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Early in 2006, the press-service of the Ministry of Economic and Communication of Estonia claimed that, if the Republic broke the contract, BRS controlling 66% of ER shares would get compensation worth their investment. Also, it was clarified that BRS would have the right for interest as the cost of ER has increased since privatization. In 2001 the state received USD 77 mln for ER shares.

The official reason to call for a potential breach of privatization contract, as stated by the administration of the state, is that current owners do not meet their engagements in respect of infrastructure investment, although last autumn Head of PR-department of ER Priit Koff clarified that, according to the privatization agreement, liabilities of BRS as a major share holder are to invest into the enterprise USD 192 mln in five years. According to Edgar Savisaar, Minister of Economics and Communications, the issue of breaking the privatization contract progressed soon after BRS brought a suit against the Estonian state to arbitration tribunal aiming to deprive it of its so-called golden share of Eesti Raudtee and disfranchise it. 

Andrus Ansip, Prime Minister of Estonia, supported the Ministry’s position regarding the contract breach but emphasized the fact that in this case one should avoid haste. 

This spring BRS was known to hold negotiations with companies potentially interested in buying АО Eesti Raudtee shares. Estonian Transgroup Invest, German Railway Concern Deutsche Bahn and even Russian Concern «Industrial Investors» were among them. Russia’s interest is quite reasonable: recently cargo turnover between neighbouring countries has been growing and it is quite obvious that this tendency will carry on. According to certain sources, the sum offered by the Russian concern was the highest price; however, Tallinn’s political position finally dominated. In the opinion of Estonian parliamentarians, it is inappropriate to sell one of the most important strategic objects to the neighboring state. Thus, the Russians were taken out of the game the same way as it happened during privatization. It should also be noted that recently Estonian transport sector has become traditional platform for huge Russian investment. This amount is growing year by year. 

In accordance with the tender terms, May 5 was declared the deadline for bringing proposals regarding the purchase of ER control stock. The state won.

BRS expects to sell off their shares for about USD 190 mln while the state was ready to offer only USD 162 mln. Moreover, disagreement also had to do with tariffs for infrastructure use and ER property cost.

In mid-September Estonian Government made final decision to buy out ER shares from BRS under conditions of mutual understanding. During the negotiations, BRS Company was represented by Suprema Investment Bank. At the Government press-conference Andrus Ansip claimed that, provided the negotiations are a success, the state will have to find additional funding in the budget to buy Estonian Railways back. However, the final price was unknown. Edgar Savisaar noted that they had calculated the probable cost of ER, but they were not inclined to make it public until the agreement was reached.

The state is interested in a large investment flow directed to railway infrastructure development. Experts say that many sectors of ER are in poor state now, and railway tracks reconstruction is badly needed. That is why, after breaking the privatization contract, railway authorities can count on large investment volumes from EU funds. Edgar Savisaar also pointed out that after nationalization many Estonian towns will get high-speed lines and railway run will be renewed. «We should be able to get to Europe from any part of Estonia by railway», the Minister stated.

Nevertheless, summing up, it is clear that all this looks like a well-planned action, especially considering the forthcoming elections. This makes some experts believe that we have just witnessed some kind of demonstrative process of destroying inefficient (is it really so?) private business in the country. There is an opinion that under conditions of state support АО Eesti Raudtee could have found access to the EU investment funds sources. Moreover, what shows efficient administration policy better than annual cargo turnover increase?

On November 7, the Government of Estonia approved the project of breaking the privatization contract concluded between AO Eesti Raudtee (Estonian Railways) and Baltic Rail Services (BRS) on April 30, 2001 and purchasing the company by the state. According to the project the state gets control over 66% of ER shares (19.800.000 shares) now belonging to BRS. 34% of shares already belong to the state. BRS must receive USD 180 mln for its shares from the state.



ANNA  TUZOVA

NATALYA  DON
    [~DETAIL_TEXT] => 

Early in 2006, the press-service of the Ministry of Economic and Communication of Estonia claimed that, if the Republic broke the contract, BRS controlling 66% of ER shares would get compensation worth their investment. Also, it was clarified that BRS would have the right for interest as the cost of ER has increased since privatization. In 2001 the state received USD 77 mln for ER shares.

The official reason to call for a potential breach of privatization contract, as stated by the administration of the state, is that current owners do not meet their engagements in respect of infrastructure investment, although last autumn Head of PR-department of ER Priit Koff clarified that, according to the privatization agreement, liabilities of BRS as a major share holder are to invest into the enterprise USD 192 mln in five years. According to Edgar Savisaar, Minister of Economics and Communications, the issue of breaking the privatization contract progressed soon after BRS brought a suit against the Estonian state to arbitration tribunal aiming to deprive it of its so-called golden share of Eesti Raudtee and disfranchise it. 

Andrus Ansip, Prime Minister of Estonia, supported the Ministry’s position regarding the contract breach but emphasized the fact that in this case one should avoid haste. 

This spring BRS was known to hold negotiations with companies potentially interested in buying АО Eesti Raudtee shares. Estonian Transgroup Invest, German Railway Concern Deutsche Bahn and even Russian Concern «Industrial Investors» were among them. Russia’s interest is quite reasonable: recently cargo turnover between neighbouring countries has been growing and it is quite obvious that this tendency will carry on. According to certain sources, the sum offered by the Russian concern was the highest price; however, Tallinn’s political position finally dominated. In the opinion of Estonian parliamentarians, it is inappropriate to sell one of the most important strategic objects to the neighboring state. Thus, the Russians were taken out of the game the same way as it happened during privatization. It should also be noted that recently Estonian transport sector has become traditional platform for huge Russian investment. This amount is growing year by year. 

In accordance with the tender terms, May 5 was declared the deadline for bringing proposals regarding the purchase of ER control stock. The state won.

BRS expects to sell off their shares for about USD 190 mln while the state was ready to offer only USD 162 mln. Moreover, disagreement also had to do with tariffs for infrastructure use and ER property cost.

In mid-September Estonian Government made final decision to buy out ER shares from BRS under conditions of mutual understanding. During the negotiations, BRS Company was represented by Suprema Investment Bank. At the Government press-conference Andrus Ansip claimed that, provided the negotiations are a success, the state will have to find additional funding in the budget to buy Estonian Railways back. However, the final price was unknown. Edgar Savisaar noted that they had calculated the probable cost of ER, but they were not inclined to make it public until the agreement was reached.

The state is interested in a large investment flow directed to railway infrastructure development. Experts say that many sectors of ER are in poor state now, and railway tracks reconstruction is badly needed. That is why, after breaking the privatization contract, railway authorities can count on large investment volumes from EU funds. Edgar Savisaar also pointed out that after nationalization many Estonian towns will get high-speed lines and railway run will be renewed. «We should be able to get to Europe from any part of Estonia by railway», the Minister stated.

Nevertheless, summing up, it is clear that all this looks like a well-planned action, especially considering the forthcoming elections. This makes some experts believe that we have just witnessed some kind of demonstrative process of destroying inefficient (is it really so?) private business in the country. There is an opinion that under conditions of state support АО Eesti Raudtee could have found access to the EU investment funds sources. Moreover, what shows efficient administration policy better than annual cargo turnover increase?

On November 7, the Government of Estonia approved the project of breaking the privatization contract concluded between AO Eesti Raudtee (Estonian Railways) and Baltic Rail Services (BRS) on April 30, 2001 and purchasing the company by the state. According to the project the state gets control over 66% of ER shares (19.800.000 shares) now belonging to BRS. 34% of shares already belong to the state. BRS must receive USD 180 mln for its shares from the state.



ANNA  TUZOVA

NATALYA  DON
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The official reason to call for a potential breach of privatization contract, as stated by the administration of the state, is that current owners do not meet their engagements in respect of infrastructure investment, although last autumn Head of PR-department of ER Priit Koff clarified that, according to the privatization agreement, liabilities of BRS as a major share holder are to invest into the enterprise USD 192 mln in five years. According to Edgar Savisaar, Minister of Economics and Communications, the issue of breaking the privatization contract progressed soon after BRS brought a suit against the Estonian state to arbitration tribunal aiming to deprive it of its so-called golden share of Eesti Raudtee and disfranchise it. 

Andrus Ansip, Prime Minister of Estonia, supported the Ministry’s position regarding the contract breach but emphasized the fact that in this case one should avoid haste. 

This spring BRS was known to hold negotiations with companies potentially interested in buying АО Eesti Raudtee shares. Estonian Transgroup Invest, German Railway Concern Deutsche Bahn and even Russian Concern «Industrial Investors» were among them. Russia’s interest is quite reasonable: recently cargo turnover between neighbouring countries has been growing and it is quite obvious that this tendency will carry on. According to certain sources, the sum offered by the Russian concern was the highest price; however, Tallinn’s political position finally dominated. In the opinion of Estonian parliamentarians, it is inappropriate to sell one of the most important strategic objects to the neighboring state. Thus, the Russians were taken out of the game the same way as it happened during privatization. It should also be noted that recently Estonian transport sector has become traditional platform for huge Russian investment. This amount is growing year by year. 

In accordance with the tender terms, May 5 was declared the deadline for bringing proposals regarding the purchase of ER control stock. The state won.

BRS expects to sell off their shares for about USD 190 mln while the state was ready to offer only USD 162 mln. Moreover, disagreement also had to do with tariffs for infrastructure use and ER property cost.

In mid-September Estonian Government made final decision to buy out ER shares from BRS under conditions of mutual understanding. During the negotiations, BRS Company was represented by Suprema Investment Bank. At the Government press-conference Andrus Ansip claimed that, provided the negotiations are a success, the state will have to find additional funding in the budget to buy Estonian Railways back. However, the final price was unknown. Edgar Savisaar noted that they had calculated the probable cost of ER, but they were not inclined to make it public until the agreement was reached.

The state is interested in a large investment flow directed to railway infrastructure development. Experts say that many sectors of ER are in poor state now, and railway tracks reconstruction is badly needed. That is why, after breaking the privatization contract, railway authorities can count on large investment volumes from EU funds. Edgar Savisaar also pointed out that after nationalization many Estonian towns will get high-speed lines and railway run will be renewed. «We should be able to get to Europe from any part of Estonia by railway», the Minister stated.

Nevertheless, summing up, it is clear that all this looks like a well-planned action, especially considering the forthcoming elections. This makes some experts believe that we have just witnessed some kind of demonstrative process of destroying inefficient (is it really so?) private business in the country. There is an opinion that under conditions of state support АО Eesti Raudtee could have found access to the EU investment funds sources. Moreover, what shows efficient administration policy better than annual cargo turnover increase?

On November 7, the Government of Estonia approved the project of breaking the privatization contract concluded between AO Eesti Raudtee (Estonian Railways) and Baltic Rail Services (BRS) on April 30, 2001 and purchasing the company by the state. According to the project the state gets control over 66% of ER shares (19.800.000 shares) now belonging to BRS. 34% of shares already belong to the state. BRS must receive USD 180 mln for its shares from the state.



