of foreign partners.

The best sales prospect for U.S. companies in the RFE is developing smooth, flexible, cost-effective cargo and passenger transportation services for both local and international users:

• Improving logistics services through local freight forwarders for both Russian and foreign intermodal operators;

• Creating multimodal logistic centers, perfecting the operational system, cargo/container/rail car fleet handling and distribution;

• Human resources management;

• Transportation services marketing;

• Insurance services brokering;

• Safety system for transit cargo monitoring;

• Development of infrastructure of the transit cargo checkpoints;

Marketing of SABRE/ GALILEO/ other IT global booking system.

Prospective buyers

As stated previously, the Russian railway is a “state within a state.” A 100% state-owned company Russian Railways (RZhD) supervises its affiliate offices in the RFE. Daughter companies, such as Russian Troika LTD, JVs, such as the newly-formed partnership between RZhD and German Deutsche Bahn AG, VICS/VFS, and freight forwarders locked into providing services to railway clients, can be potential buyers of U.S. products in the railway sector. There are few key local players in the RFE providing reliable railway transportation services. VladivostokVneshTrans, LTD is a leading railway transportation company, a member of the Russian Association of International Forwarding Agents. The major service of VladivostokVneshTrans is containerized cargo forwarding via the TransSib from the ports of Vladivostok, Posyet, Zarubino, the TransSiberian railway station of Khasan (Zarubino). The densest concentration of railway transportation companies serving export/import and transit cargo shipments via the TransSib is in Khabarovsk. Transport-Service-Transit, East-by-West, DTK-Freight, MCh-1, DalVneshTrans, and TransRail-Vostok provide containerized and bulk cargo transportation, as well as loading/unloading, and warehouse-to-warehouse delivery.

Market entry

Based on the current situation in the RFE railroad equipment market, the recommended strategy for entering the market is attempting to sell diesel locomotives, freight cars, and components directly to the Far Eastern and Sakhalinskaya railroad head offices, their daughter companies, rail freight forwarders, and their clients. These contacts may have a capacity for service station operations and a distribution network for spare parts sales. It is preferable that the local contact have a good record with the banks, so that he could get a loan or a leasing agreement. This strategy will allow U.S. railroad products to take a considerable market share within a short period of time. The sale of spare parts, accessories, and service equipment can be handled through official agents or dealers of manufacturers/exporters or through companies involved in the importation and distribution of spare parts and special railway equipment in Russia or Southeastern Asia.

General tips for entering the market. Today, the business environment and economic situation are beneficial for U.S. companies to enter the RFE market. Interested U.S. companies seeking to penetrate the RFE market are encouraged to use the following tips:

1) Pricing strategy;

2) Financing considerations, e.g., extension of credit;

3) Willingness to invest in training of potential dealers and customers;

4) Participation in tenders;

5) Direct contacts with local railroad decision-makers;

6) Participation in exhibitions at national and local levels;

7) Presentations and seminars. The availability of technical information in Russian language is very important for such seminars.