ANNA  TUZOVA

NATALYA  DON
    [~DETAIL_TEXT] => 

Early in 2006, the press-service of the Ministry of Economic and Communication of Estonia claimed that, if the Republic broke the contract, BRS controlling 66% of ER shares would get compensation worth their investment. Also, it was clarified that BRS would have the right for interest as the cost of ER has increased since privatization. In 2001 the state received USD 77 mln for ER shares.

The official reason to call for a potential breach of privatization contract, as stated by the administration of the state, is that current owners do not meet their engagements in respect of infrastructure investment, although last autumn Head of PR-department of ER Priit Koff clarified that, according to the privatization agreement, liabilities of BRS as a major share holder are to invest into the enterprise USD 192 mln in five years. According to Edgar Savisaar, Minister of Economics and Communications, the issue of breaking the privatization contract progressed soon after BRS brought a suit against the Estonian state to arbitration tribunal aiming to deprive it of its so-called golden share of Eesti Raudtee and disfranchise it. 

Andrus Ansip, Prime Minister of Estonia, supported the Ministry’s position regarding the contract breach but emphasized the fact that in this case one should avoid haste. 

This spring BRS was known to hold negotiations with companies potentially interested in buying АО Eesti Raudtee shares. Estonian Transgroup Invest, German Railway Concern Deutsche Bahn and even Russian Concern «Industrial Investors» were among them. Russia’s interest is quite reasonable: recently cargo turnover between neighbouring countries has been growing and it is quite obvious that this tendency will carry on. According to certain sources, the sum offered by the Russian concern was the highest price; however, Tallinn’s political position finally dominated. In the opinion of Estonian parliamentarians, it is inappropriate to sell one of the most important strategic objects to the neighboring state. Thus, the Russians were taken out of the game the same way as it happened during privatization. It should also be noted that recently Estonian transport sector has become traditional platform for huge Russian investment. This amount is growing year by year. 

In accordance with the tender terms, May 5 was declared the deadline for bringing proposals regarding the purchase of ER control stock. The state won.

BRS expects to sell off their shares for about USD 190 mln while the state was ready to offer only USD 162 mln. Moreover, disagreement also had to do with tariffs for infrastructure use and ER property cost.

In mid-September Estonian Government made final decision to buy out ER shares from BRS under conditions of mutual understanding. During the negotiations, BRS Company was represented by Suprema Investment Bank. At the Government press-conference Andrus Ansip claimed that, provided the negotiations are a success, the state will have to find additional funding in the budget to buy Estonian Railways back. However, the final price was unknown. Edgar Savisaar noted that they had calculated the probable cost of ER, but they were not inclined to make it public until the agreement was reached.

The state is interested in a large investment flow directed to railway infrastructure development. Experts say that many sectors of ER are in poor state now, and railway tracks reconstruction is badly needed. That is why, after breaking the privatization contract, railway authorities can count on large investment volumes from EU funds. Edgar Savisaar also pointed out that after nationalization many Estonian towns will get high-speed lines and railway run will be renewed. «We should be able to get to Europe from any part of Estonia by railway», the Minister stated.

Nevertheless, summing up, it is clear that all this looks like a well-planned action, especially considering the forthcoming elections. This makes some experts believe that we have just witnessed some kind of demonstrative process of destroying inefficient (is it really so?) private business in the country. There is an opinion that under conditions of state support АО Eesti Raudtee could have found access to the EU investment funds sources. Moreover, what shows efficient administration policy better than annual cargo turnover increase?

On November 7, the Government of Estonia approved the project of breaking the privatization contract concluded between AO Eesti Raudtee (Estonian Railways) and Baltic Rail Services (BRS) on April 30, 2001 and purchasing the company by the state. According to the project the state gets control over 66% of ER shares (19.800.000 shares) now belonging to BRS. 34% of shares already belong to the state. BRS must receive USD 180 mln for its shares from the state.



ANNA  TUZOVA

NATALYA  DON
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    [DETAIL_TEXT] => 

Waiting for Modernization

Railway transport needs permanent development and renewal. One of the most important tasks to be solved by railways is the development of the national machine engineering complex.

Nowadays wear-and-tear of basic assets of railway transport amounts to 60-73%. For certain positions rolling stock wear-and-tear reaches 80%. About 10 thousand passenger cars are 20 years old or even more. The most complicated situation can be seen in the locomotive sector, their average wear-and-tear amounts 70-75%. The park is aging faster than it is renewed. 

To solve this problem, ОАО RZD approved a special programme for the period of 2004-2010 that envisages general investment volume worth RUR 600 bln into rolling stock renewal.

Considering the forecasted increase in cargo transportation volume, the cargo park of the company should operate about 615 units by 2010. The purchase of about 9.5 thousand passenger cars is also considered, as well as locomotives and motor car rolling stock. 

Te rapid growth of demand for railway machinery gives the sector the highest rates of development in the Russian industry – 25-30% per year. However, opportunities to satisfy such intensive growth, considering modern technical demands to rolling stock, face a serious problem of wear-and-tear of basic production assets. 

From the beginning of the 1990-s enterprises of machine engineering specializing in railway machinery did not have any investment opportunities to renew assets. By the end of the 1990-s production capacities were loaded by less than 50%, while wear-and-tear of equipment amounted to 90% for some positions. For the sake of comparison, in developed countries sales volumes allow machine engineering enterprises to renew their technological park every seven-ten years. In Russia this period is much longer. 

Nowadays the investment volume into the national machine engineering is one of the crucial factors that define probable rates of the transport sector modernization and development. This is an economic base providing stable and dynamic sector development corresponding to the modern demands to rolling stock. Now we can easily state that in the last two years the machine engineering sector has been witnessing the tendency of investment growth directed into basic assets renewal. 

The major investor of the transport engineering sector is OAO RZD who is responsible for the main share in the general volume of demand for this production. At the same time, machine engineering enterprises, feeling a crucial deficit in long-term resources, actively invest their own funds into production modernization. According to experts, the share of this sort of investment amounts to 75-78% from general investment volume. At the same time, developed countries have an opposite proportion: 70-80% of financing directed to investment is usually attracted funds or loans. 



Hope-rising Changes

An analysis of Russian banks investment activities shows quite large-scaled financing of the real sector of the Russian economy. However, banks participation in financing investment projects with long-term of pay-back is restricted by small projects worth a few million dollars. Large-scaled projects with complicated schemes of project financing and attracting different sorts of financial institutions, risks re-distribution and insurance of each stage are implemented very seldom. 

The largest banks take active steps to develop and implement such schemes, as well as to attract Russian and international financial institutions to participate in the projects. 

The major obstacle that stops bank investment from flowing into the industrial sector is high risks. The reason for that is the uncertainty of economic medium- and long-term conjuncture, lack of transparency in corporate finance, old debts, low level of discipline for following contractual obligations etc. All this, in combination with typical of machine engineering high capital intensity and long-term of pay-back of investment projects, as well as high rates of inflation, explain the reserved position of the bank sector towards investment crediting of this sector enterprises. 

In this respect, of special importance for enterprises and financial institutions are accuracy and logic in the process of implementation OAO RZD investment programmes based on long-term agreements with rolling stock manufacturers. A guaranteed chance to sell their production for several years proved by respective documents of the corporation, its open position about development plans, technical policy aimed at the national manufacturer are basic factors that define the positive dynamics of investment processes in the railway machine engineering sector. 

Another important factor that can help change the bank sector attitude to investment into machine engineering is activating investment by the enterprises themselves, who can use market instruments of direct loans to implement medium- and long-term projects. Emission has become a very popular mechanism which is organized with attraction of highly-skilled financial consultants and bank-organizers. 

In the last three years this sector has undergone serious positive changes. Enterprises learnt to work on the financial market, «to sell their own investment potential» to financial institutions and other interested investors. As an example a range of bonds placement implemented by machine engineering enterprises can be quoted. In particular, bonds were issued by PO Uralwagonzavod, and ОАО Tver Wagon Engineering Works. In October, ООО Promtractor-Finance issued bond worth RUR 3 bln. ОАО Bank АK Bars and ZAO Gazprombank performed as this issue organizers. The co-organizer part was played by ОАО TransCreditBank.

The bank sector activated within financial leasing, which is now a highly potential and dynamically developing direction of investment financing. It is quite important that banks, being most conservative financial institutions, operate significant resources of required urgency and in general of quite acceptable cost. The proof to this is a tender held by ОАО RZD on the right to conclude contracts on rolling stock leasing for the period of 5-8 years. The general cost of leasing objects prepared for the tender (locomotives, cargo and passenger cars, rail buses) amounted to RUR 20.5 bln and the volume of applications for participation made RUR 76.7 bln In terms of risks OAO RZD performing as a lease customer has serious advantages as compared to the industrial enterprises of railway engineering, since this very company is a sort of «locomotive» which provides positive dynamics of these machinery building enterprises development. 

Significant changes can be observed in the area of long-term credit recourses attraction from Western banks in order to implement costly technical re-equipment of railway engineering enterprises. The largest equipment manufacturers from Europe and the US come to the Russian market interested in high profitability, especially under the comforting conditions of guarantees given by Export Credit Agencies of the states. 



TransCreditBank on the Transport Services Market

The railway transport reform also aims to create a competitive market of transportation. In recent years the number of companies-carriers has been growing intensively. Quite often it happens so that their own funds do not allow them to enhance their rolling stock park to satisfy the demand for transportation by industrial enterprises. That is the reason why they actively use leasing schemes to finance their projects on rolling stock purchase.

The growth rates of the present-day leasing market are significantly surpassing any other macroeconomic data characterizing the national economic dynamics. The volume of contracts concluded in 2005 increased by 23%-27% compared to the results of 2004.

TransCreditBank demonstrates even more impressive dynamics. It started to develop leasing credits as a business direction in spring 2003. In 2004 the volume of leasing credits contracts exceeded RUR 1 bln. In 2005 the general volume of credit debts allocated to finance leasing contracts reached RUR 5 bln and the aggregate cost of property for financed leasing contracts amounted to RUR 9.5 bln. In particular, our bank allocated funds to ОАО RZD for acquiring rolling stock (over 1400 units); financing of equipment leasing given to machine engineering enterprises was also implemented. At present ОАО TransCreditBank, together with some leasing companies - its reliable partners is carrying on several projects of leasing credits for the transport engineering sector. As a rule, these are long-term projects (4 to 7 years) directed on purchase of complex import and domestic equipment with frequent attraction of credits from foreign banks.

Our experience gives the bank a chance to apply it effectively for allocating credits on purchase equipment for aircrafts, cargo sea and river vessels, trucks etc. It is important that investment made into these projects is easily forecasted in terms of probable risks, and the nature of assets satisfies the demands for objective control in respect of spending funds and their liquidity.

TransCreditBank participates in fulfilling new for Russia mechanisms of funding investment projects, developed on the basis of leasing financing.

Thus, nowadays the time has come to speak of the fundamental opportunity and readiness of the bank sector to sustain long-term investment programmes. To achieve this under conditions of keeping positive dynamics in the country’s general economic situation, as well as considering the present-day tendencies of the machine engineering market, we need to care about the financial «health» of the enterprises, which is based on the stable solvent demand for their production. This scenario can lead to solving the problem of trust between the bank sector and enterprises and, consequently, serious growth of investment activities.



ELENA  USHKOVA
    [~DETAIL_TEXT] => 

Waiting for Modernization

Railway transport needs permanent development and renewal. One of the most important tasks to be solved by railways is the development of the national machine engineering complex.

Nowadays wear-and-tear of basic assets of railway transport amounts to 60-73%. For certain positions rolling stock wear-and-tear reaches 80%. About 10 thousand passenger cars are 20 years old or even more. The most complicated situation can be seen in the locomotive sector, their average wear-and-tear amounts 70-75%. The park is aging faster than it is renewed. 

To solve this problem, ОАО RZD approved a special programme for the period of 2004-2010 that envisages general investment volume worth RUR 600 bln into rolling stock renewal.

Considering the forecasted increase in cargo transportation volume, the cargo park of the company should operate about 615 units by 2010. The purchase of about 9.5 thousand passenger cars is also considered, as well as locomotives and motor car rolling stock. 

Te rapid growth of demand for railway machinery gives the sector the highest rates of development in the Russian industry – 25-30% per year. However, opportunities to satisfy such intensive growth, considering modern technical demands to rolling stock, face a serious problem of wear-and-tear of basic production assets. 

From the beginning of the 1990-s enterprises of machine engineering specializing in railway machinery did not have any investment opportunities to renew assets. By the end of the 1990-s production capacities were loaded by less than 50%, while wear-and-tear of equipment amounted to 90% for some positions. For the sake of comparison, in developed countries sales volumes allow machine engineering enterprises to renew their technological park every seven-ten years. In Russia this period is much longer. 

Nowadays the investment volume into the national machine engineering is one of the crucial factors that define probable rates of the transport sector modernization and development. This is an economic base providing stable and dynamic sector development corresponding to the modern demands to rolling stock. Now we can easily state that in the last two years the machine engineering sector has been witnessing the tendency of investment growth directed into basic assets renewal. 

The major investor of the transport engineering sector is OAO RZD who is responsible for the main share in the general volume of demand for this production. At the same time, machine engineering enterprises, feeling a crucial deficit in long-term resources, actively invest their own funds into production modernization. According to experts, the share of this sort of investment amounts to 75-78% from general investment volume. At the same time, developed countries have an opposite proportion: 70-80% of financing directed to investment is usually attracted funds or loans. 



Hope-rising Changes

An analysis of Russian banks investment activities shows quite large-scaled financing of the real sector of the Russian economy. However, banks participation in financing investment projects with long-term of pay-back is restricted by small projects worth a few million dollars. Large-scaled projects with complicated schemes of project financing and attracting different sorts of financial institutions, risks re-distribution and insurance of each stage are implemented very seldom. 

The largest banks take active steps to develop and implement such schemes, as well as to attract Russian and international financial institutions to participate in the projects. 

The major obstacle that stops bank investment from flowing into the industrial sector is high risks. The reason for that is the uncertainty of economic medium- and long-term conjuncture, lack of transparency in corporate finance, old debts, low level of discipline for following contractual obligations etc. All this, in combination with typical of machine engineering high capital intensity and long-term of pay-back of investment projects, as well as high rates of inflation, explain the reserved position of the bank sector towards investment crediting of this sector enterprises. 

In this respect, of special importance for enterprises and financial institutions are accuracy and logic in the process of implementation OAO RZD investment programmes based on long-term agreements with rolling stock manufacturers. A guaranteed chance to sell their production for several years proved by respective documents of the corporation, its open position about development plans, technical policy aimed at the national manufacturer are basic factors that define the positive dynamics of investment processes in the railway machine engineering sector. 

Another important factor that can help change the bank sector attitude to investment into machine engineering is activating investment by the enterprises themselves, who can use market instruments of direct loans to implement medium- and long-term projects. Emission has become a very popular mechanism which is organized with attraction of highly-skilled financial consultants and bank-organizers. 

In the last three years this sector has undergone serious positive changes. Enterprises learnt to work on the financial market, «to sell their own investment potential» to financial institutions and other interested investors. As an example a range of bonds placement implemented by machine engineering enterprises can be quoted. In particular, bonds were issued by PO Uralwagonzavod, and ОАО Tver Wagon Engineering Works. In October, ООО Promtractor-Finance issued bond worth RUR 3 bln. ОАО Bank АK Bars and ZAO Gazprombank performed as this issue organizers. The co-organizer part was played by ОАО TransCreditBank.

The bank sector activated within financial leasing, which is now a highly potential and dynamically developing direction of investment financing. It is quite important that banks, being most conservative financial institutions, operate significant resources of required urgency and in general of quite acceptable cost. The proof to this is a tender held by ОАО RZD on the right to conclude contracts on rolling stock leasing for the period of 5-8 years. The general cost of leasing objects prepared for the tender (locomotives, cargo and passenger cars, rail buses) amounted to RUR 20.5 bln and the volume of applications for participation made RUR 76.7 bln In terms of risks OAO RZD performing as a lease customer has serious advantages as compared to the industrial enterprises of railway engineering, since this very company is a sort of «locomotive» which provides positive dynamics of these machinery building enterprises development. 

Significant changes can be observed in the area of long-term credit recourses attraction from Western banks in order to implement costly technical re-equipment of railway engineering enterprises. The largest equipment manufacturers from Europe and the US come to the Russian market interested in high profitability, especially under the comforting conditions of guarantees given by Export Credit Agencies of the states. 



TransCreditBank on the Transport Services Market

The railway transport reform also aims to create a competitive market of transportation. In recent years the number of companies-carriers has been growing intensively. Quite often it happens so that their own funds do not allow them to enhance their rolling stock park to satisfy the demand for transportation by industrial enterprises. That is the reason why they actively use leasing schemes to finance their projects on rolling stock purchase.

The growth rates of the present-day leasing market are significantly surpassing any other macroeconomic data characterizing the national economic dynamics. The volume of contracts concluded in 2005 increased by 23%-27% compared to the results of 2004.

TransCreditBank demonstrates even more impressive dynamics. It started to develop leasing credits as a business direction in spring 2003. In 2004 the volume of leasing credits contracts exceeded RUR 1 bln. In 2005 the general volume of credit debts allocated to finance leasing contracts reached RUR 5 bln and the aggregate cost of property for financed leasing contracts amounted to RUR 9.5 bln. In particular, our bank allocated funds to ОАО RZD for acquiring rolling stock (over 1400 units); financing of equipment leasing given to machine engineering enterprises was also implemented. At present ОАО TransCreditBank, together with some leasing companies - its reliable partners is carrying on several projects of leasing credits for the transport engineering sector. As a rule, these are long-term projects (4 to 7 years) directed on purchase of complex import and domestic equipment with frequent attraction of credits from foreign banks.

Our experience gives the bank a chance to apply it effectively for allocating credits on purchase equipment for aircrafts, cargo sea and river vessels, trucks etc. It is important that investment made into these projects is easily forecasted in terms of probable risks, and the nature of assets satisfies the demands for objective control in respect of spending funds and their liquidity.

TransCreditBank participates in fulfilling new for Russia mechanisms of funding investment projects, developed on the basis of leasing financing.

Thus, nowadays the time has come to speak of the fundamental opportunity and readiness of the bank sector to sustain long-term investment programmes. To achieve this under conditions of keeping positive dynamics in the country’s general economic situation, as well as considering the present-day tendencies of the machine engineering market, we need to care about the financial «health» of the enterprises, which is based on the stable solvent demand for their production. This scenario can lead to solving the problem of trust between the bank sector and enterprises and, consequently, serious growth of investment activities.



ELENA  USHKOVA
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    [DETAIL_TEXT] => 

Waiting for Modernization

Railway transport needs permanent development and renewal. One of the most important tasks to be solved by railways is the development of the national machine engineering complex.

Nowadays wear-and-tear of basic assets of railway transport amounts to 60-73%. For certain positions rolling stock wear-and-tear reaches 80%. About 10 thousand passenger cars are 20 years old or even more. The most complicated situation can be seen in the locomotive sector, their average wear-and-tear amounts 70-75%. The park is aging faster than it is renewed. 

To solve this problem, ОАО RZD approved a special programme for the period of 2004-2010 that envisages general investment volume worth RUR 600 bln into rolling stock renewal.

Considering the forecasted increase in cargo transportation volume, the cargo park of the company should operate about 615 units by 2010. The purchase of about 9.5 thousand passenger cars is also considered, as well as locomotives and motor car rolling stock. 

Te rapid growth of demand for railway machinery gives the sector the highest rates of development in the Russian industry – 25-30% per year. However, opportunities to satisfy such intensive growth, considering modern technical demands to rolling stock, face a serious problem of wear-and-tear of basic production assets. 

From the beginning of the 1990-s enterprises of machine engineering specializing in railway machinery did not have any investment opportunities to renew assets. By the end of the 1990-s production capacities were loaded by less than 50%, while wear-and-tear of equipment amounted to 90% for some positions. For the sake of comparison, in developed countries sales volumes allow machine engineering enterprises to renew their technological park every seven-ten years. In Russia this period is much longer. 

Nowadays the investment volume into the national machine engineering is one of the crucial factors that define probable rates of the transport sector modernization and development. This is an economic base providing stable and dynamic sector development corresponding to the modern demands to rolling stock. Now we can easily state that in the last two years the machine engineering sector has been witnessing the tendency of investment growth directed into basic assets renewal. 

The major investor of the transport engineering sector is OAO RZD who is responsible for the main share in the general volume of demand for this production. At the same time, machine engineering enterprises, feeling a crucial deficit in long-term resources, actively invest their own funds into production modernization. According to experts, the share of this sort of investment amounts to 75-78% from general investment volume. At the same time, developed countries have an opposite proportion: 70-80% of financing directed to investment is usually attracted funds or loans. 



Hope-rising Changes

An analysis of Russian banks investment activities shows quite large-scaled financing of the real sector of the Russian economy. However, banks participation in financing investment projects with long-term of pay-back is restricted by small projects worth a few million dollars. Large-scaled projects with complicated schemes of project financing and attracting different sorts of financial institutions, risks re-distribution and insurance of each stage are implemented very seldom. 

The largest banks take active steps to develop and implement such schemes, as well as to attract Russian and international financial institutions to participate in the projects. 

The major obstacle that stops bank investment from flowing into the industrial sector is high risks. The reason for that is the uncertainty of economic medium- and long-term conjuncture, lack of transparency in corporate finance, old debts, low level of discipline for following contractual obligations etc. All this, in combination with typical of machine engineering high capital intensity and long-term of pay-back of investment projects, as well as high rates of inflation, explain the reserved position of the bank sector towards investment crediting of this sector enterprises. 

In this respect, of special importance for enterprises and financial institutions are accuracy and logic in the process of implementation OAO RZD investment programmes based on long-term agreements with rolling stock manufacturers. A guaranteed chance to sell their production for several years proved by respective documents of the corporation, its open position about development plans, technical policy aimed at the national manufacturer are basic factors that define the positive dynamics of investment processes in the railway machine engineering sector. 

Another important factor that can help change the bank sector attitude to investment into machine engineering is activating investment by the enterprises themselves, who can use market instruments of direct loans to implement medium- and long-term projects. Emission has become a very popular mechanism which is organized with attraction of highly-skilled financial consultants and bank-organizers. 

In the last three years this sector has undergone serious positive changes. Enterprises learnt to work on the financial market, «to sell their own investment potential» to financial institutions and other interested investors. As an example a range of bonds placement implemented by machine engineering enterprises can be quoted. In particular, bonds were issued by PO Uralwagonzavod, and ОАО Tver Wagon Engineering Works. In October, ООО Promtractor-Finance issued bond worth RUR 3 bln. ОАО Bank АK Bars and ZAO Gazprombank performed as this issue organizers. The co-organizer part was played by ОАО TransCreditBank.

The bank sector activated within financial leasing, which is now a highly potential and dynamically developing direction of investment financing. It is quite important that banks, being most conservative financial institutions, operate significant resources of required urgency and in general of quite acceptable cost. The proof to this is a tender held by ОАО RZD on the right to conclude contracts on rolling stock leasing for the period of 5-8 years. The general cost of leasing objects prepared for the tender (locomotives, cargo and passenger cars, rail buses) amounted to RUR 20.5 bln and the volume of applications for participation made RUR 76.7 bln In terms of risks OAO RZD performing as a lease customer has serious advantages as compared to the industrial enterprises of railway engineering, since this very company is a sort of «locomotive» which provides positive dynamics of these machinery building enterprises development. 

Significant changes can be observed in the area of long-term credit recourses attraction from Western banks in order to implement costly technical re-equipment of railway engineering enterprises. The largest equipment manufacturers from Europe and the US come to the Russian market interested in high profitability, especially under the comforting conditions of guarantees given by Export Credit Agencies of the states. 



TransCreditBank on the Transport Services Market

The railway transport reform also aims to create a competitive market of transportation. In recent years the number of companies-carriers has been growing intensively. Quite often it happens so that their own funds do not allow them to enhance their rolling stock park to satisfy the demand for transportation by industrial enterprises. That is the reason why they actively use leasing schemes to finance their projects on rolling stock purchase.

The growth rates of the present-day leasing market are significantly surpassing any other macroeconomic data characterizing the national economic dynamics. The volume of contracts concluded in 2005 increased by 23%-27% compared to the results of 2004.

TransCreditBank demonstrates even more impressive dynamics. It started to develop leasing credits as a business direction in spring 2003. In 2004 the volume of leasing credits contracts exceeded RUR 1 bln. In 2005 the general volume of credit debts allocated to finance leasing contracts reached RUR 5 bln and the aggregate cost of property for financed leasing contracts amounted to RUR 9.5 bln. In particular, our bank allocated funds to ОАО RZD for acquiring rolling stock (over 1400 units); financing of equipment leasing given to machine engineering enterprises was also implemented. At present ОАО TransCreditBank, together with some leasing companies - its reliable partners is carrying on several projects of leasing credits for the transport engineering sector. As a rule, these are long-term projects (4 to 7 years) directed on purchase of complex import and domestic equipment with frequent attraction of credits from foreign banks.

Our experience gives the bank a chance to apply it effectively for allocating credits on purchase equipment for aircrafts, cargo sea and river vessels, trucks etc. It is important that investment made into these projects is easily forecasted in terms of probable risks, and the nature of assets satisfies the demands for objective control in respect of spending funds and their liquidity.

TransCreditBank participates in fulfilling new for Russia mechanisms of funding investment projects, developed on the basis of leasing financing.

Thus, nowadays the time has come to speak of the fundamental opportunity and readiness of the bank sector to sustain long-term investment programmes. To achieve this under conditions of keeping positive dynamics in the country’s general economic situation, as well as considering the present-day tendencies of the machine engineering market, we need to care about the financial «health» of the enterprises, which is based on the stable solvent demand for their production. This scenario can lead to solving the problem of trust between the bank sector and enterprises and, consequently, serious growth of investment activities.



ELENA  USHKOVA
    [~DETAIL_TEXT] => 

Waiting for Modernization

Railway transport needs permanent development and renewal. One of the most important tasks to be solved by railways is the development of the national machine engineering complex.

Nowadays wear-and-tear of basic assets of railway transport amounts to 60-73%. For certain positions rolling stock wear-and-tear reaches 80%. About 10 thousand passenger cars are 20 years old or even more. The most complicated situation can be seen in the locomotive sector, their average wear-and-tear amounts 70-75%. The park is aging faster than it is renewed. 

To solve this problem, ОАО RZD approved a special programme for the period of 2004-2010 that envisages general investment volume worth RUR 600 bln into rolling stock renewal.

Considering the forecasted increase in cargo transportation volume, the cargo park of the company should operate about 615 units by 2010. The purchase of about 9.5 thousand passenger cars is also considered, as well as locomotives and motor car rolling stock. 

Te rapid growth of demand for railway machinery gives the sector the highest rates of development in the Russian industry – 25-30% per year. However, opportunities to satisfy such intensive growth, considering modern technical demands to rolling stock, face a serious problem of wear-and-tear of basic production assets. 

From the beginning of the 1990-s enterprises of machine engineering specializing in railway machinery did not have any investment opportunities to renew assets. By the end of the 1990-s production capacities were loaded by less than 50%, while wear-and-tear of equipment amounted to 90% for some positions. For the sake of comparison, in developed countries sales volumes allow machine engineering enterprises to renew their technological park every seven-ten years. In Russia this period is much longer. 

Nowadays the investment volume into the national machine engineering is one of the crucial factors that define probable rates of the transport sector modernization and development. This is an economic base providing stable and dynamic sector development corresponding to the modern demands to rolling stock. Now we can easily state that in the last two years the machine engineering sector has been witnessing the tendency of investment growth directed into basic assets renewal. 

The major investor of the transport engineering sector is OAO RZD who is responsible for the main share in the general volume of demand for this production. At the same time, machine engineering enterprises, feeling a crucial deficit in long-term resources, actively invest their own funds into production modernization. According to experts, the share of this sort of investment amounts to 75-78% from general investment volume. At the same time, developed countries have an opposite proportion: 70-80% of financing directed to investment is usually attracted funds or loans. 



Hope-rising Changes

An analysis of Russian banks investment activities shows quite large-scaled financing of the real sector of the Russian economy. However, banks participation in financing investment projects with long-term of pay-back is restricted by small projects worth a few million dollars. Large-scaled projects with complicated schemes of project financing and attracting different sorts of financial institutions, risks re-distribution and insurance of each stage are implemented very seldom. 

The largest banks take active steps to develop and implement such schemes, as well as to attract Russian and international financial institutions to participate in the projects. 

The major obstacle that stops bank investment from flowing into the industrial sector is high risks. The reason for that is the uncertainty of economic medium- and long-term conjuncture, lack of transparency in corporate finance, old debts, low level of discipline for following contractual obligations etc. All this, in combination with typical of machine engineering high capital intensity and long-term of pay-back of investment projects, as well as high rates of inflation, explain the reserved position of the bank sector towards investment crediting of this sector enterprises. 

In this respect, of special importance for enterprises and financial institutions are accuracy and logic in the process of implementation OAO RZD investment programmes based on long-term agreements with rolling stock manufacturers. A guaranteed chance to sell their production for several years proved by respective documents of the corporation, its open position about development plans, technical policy aimed at the national manufacturer are basic factors that define the positive dynamics of investment processes in the railway machine engineering sector. 

Another important factor that can help change the bank sector attitude to investment into machine engineering is activating investment by the enterprises themselves, who can use market instruments of direct loans to implement medium- and long-term projects. Emission has become a very popular mechanism which is organized with attraction of highly-skilled financial consultants and bank-organizers. 

In the last three years this sector has undergone serious positive changes. Enterprises learnt to work on the financial market, «to sell their own investment potential» to financial institutions and other interested investors. As an example a range of bonds placement implemented by machine engineering enterprises can be quoted. In particular, bonds were issued by PO Uralwagonzavod, and ОАО Tver Wagon Engineering Works. In October, ООО Promtractor-Finance issued bond worth RUR 3 bln. ОАО Bank АK Bars and ZAO Gazprombank performed as this issue organizers. The co-organizer part was played by ОАО TransCreditBank.

The bank sector activated within financial leasing, which is now a highly potential and dynamically developing direction of investment financing. It is quite important that banks, being most conservative financial institutions, operate significant resources of required urgency and in general of quite acceptable cost. The proof to this is a tender held by ОАО RZD on the right to conclude contracts on rolling stock leasing for the period of 5-8 years. The general cost of leasing objects prepared for the tender (locomotives, cargo and passenger cars, rail buses) amounted to RUR 20.5 bln and the volume of applications for participation made RUR 76.7 bln In terms of risks OAO RZD performing as a lease customer has serious advantages as compared to the industrial enterprises of railway engineering, since this very company is a sort of «locomotive» which provides positive dynamics of these machinery building enterprises development. 

Significant changes can be observed in the area of long-term credit recourses attraction from Western banks in order to implement costly technical re-equipment of railway engineering enterprises. The largest equipment manufacturers from Europe and the US come to the Russian market interested in high profitability, especially under the comforting conditions of guarantees given by Export Credit Agencies of the states. 



TransCreditBank on the Transport Services Market

The railway transport reform also aims to create a competitive market of transportation. In recent years the number of companies-carriers has been growing intensively. Quite often it happens so that their own funds do not allow them to enhance their rolling stock park to satisfy the demand for transportation by industrial enterprises. That is the reason why they actively use leasing schemes to finance their projects on rolling stock purchase.

The growth rates of the present-day leasing market are significantly surpassing any other macroeconomic data characterizing the national economic dynamics. The volume of contracts concluded in 2005 increased by 23%-27% compared to the results of 2004.

TransCreditBank demonstrates even more impressive dynamics. It started to develop leasing credits as a business direction in spring 2003. In 2004 the volume of leasing credits contracts exceeded RUR 1 bln. In 2005 the general volume of credit debts allocated to finance leasing contracts reached RUR 5 bln and the aggregate cost of property for financed leasing contracts amounted to RUR 9.5 bln. In particular, our bank allocated funds to ОАО RZD for acquiring rolling stock (over 1400 units); financing of equipment leasing given to machine engineering enterprises was also implemented. At present ОАО TransCreditBank, together with some leasing companies - its reliable partners is carrying on several projects of leasing credits for the transport engineering sector. As a rule, these are long-term projects (4 to 7 years) directed on purchase of complex import and domestic equipment with frequent attraction of credits from foreign banks.

Our experience gives the bank a chance to apply it effectively for allocating credits on purchase equipment for aircrafts, cargo sea and river vessels, trucks etc. It is important that investment made into these projects is easily forecasted in terms of probable risks, and the nature of assets satisfies the demands for objective control in respect of spending funds and their liquidity.

TransCreditBank participates in fulfilling new for Russia mechanisms of funding investment projects, developed on the basis of leasing financing.

Thus, nowadays the time has come to speak of the fundamental opportunity and readiness of the bank sector to sustain long-term investment programmes. To achieve this under conditions of keeping positive dynamics in the country’s general economic situation, as well as considering the present-day tendencies of the machine engineering market, we need to care about the financial «health» of the enterprises, which is based on the stable solvent demand for their production. This scenario can lead to solving the problem of trust between the bank sector and enterprises and, consequently, serious growth of investment activities.



ELENA  USHKOVA
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Approved and Continued to Discuss

According to the basic statements of the concept developed by the specialists of OAO RZD, the company was to be launched and given all OAO RZD inventory park of 531 thousand units (see The RZD-Partner International #3, 2006 «Russian Railways build up market»). The newly launched company was to act as an operator. The main targets were the increase of transportation business profitability, attraction of additional capital to renew rolling stock, and developing a service pack and business processes to all client requirements.

Besides, the concept was based on the two most important principles (failure to fulfill which would lead to a breech in the reform strategy of the country’s railway sector): the launch of the Cargo Company must not cause growth of transport expenses for consumers of railway transport services, and the company’s activities must not reduce the level of competition in the segment of rolling stock providing.

Another characteristic feature is that the new company’s activities should be concentrated on the increase of OAO Cargo Company’s participation in the profitable transportation segment. So, it was planned that the company would operate a rolling stock park of only 100 thousand units of most popular types. The rest rolling stock would be rented to OAO RZD. This measure is necessary to provide high capitalization of OAO Cargo Company, so that it would become possible to do an IPO and attract private investment to enlarge the rolling stock park.

On the other hand there is another economic benefit for OAO RZD in the launch of the new company. The daughter company will operate rolling stock, but not pays as a public carrier, who must provide transportation to anybody if they are ready to pay in compliance with existing tariffs. The only reason for refuse is rolling stock shortage. The new type of property and terms of activities will make a daughter company equal to the private companies-operators working nowadays on the Russian Railways network. Thus, the company will get an opportunity of flexible tariff regulation at the expense of the wagon constituent. It should be noted that OAO RZD concept was supported by all the interested Ministries and Departments. The representatives of the Federal Antimonopoly Service, as well as those of the RF Federal Tariff Service, point at the necessity of changing the structure of Tariff Regulation №10-01, which has become a crucial one. Working out the mechanisms on the basis of a launched subsidiary is the best version for it. Besides, the sector has been in need of serious investment for a long time. And such investments should be searched for on the market, but not in the state reserves.

The Government of the Russian Federation approved the approach. However, officials of high rank underlined that the question is a difficult one, and it requires further work and detailed analysis, especially taking into consideration the scale of the railway sector in Russia and the strategic importance of the transport mode for the country’s economy. So, it was planned to hold a special meeting to discuss the future of the Cargo Company.

However, it was not held as planned. In spite of OAO RZD’s demand to make decision before the New Year, it will hardly be taken.

After OAO RZD President Vladimir Yakunin announced officially that the concept of the Cargo Company launch had been fundamentally approved, there arose a wave of indignation among Russian companies-operators. The independent players of the market considered the position of OAO Russian Railway as an attempt to create a large player on the state transport market, which would not only have the largest rolling stock park, but also a serious administrative resource. Against the background of the last two months, when the attraction of OAO RZD’s rolling stock for freight transportation has become an urgent problem for consignors, independent carriers claim the company can exercise further impact on the private business. They meant that, due to its monopolistic position regarding infrastructure ownership and providing the overall planning of the sector’s work, OAO RZD will only be able to regulate loading of profitable cargoes into OAO Cargo Company’s wagons. To some degree, the position of companies-operators was reflected in the concept of further reform in the Russian rail transport sector, offered by the Federal Agency of Railway Transport. The concept was developed in a very short term and became the basic factor for delay of OAO RZD’s concept discussion by the RF Government. In particular, Roszheldor offers to bring out independent cargo carriers to the market in the framework of separate routes, cargoes and rolling stock, making OAO RZD’s services of providing locomotive traction public. No later than in 2010, two independent «national» carriers, with the 100% state capital, must be separated off of OAO RZD – the Federal Cargo and Passenger Companies. Thus, according to the concept of Roszheldor, by 2015 OAO RZD is to become an infrastructure company, and to leave the transportation services market. The market share of the Cargo Company is to reach 40%, the share of OAO RZD’s subsidiaries and private companies-transporters will be 20% and 40% respectively. 



Further Lack of Investment Will Lead Sector to Dead End

The point of the conflict is obvious. Roszheldor may be prejudiced against the terms of making decision on the further railway transport development. But OAO RZD has no time to lose. The decision must be made immediately. The level of the basic assets deterioration has amounted to 58% (including 73% of electric locomotives, 84% of diesel locomotives, 86% and 74% of freight and passenger wagons respectively), which was caused by the insufficient funding of the sector during many years. On terms of timely writing off of the rolling stock, the life time of which is over, the company needs to purchase annually over 1,000 sections of locomotives, and about 30,000 freight wagons and 1,200 passenger ones annually. Without taking into account the fact that joint capacities of the wagon building and machine building sectors of Russia are not able to produce such volumes of machinery, there is a crucial necessity of urgent investments. The problem of Russian railways network development is also to be solved as fast as possible. In the last 15 years, its exploitation length reduced by 2.5 thousand km. At the same time, for example, in China, which sets new records of the rates of economic development, over 17,000 km of railways has been constructed. In the next 15 years, it is planned to build another 25 thousand km of tracks, so China will take the lead over Russia according to the length of railway network, and become top second after the USA.

Meanwhile, OAO RZD, like other subjects of the market (including natural monopolies), is more limited by the acting legislation. OAO RZD representatives claimed that in 2005 the ratio of capital investments and cost of basic funds of OAO RZD was only 8.4%, while in Gazprom the figure was 10.5%, in RAO UES Russia it was 12.8%, and in OAO Transneft it was 19.6%. Meanwhile, the rates of investment growth in OAO RZD are half those into the economy of Russia, which is inadmissible for an infrastructure company. 

As for the organizational form of the enterprise and the specific character of its activities, OAO RZD explains that nowadays there are unequal conditions of competition for OAO RZD and other companies on the freight transportation market. It is reasoned by the strict tariff regulation of all the tariff constituents for the company. The activities of private companies-operators are liberalized and focused on profitable cargoes transportation. For example, now 96% of export oil is transported in wagons of private companies-operators. Meanwhile, over 99% of export coal is transported in OAO RZD’s rolling stock. As a result, the profitability of transportation provided by OAO RZD in its wagon park reduces. Consequently, the company’s profit decreases, and the investment deficit grows, whereas this money, as it has been already mentioned, is badly needed.

According to the general scheme of Russian Railways development, the requirements of the holding company in terms of investment in 2007-2009 make RUR 1.072 trln. Firstly, RUR 625 bln is needed to renew and develop the existing railway infrastructure (including construction of Tommot-Kerdem and Izvestkovaya-Chegdomyn lines). Secondly, RUR 447 bln is required to renew the rolling stock park (RUR 84.5 bln for freight wagons, RUR 67.1 bln for passenger wagons, RUR 51 bln for engine-wagon rolling stock, and RUR 244.4 bln for locomotives). 

At the same time, the total investment resources of the holding company RZD in 2007-2009 are estimated at RUR 790.7 bln, or 74% of the required. In spite of the fact that it is 1.6 times more than in the previous three years, the shortage of investment will make RUR 281.4 bln in 2007-2009.

Thus, the launch of the Cargo Company is vitally important for OAO RZD. In support of its position, the company mentions the following figures. According to the results of H1 of 2006, the joint assets of OAO RZD’s daughter companies and subsidiaries amounted to RUR 79.7 bln, and their net assets increased by 1.6 times. During the same period, the revenue of OAO RZD’s daughter companies and subsidiaries amounted to RUR 31.9 bln; the profit from sales made RUR 3.8 bln, and the net profit made RUR 1.5 bln. These figures prove that the efficiency of the company’s corporate management increased, and there is a stable growth of additional money supply resources from the activities of daughter companies and subsidiaries. One of the ways to solve the problem of investment resources shortage is IPO, sell of the shareholdings of OAO RZD’s daughter companies and formation of additional investment resources to develop federal railway infrastructure. The financial plan of OAO RZD for 2007-2009 envisages obtaining dividends (RUR 1.5 bln) and the revenue from the sell of daughter companies’ shareholding (RUR 17 bln). 

In its turn Roszheldor points at the discrepancy of the offered concept and the main principle of the sector reforming – creation of terms for competition market formation. Once again, its arguments include the work of OAO RZD’s launched daughter companies, and, first of all, OAO TransContainer, whose activities have caused a 25% tariff increase for consignors. In their turn, the top-managers of OAO RZD protest against such arguments.

– This increase of price was caused by the necessity of payment for the empty backhaul of containers for private owners, said Vladimir Yakunin. In fact, for OAO RZD the cost of empty backhaul of containers is zero, while a private owner must pay for exploitation expenses suffered by the company. Thus, we have an example of political discussion on a concrete technological theme.

Another complicated issue the top-management of OAO RZD faced concerns the company’s current investment activities. It is no secret that in the near future OAO RZD plans to purchase the shares of Russian sea terminals. And this means that it has money for it. Why not use it to buy rolling stock?

 Explaining the situation, Vladimir Yakunin underlined that in this case the matter does not concern the company’s unmotivated wish to get the majority shareholding of the terminals. One of OAO RZD’s strategic targets, aimed at the increase of its competitiveness, is the creation of conditions to provide a through rate when transporting cargo in containers. So, it is necessary to obtain the opportunity to control charter and handling of containers in ports for that. Moreover, the Head of OAO RZD noted that nowadays the company thinks of assembling new rolling stock, in particular locomotives. To avoid price pressure, OAO RZD may purchase a shareholding of the plants, where it will place its orders.

So, the question is if the management of the wagon park on the Russian Railways network will be efficient in case the rolling stock is owned by different transporters, who have equal rights, and especially the right to decide whom to deliver their rolling stock? Will it not cause auctions for the available rolling stock among consignor, if the market situation is favourable? Who will be able to guarantee proper regulation of the park and delivery of the necessary amount of empty wagons to the regions where it is required?

Finally, such things as safety of communication and cargoes are important. According to OAO RZD’s data, the losses from the damage of freight amounted to RUR 33 mln in 2003, RUR 25 mln in 2004, and RUR 21.6 mln in 2005. This year they will not exceed RUR 20 mln. However, to reach such a positive tendency, the company has to hold a number of events annually, including improvement of stations technical supplement with systems and facilities to control the state of cargo safety during transportation; secondly, organization of guarding and forwarding cargoes during transportation, and working with clients who have suffered losses (on the basis of the EASAPR system (Universal Automated System of Statement-Complaint Work)). Can independent companies guarantee such a level of responsibility?

Nowadays, companies-operators are more attentive to their client than OAO RZD from the standpoint of quality. But the scales of the clients base are different. Is it possible to state that Russian independent transport companies are ready to become transporters? Or are they just worried about their own economic benefit?



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Approved and Continued to Discuss

According to the basic statements of the concept developed by the specialists of OAO RZD, the company was to be launched and given all OAO RZD inventory park of 531 thousand units (see The RZD-Partner International #3, 2006 «Russian Railways build up market»). The newly launched company was to act as an operator. The main targets were the increase of transportation business profitability, attraction of additional capital to renew rolling stock, and developing a service pack and business processes to all client requirements.

Besides, the concept was based on the two most important principles (failure to fulfill which would lead to a breech in the reform strategy of the country’s railway sector): the launch of the Cargo Company must not cause growth of transport expenses for consumers of railway transport services, and the company’s activities must not reduce the level of competition in the segment of rolling stock providing.

Another characteristic feature is that the new company’s activities should be concentrated on the increase of OAO Cargo Company’s participation in the profitable transportation segment. So, it was planned that the company would operate a rolling stock park of only 100 thousand units of most popular types. The rest rolling stock would be rented to OAO RZD. This measure is necessary to provide high capitalization of OAO Cargo Company, so that it would become possible to do an IPO and attract private investment to enlarge the rolling stock park.

On the other hand there is another economic benefit for OAO RZD in the launch of the new company. The daughter company will operate rolling stock, but not pays as a public carrier, who must provide transportation to anybody if they are ready to pay in compliance with existing tariffs. The only reason for refuse is rolling stock shortage. The new type of property and terms of activities will make a daughter company equal to the private companies-operators working nowadays on the Russian Railways network. Thus, the company will get an opportunity of flexible tariff regulation at the expense of the wagon constituent. It should be noted that OAO RZD concept was supported by all the interested Ministries and Departments. The representatives of the Federal Antimonopoly Service, as well as those of the RF Federal Tariff Service, point at the necessity of changing the structure of Tariff Regulation №10-01, which has become a crucial one. Working out the mechanisms on the basis of a launched subsidiary is the best version for it. Besides, the sector has been in need of serious investment for a long time. And such investments should be searched for on the market, but not in the state reserves.

The Government of the Russian Federation approved the approach. However, officials of high rank underlined that the question is a difficult one, and it requires further work and detailed analysis, especially taking into consideration the scale of the railway sector in Russia and the strategic importance of the transport mode for the country’s economy. So, it was planned to hold a special meeting to discuss the future of the Cargo Company.

However, it was not held as planned. In spite of OAO RZD’s demand to make decision before the New Year, it will hardly be taken.

After OAO RZD President Vladimir Yakunin announced officially that the concept of the Cargo Company launch had been fundamentally approved, there arose a wave of indignation among Russian companies-operators. The independent players of the market considered the position of OAO Russian Railway as an attempt to create a large player on the state transport market, which would not only have the largest rolling stock park, but also a serious administrative resource. Against the background of the last two months, when the attraction of OAO RZD’s rolling stock for freight transportation has become an urgent problem for consignors, independent carriers claim the company can exercise further impact on the private business. They meant that, due to its monopolistic position regarding infrastructure ownership and providing the overall planning of the sector’s work, OAO RZD will only be able to regulate loading of profitable cargoes into OAO Cargo Company’s wagons. To some degree, the position of companies-operators was reflected in the concept of further reform in the Russian rail transport sector, offered by the Federal Agency of Railway Transport. The concept was developed in a very short term and became the basic factor for delay of OAO RZD’s concept discussion by the RF Government. In particular, Roszheldor offers to bring out independent cargo carriers to the market in the framework of separate routes, cargoes and rolling stock, making OAO RZD’s services of providing locomotive traction public. No later than in 2010, two independent «national» carriers, with the 100% state capital, must be separated off of OAO RZD – the Federal Cargo and Passenger Companies. Thus, according to the concept of Roszheldor, by 2015 OAO RZD is to become an infrastructure company, and to leave the transportation services market. The market share of the Cargo Company is to reach 40%, the share of OAO RZD’s subsidiaries and private companies-transporters will be 20% and 40% respectively. 



Further Lack of Investment Will Lead Sector to Dead End

The point of the conflict is obvious. Roszheldor may be prejudiced against the terms of making decision on the further railway transport development. But OAO RZD has no time to lose. The decision must be made immediately. The level of the basic assets deterioration has amounted to 58% (including 73% of electric locomotives, 84% of diesel locomotives, 86% and 74% of freight and passenger wagons respectively), which was caused by the insufficient funding of the sector during many years. On terms of timely writing off of the rolling stock, the life time of which is over, the company needs to purchase annually over 1,000 sections of locomotives, and about 30,000 freight wagons and 1,200 passenger ones annually. Without taking into account the fact that joint capacities of the wagon building and machine building sectors of Russia are not able to produce such volumes of machinery, there is a crucial necessity of urgent investments. The problem of Russian railways network development is also to be solved as fast as possible. In the last 15 years, its exploitation length reduced by 2.5 thousand km. At the same time, for example, in China, which sets new records of the rates of economic development, over 17,000 km of railways has been constructed. In the next 15 years, it is planned to build another 25 thousand km of tracks, so China will take the lead over Russia according to the length of railway network, and become top second after the USA.

Meanwhile, OAO RZD, like other subjects of the market (including natural monopolies), is more limited by the acting legislation. OAO RZD representatives claimed that in 2005 the ratio of capital investments and cost of basic funds of OAO RZD was only 8.4%, while in Gazprom the figure was 10.5%, in RAO UES Russia it was 12.8%, and in OAO Transneft it was 19.6%. Meanwhile, the rates of investment growth in OAO RZD are half those into the economy of Russia, which is inadmissible for an infrastructure company. 

As for the organizational form of the enterprise and the specific character of its activities, OAO RZD explains that nowadays there are unequal conditions of competition for OAO RZD and other companies on the freight transportation market. It is reasoned by the strict tariff regulation of all the tariff constituents for the company. The activities of private companies-operators are liberalized and focused on profitable cargoes transportation. For example, now 96% of export oil is transported in wagons of private companies-operators. Meanwhile, over 99% of export coal is transported in OAO RZD’s rolling stock. As a result, the profitability of transportation provided by OAO RZD in its wagon park reduces. Consequently, the company’s profit decreases, and the investment deficit grows, whereas this money, as it has been already mentioned, is badly needed.

According to the general scheme of Russian Railways development, the requirements of the holding company in terms of investment in 2007-2009 make RUR 1.072 trln. Firstly, RUR 625 bln is needed to renew and develop the existing railway infrastructure (including construction of Tommot-Kerdem and Izvestkovaya-Chegdomyn lines). Secondly, RUR 447 bln is required to renew the rolling stock park (RUR 84.5 bln for freight wagons, RUR 67.1 bln for passenger wagons, RUR 51 bln for engine-wagon rolling stock, and RUR 244.4 bln for locomotives). 

At the same time, the total investment resources of the holding company RZD in 2007-2009 are estimated at RUR 790.7 bln, or 74% of the required. In spite of the fact that it is 1.6 times more than in the previous three years, the shortage of investment will make RUR 281.4 bln in 2007-2009.

Thus, the launch of the Cargo Company is vitally important for OAO RZD. In support of its position, the company mentions the following figures. According to the results of H1 of 2006, the joint assets of OAO RZD’s daughter companies and subsidiaries amounted to RUR 79.7 bln, and their net assets increased by 1.6 times. During the same period, the revenue of OAO RZD’s daughter companies and subsidiaries amounted to RUR 31.9 bln; the profit from sales made RUR 3.8 bln, and the net profit made RUR 1.5 bln. These figures prove that the efficiency of the company’s corporate management increased, and there is a stable growth of additional money supply resources from the activities of daughter companies and subsidiaries. One of the ways to solve the problem of investment resources shortage is IPO, sell of the shareholdings of OAO RZD’s daughter companies and formation of additional investment resources to develop federal railway infrastructure. The financial plan of OAO RZD for 2007-2009 envisages obtaining dividends (RUR 1.5 bln) and the revenue from the sell of daughter companies’ shareholding (RUR 17 bln). 

In its turn Roszheldor points at the discrepancy of the offered concept and the main principle of the sector reforming – creation of terms for competition market formation. Once again, its arguments include the work of OAO RZD’s launched daughter companies, and, first of all, OAO TransContainer, whose activities have caused a 25% tariff increase for consignors. In their turn, the top-managers of OAO RZD protest against such arguments.

– This increase of price was caused by the necessity of payment for the empty backhaul of containers for private owners, said Vladimir Yakunin. In fact, for OAO RZD the cost of empty backhaul of containers is zero, while a private owner must pay for exploitation expenses suffered by the company. Thus, we have an example of political discussion on a concrete technological theme.

Another complicated issue the top-management of OAO RZD faced concerns the company’s current investment activities. It is no secret that in the near future OAO RZD plans to purchase the shares of Russian sea terminals. And this means that it has money for it. Why not use it to buy rolling stock?

 Explaining the situation, Vladimir Yakunin underlined that in this case the matter does not concern the company’s unmotivated wish to get the majority shareholding of the terminals. One of OAO RZD’s strategic targets, aimed at the increase of its competitiveness, is the creation of conditions to provide a through rate when transporting cargo in containers. So, it is necessary to obtain the opportunity to control charter and handling of containers in ports for that. Moreover, the Head of OAO RZD noted that nowadays the company thinks of assembling new rolling stock, in particular locomotives. To avoid price pressure, OAO RZD may purchase a shareholding of the plants, where it will place its orders.

So, the question is if the management of the wagon park on the Russian Railways network will be efficient in case the rolling stock is owned by different transporters, who have equal rights, and especially the right to decide whom to deliver their rolling stock? Will it not cause auctions for the available rolling stock among consignor, if the market situation is favourable? Who will be able to guarantee proper regulation of the park and delivery of the necessary amount of empty wagons to the regions where it is required?

Finally, such things as safety of communication and cargoes are important. According to OAO RZD’s data, the losses from the damage of freight amounted to RUR 33 mln in 2003, RUR 25 mln in 2004, and RUR 21.6 mln in 2005. This year they will not exceed RUR 20 mln. However, to reach such a positive tendency, the company has to hold a number of events annually, including improvement of stations technical supplement with systems and facilities to control the state of cargo safety during transportation; secondly, organization of guarding and forwarding cargoes during transportation, and working with clients who have suffered losses (on the basis of the EASAPR system (Universal Automated System of Statement-Complaint Work)). Can independent companies guarantee such a level of responsibility?

Nowadays, companies-operators are more attentive to their client than OAO RZD from the standpoint of quality. But the scales of the clients base are different. Is it possible to state that Russian independent transport companies are ready to become transporters? Or are they just worried about their own economic benefit?



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Approved and Continued to Discuss

According to the basic statements of the concept developed by the specialists of OAO RZD, the company was to be launched and given all OAO RZD inventory park of 531 thousand units (see The RZD-Partner International #3, 2006 «Russian Railways build up market»). The newly launched company was to act as an operator. The main targets were the increase of transportation business profitability, attraction of additional capital to renew rolling stock, and developing a service pack and business processes to all client requirements.

Besides, the concept was based on the two most important principles (failure to fulfill which would lead to a breech in the reform strategy of the country’s railway sector): the launch of the Cargo Company must not cause growth of transport expenses for consumers of railway transport services, and the company’s activities must not reduce the level of competition in the segment of rolling stock providing.

Another characteristic feature is that the new company’s activities should be concentrated on the increase of OAO Cargo Company’s participation in the profitable transportation segment. So, it was planned that the company would operate a rolling stock park of only 100 thousand units of most popular types. The rest rolling stock would be rented to OAO RZD. This measure is necessary to provide high capitalization of OAO Cargo Company, so that it would become possible to do an IPO and attract private investment to enlarge the rolling stock park.

On the other hand there is another economic benefit for OAO RZD in the launch of the new company. The daughter company will operate rolling stock, but not pays as a public carrier, who must provide transportation to anybody if they are ready to pay in compliance with existing tariffs. The only reason for refuse is rolling stock shortage. The new type of property and terms of activities will make a daughter company equal to the private companies-operators working nowadays on the Russian Railways network. Thus, the company will get an opportunity of flexible tariff regulation at the expense of the wagon constituent. It should be noted that OAO RZD concept was supported by all the interested Ministries and Departments. The representatives of the Federal Antimonopoly Service, as well as those of the RF Federal Tariff Service, point at the necessity of changing the structure of Tariff Regulation №10-01, which has become a crucial one. Working out the mechanisms on the basis of a launched subsidiary is the best version for it. Besides, the sector has been in need of serious investment for a long time. And such investments should be searched for on the market, but not in the state reserves.

The Government of the Russian Federation approved the approach. However, officials of high rank underlined that the question is a difficult one, and it requires further work and detailed analysis, especially taking into consideration the scale of the railway sector in Russia and the strategic importance of the transport mode for the country’s economy. So, it was planned to hold a special meeting to discuss the future of the Cargo Company.

However, it was not held as planned. In spite of OAO RZD’s demand to make decision before the New Year, it will hardly be taken.

After OAO RZD President Vladimir Yakunin announced officially that the concept of the Cargo Company launch had been fundamentally approved, there arose a wave of indignation among Russian companies-operators. The independent players of the market considered the position of OAO Russian Railway as an attempt to create a large player on the state transport market, which would not only have the largest rolling stock park, but also a serious administrative resource. Against the background of the last two months, when the attraction of OAO RZD’s rolling stock for freight transportation has become an urgent problem for consignors, independent carriers claim the company can exercise further impact on the private business. They meant that, due to its monopolistic position regarding infrastructure ownership and providing the overall planning of the sector’s work, OAO RZD will only be able to regulate loading of profitable cargoes into OAO Cargo Company’s wagons. To some degree, the position of companies-operators was reflected in the concept of further reform in the Russian rail transport sector, offered by the Federal Agency of Railway Transport. The concept was developed in a very short term and became the basic factor for delay of OAO RZD’s concept discussion by the RF Government. In particular, Roszheldor offers to bring out independent cargo carriers to the market in the framework of separate routes, cargoes and rolling stock, making OAO RZD’s services of providing locomotive traction public. No later than in 2010, two independent «national» carriers, with the 100% state capital, must be separated off of OAO RZD – the Federal Cargo and Passenger Companies. Thus, according to the concept of Roszheldor, by 2015 OAO RZD is to become an infrastructure company, and to leave the transportation services market. The market share of the Cargo Company is to reach 40%, the share of OAO RZD’s subsidiaries and private companies-transporters will be 20% and 40% respectively. 



Further Lack of Investment Will Lead Sector to Dead End

The point of the conflict is obvious. Roszheldor may be prejudiced against the terms of making decision on the further railway transport development. But OAO RZD has no time to lose. The decision must be made immediately. The level of the basic assets deterioration has amounted to 58% (including 73% of electric locomotives, 84% of diesel locomotives, 86% and 74% of freight and passenger wagons respectively), which was caused by the insufficient funding of the sector during many years. On terms of timely writing off of the rolling stock, the life time of which is over, the company needs to purchase annually over 1,000 sections of locomotives, and about 30,000 freight wagons and 1,200 passenger ones annually. Without taking into account the fact that joint capacities of the wagon building and machine building sectors of Russia are not able to produce such volumes of machinery, there is a crucial necessity of urgent investments. The problem of Russian railways network development is also to be solved as fast as possible. In the last 15 years, its exploitation length reduced by 2.5 thousand km. At the same time, for example, in China, which sets new records of the rates of economic development, over 17,000 km of railways has been constructed. In the next 15 years, it is planned to build another 25 thousand km of tracks, so China will take the lead over Russia according to the length of railway network, and become top second after the USA.

Meanwhile, OAO RZD, like other subjects of the market (including natural monopolies), is more limited by the acting legislation. OAO RZD representatives claimed that in 2005 the ratio of capital investments and cost of basic funds of OAO RZD was only 8.4%, while in Gazprom the figure was 10.5%, in RAO UES Russia it was 12.8%, and in OAO Transneft it was 19.6%. Meanwhile, the rates of investment growth in OAO RZD are half those into the economy of Russia, which is inadmissible for an infrastructure company. 

As for the organizational form of the enterprise and the specific character of its activities, OAO RZD explains that nowadays there are unequal conditions of competition for OAO RZD and other companies on the freight transportation market. It is reasoned by the strict tariff regulation of all the tariff constituents for the company. The activities of private companies-operators are liberalized and focused on profitable cargoes transportation. For example, now 96% of export oil is transported in wagons of private companies-operators. Meanwhile, over 99% of export coal is transported in OAO RZD’s rolling stock. As a result, the profitability of transportation provided by OAO RZD in its wagon park reduces. Consequently, the company’s profit decreases, and the investment deficit grows, whereas this money, as it has been already mentioned, is badly needed.

According to the general scheme of Russian Railways development, the requirements of the holding company in terms of investment in 2007-2009 make RUR 1.072 trln. Firstly, RUR 625 bln is needed to renew and develop the existing railway infrastructure (including construction of Tommot-Kerdem and Izvestkovaya-Chegdomyn lines). Secondly, RUR 447 bln is required to renew the rolling stock park (RUR 84.5 bln for freight wagons, RUR 67.1 bln for passenger wagons, RUR 51 bln for engine-wagon rolling stock, and RUR 244.4 bln for locomotives). 

At the same time, the total investment resources of the holding company RZD in 2007-2009 are estimated at RUR 790.7 bln, or 74% of the required. In spite of the fact that it is 1.6 times more than in the previous three years, the shortage of investment will make RUR 281.4 bln in 2007-2009.

Thus, the launch of the Cargo Company is vitally important for OAO RZD. In support of its position, the company mentions the following figures. According to the results of H1 of 2006, the joint assets of OAO RZD’s daughter companies and subsidiaries amounted to RUR 79.7 bln, and their net assets increased by 1.6 times. During the same period, the revenue of OAO RZD’s daughter companies and subsidiaries amounted to RUR 31.9 bln; the profit from sales made RUR 3.8 bln, and the net profit made RUR 1.5 bln. These figures prove that the efficiency of the company’s corporate management increased, and there is a stable growth of additional money supply resources from the activities of daughter companies and subsidiaries. One of the ways to solve the problem of investment resources shortage is IPO, sell of the shareholdings of OAO RZD’s daughter companies and formation of additional investment resources to develop federal railway infrastructure. The financial plan of OAO RZD for 2007-2009 envisages obtaining dividends (RUR 1.5 bln) and the revenue from the sell of daughter companies’ shareholding (RUR 17 bln). 

In its turn Roszheldor points at the discrepancy of the offered concept and the main principle of the sector reforming – creation of terms for competition market formation. Once again, its arguments include the work of OAO RZD’s launched daughter companies, and, first of all, OAO TransContainer, whose activities have caused a 25% tariff increase for consignors. In their turn, the top-managers of OAO RZD protest against such arguments.

– This increase of price was caused by the necessity of payment for the empty backhaul of containers for private owners, said Vladimir Yakunin. In fact, for OAO RZD the cost of empty backhaul of containers is zero, while a private owner must pay for exploitation expenses suffered by the company. Thus, we have an example of political discussion on a concrete technological theme.

Another complicated issue the top-management of OAO RZD faced concerns the company’s current investment activities. It is no secret that in the near future OAO RZD plans to purchase the shares of Russian sea terminals. And this means that it has money for it. Why not use it to buy rolling stock?

 Explaining the situation, Vladimir Yakunin underlined that in this case the matter does not concern the company’s unmotivated wish to get the majority shareholding of the terminals. One of OAO RZD’s strategic targets, aimed at the increase of its competitiveness, is the creation of conditions to provide a through rate when transporting cargo in containers. So, it is necessary to obtain the opportunity to control charter and handling of containers in ports for that. Moreover, the Head of OAO RZD noted that nowadays the company thinks of assembling new rolling stock, in particular locomotives. To avoid price pressure, OAO RZD may purchase a shareholding of the plants, where it will place its orders.

So, the question is if the management of the wagon park on the Russian Railways network will be efficient in case the rolling stock is owned by different transporters, who have equal rights, and especially the right to decide whom to deliver their rolling stock? Will it not cause auctions for the available rolling stock among consignor, if the market situation is favourable? Who will be able to guarantee proper regulation of the park and delivery of the necessary amount of empty wagons to the regions where it is required?

Finally, such things as safety of communication and cargoes are important. According to OAO RZD’s data, the losses from the damage of freight amounted to RUR 33 mln in 2003, RUR 25 mln in 2004, and RUR 21.6 mln in 2005. This year they will not exceed RUR 20 mln. However, to reach such a positive tendency, the company has to hold a number of events annually, including improvement of stations technical supplement with systems and facilities to control the state of cargo safety during transportation; secondly, organization of guarding and forwarding cargoes during transportation, and working with clients who have suffered losses (on the basis of the EASAPR system (Universal Automated System of Statement-Complaint Work)). Can independent companies guarantee such a level of responsibility?

Nowadays, companies-operators are more attentive to their client than OAO RZD from the standpoint of quality. But the scales of the clients base are different. Is it possible to state that Russian independent transport companies are ready to become transporters? Or are they just worried about their own economic benefit?



ZLATA  YASENEVA
    [~DETAIL_TEXT] => 

Approved and Continued to Discuss

According to the basic statements of the concept developed by the specialists of OAO RZD, the company was to be launched and given all OAO RZD inventory park of 531 thousand units (see The RZD-Partner International #3, 2006 «Russian Railways build up market»). The newly launched company was to act as an operator. The main targets were the increase of transportation business profitability, attraction of additional capital to renew rolling stock, and developing a service pack and business processes to all client requirements.

Besides, the concept was based on the two most important principles (failure to fulfill which would lead to a breech in the reform strategy of the country’s railway sector): the launch of the Cargo Company must not cause growth of transport expenses for consumers of railway transport services, and the company’s activities must not reduce the level of competition in the segment of rolling stock providing.

Another characteristic feature is that the new company’s activities should be concentrated on the increase of OAO Cargo Company’s participation in the profitable transportation segment. So, it was planned that the company would operate a rolling stock park of only 100 thousand units of most popular types. The rest rolling stock would be rented to OAO RZD. This measure is necessary to provide high capitalization of OAO Cargo Company, so that it would become possible to do an IPO and attract private investment to enlarge the rolling stock park.

On the other hand there is another economic benefit for OAO RZD in the launch of the new company. The daughter company will operate rolling stock, but not pays as a public carrier, who must provide transportation to anybody if they are ready to pay in compliance with existing tariffs. The only reason for refuse is rolling stock shortage. The new type of property and terms of activities will make a daughter company equal to the private companies-operators working nowadays on the Russian Railways network. Thus, the company will get an opportunity of flexible tariff regulation at the expense of the wagon constituent. It should be noted that OAO RZD concept was supported by all the interested Ministries and Departments. The representatives of the Federal Antimonopoly Service, as well as those of the RF Federal Tariff Service, point at the necessity of changing the structure of Tariff Regulation №10-01, which has become a crucial one. Working out the mechanisms on the basis of a launched subsidiary is the best version for it. Besides, the sector has been in need of serious investment for a long time. And such investments should be searched for on the market, but not in the state reserves.

The Government of the Russian Federation approved the approach. However, officials of high rank underlined that the question is a difficult one, and it requires further work and detailed analysis, especially taking into consideration the scale of the railway sector in Russia and the strategic importance of the transport mode for the country’s economy. So, it was planned to hold a special meeting to discuss the future of the Cargo Company.

However, it was not held as planned. In spite of OAO RZD’s demand to make decision before the New Year, it will hardly be taken.

After OAO RZD President Vladimir Yakunin announced officially that the concept of the Cargo Company launch had been fundamentally approved, there arose a wave of indignation among Russian companies-operators. The independent players of the market considered the position of OAO Russian Railway as an attempt to create a large player on the state transport market, which would not only have the largest rolling stock park, but also a serious administrative resource. Against the background of the last two months, when the attraction of OAO RZD’s rolling stock for freight transportation has become an urgent problem for consignors, independent carriers claim the company can exercise further impact on the private business. They meant that, due to its monopolistic position regarding infrastructure ownership and providing the overall planning of the sector’s work, OAO RZD will only be able to regulate loading of profitable cargoes into OAO Cargo Company’s wagons. To some degree, the position of companies-operators was reflected in the concept of further reform in the Russian rail transport sector, offered by the Federal Agency of Railway Transport. The concept was developed in a very short term and became the basic factor for delay of OAO RZD’s concept discussion by the RF Government. In particular, Roszheldor offers to bring out independent cargo carriers to the market in the framework of separate routes, cargoes and rolling stock, making OAO RZD’s services of providing locomotive traction public. No later than in 2010, two independent «national» carriers, with the 100% state capital, must be separated off of OAO RZD – the Federal Cargo and Passenger Companies. Thus, according to the concept of Roszheldor, by 2015 OAO RZD is to become an infrastructure company, and to leave the transportation services market. The market share of the Cargo Company is to reach 40%, the share of OAO RZD’s subsidiaries and private companies-transporters will be 20% and 40% respectively. 



Further Lack of Investment Will Lead Sector to Dead End

The point of the conflict is obvious. Roszheldor may be prejudiced against the terms of making decision on the further railway transport development. But OAO RZD has no time to lose. The decision must be made immediately. The level of the basic assets deterioration has amounted to 58% (including 73% of electric locomotives, 84% of diesel locomotives, 86% and 74% of freight and passenger wagons respectively), which was caused by the insufficient funding of the sector during many years. On terms of timely writing off of the rolling stock, the life time of which is over, the company needs to purchase annually over 1,000 sections of locomotives, and about 30,000 freight wagons and 1,200 passenger ones annually. Without taking into account the fact that joint capacities of the wagon building and machine building sectors of Russia are not able to produce such volumes of machinery, there is a crucial necessity of urgent investments. The problem of Russian railways network development is also to be solved as fast as possible. In the last 15 years, its exploitation length reduced by 2.5 thousand km. At the same time, for example, in China, which sets new records of the rates of economic development, over 17,000 km of railways has been constructed. In the next 15 years, it is planned to build another 25 thousand km of tracks, so China will take the lead over Russia according to the length of railway network, and become top second after the USA.

Meanwhile, OAO RZD, like other subjects of the market (including natural monopolies), is more limited by the acting legislation. OAO RZD representatives claimed that in 2005 the ratio of capital investments and cost of basic funds of OAO RZD was only 8.4%, while in Gazprom the figure was 10.5%, in RAO UES Russia it was 12.8%, and in OAO Transneft it was 19.6%. Meanwhile, the rates of investment growth in OAO RZD are half those into the economy of Russia, which is inadmissible for an infrastructure company. 

As for the organizational form of the enterprise and the specific character of its activities, OAO RZD explains that nowadays there are unequal conditions of competition for OAO RZD and other companies on the freight transportation market. It is reasoned by the strict tariff regulation of all the tariff constituents for the company. The activities of private companies-operators are liberalized and focused on profitable cargoes transportation. For example, now 96% of export oil is transported in wagons of private companies-operators. Meanwhile, over 99% of export coal is transported in OAO RZD’s rolling stock. As a result, the profitability of transportation provided by OAO RZD in its wagon park reduces. Consequently, the company’s profit decreases, and the investment deficit grows, whereas this money, as it has been already mentioned, is badly needed.

According to the general scheme of Russian Railways development, the requirements of the holding company in terms of investment in 2007-2009 make RUR 1.072 trln. Firstly, RUR 625 bln is needed to renew and develop the existing railway infrastructure (including construction of Tommot-Kerdem and Izvestkovaya-Chegdomyn lines). Secondly, RUR 447 bln is required to renew the rolling stock park (RUR 84.5 bln for freight wagons, RUR 67.1 bln for passenger wagons, RUR 51 bln for engine-wagon rolling stock, and RUR 244.4 bln for locomotives). 

At the same time, the total investment resources of the holding company RZD in 2007-2009 are estimated at RUR 790.7 bln, or 74% of the required. In spite of the fact that it is 1.6 times more than in the previous three years, the shortage of investment will make RUR 281.4 bln in 2007-2009.

Thus, the launch of the Cargo Company is vitally important for OAO RZD. In support of its position, the company mentions the following figures. According to the results of H1 of 2006, the joint assets of OAO RZD’s daughter companies and subsidiaries amounted to RUR 79.7 bln, and their net assets increased by 1.6 times. During the same period, the revenue of OAO RZD’s daughter companies and subsidiaries amounted to RUR 31.9 bln; the profit from sales made RUR 3.8 bln, and the net profit made RUR 1.5 bln. These figures prove that the efficiency of the company’s corporate management increased, and there is a stable growth of additional money supply resources from the activities of daughter companies and subsidiaries. One of the ways to solve the problem of investment resources shortage is IPO, sell of the shareholdings of OAO RZD’s daughter companies and formation of additional investment resources to develop federal railway infrastructure. The financial plan of OAO RZD for 2007-2009 envisages obtaining dividends (RUR 1.5 bln) and the revenue from the sell of daughter companies’ shareholding (RUR 17 bln). 

In its turn Roszheldor points at the discrepancy of the offered concept and the main principle of the sector reforming – creation of terms for competition market formation. Once again, its arguments include the work of OAO RZD’s launched daughter companies, and, first of all, OAO TransContainer, whose activities have caused a 25% tariff increase for consignors. In their turn, the top-managers of OAO RZD protest against such arguments.

– This increase of price was caused by the necessity of payment for the empty backhaul of containers for private owners, said Vladimir Yakunin. In fact, for OAO RZD the cost of empty backhaul of containers is zero, while a private owner must pay for exploitation expenses suffered by the company. Thus, we have an example of political discussion on a concrete technological theme.

Another complicated issue the top-management of OAO RZD faced concerns the company’s current investment activities. It is no secret that in the near future OAO RZD plans to purchase the shares of Russian sea terminals. And this means that it has money for it. Why not use it to buy rolling stock?

 Explaining the situation, Vladimir Yakunin underlined that in this case the matter does not concern the company’s unmotivated wish to get the majority shareholding of the terminals. One of OAO RZD’s strategic targets, aimed at the increase of its competitiveness, is the creation of conditions to provide a through rate when transporting cargo in containers. So, it is necessary to obtain the opportunity to control charter and handling of containers in ports for that. Moreover, the Head of OAO RZD noted that nowadays the company thinks of assembling new rolling stock, in particular locomotives. To avoid price pressure, OAO RZD may purchase a shareholding of the plants, where it will place its orders.

So, the question is if the management of the wagon park on the Russian Railways network will be efficient in case the rolling stock is owned by different transporters, who have equal rights, and especially the right to decide whom to deliver their rolling stock? Will it not cause auctions for the available rolling stock among consignor, if the market situation is favourable? Who will be able to guarantee proper regulation of the park and delivery of the necessary amount of empty wagons to the regions where it is required?

Finally, such things as safety of communication and cargoes are important. According to OAO RZD’s data, the losses from the damage of freight amounted to RUR 33 mln in 2003, RUR 25 mln in 2004, and RUR 21.6 mln in 2005. This year they will not exceed RUR 20 mln. However, to reach such a positive tendency, the company has to hold a number of events annually, including improvement of stations technical supplement with systems and facilities to control the state of cargo safety during transportation; secondly, organization of guarding and forwarding cargoes during transportation, and working with clients who have suffered losses (on the basis of the EASAPR system (Universal Automated System of Statement-Complaint Work)). Can independent companies guarantee such a level of responsibility?

Nowadays, companies-operators are more attentive to their client than OAO RZD from the standpoint of quality. But the scales of the clients base are different. Is it possible to state that Russian independent transport companies are ready to become transporters? Or are they just worried about their own economic benefit?



ZLATA  YASENEVA
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    [PREVIEW_TEXT] => The issue of further reform in the Russian railway sector is one of the most crucial nowadays. It is discussed not only by the Ministries and Departments in charge, but also by the RF Government, and the discussions have become public. Recently, the Board of Directors of OAO RZD approved the idea of separation off and launch of the company’s subsidiary – OAO Cargo Company. However, now its future is unclear. The Federal Agency of Railways (Roszheldor) has developed another concept, excluding the principle of providing transportation services by OAO RZD. According to the concept, the company must become just an infrastructure one.

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    [DETAIL_TEXT] => While many international investors are still abstaining from putting money into the Russian economy, Russia has become the key client for the International Finance Corporation (IFC). As of now, Russian projects in IFC’s portfolio are worth USD 1.9 billion, with the infrastructure/transport sector accounting for more than 15% of the total volume of investments. The experience of IFC’s investments in Russia’s transport sector was the subject of our discussion with Ms. Milana Pirogova, Senior Investment Officer of IFC’s Central and Eastern Europe Department.



– Ms. Pirogova, as is well known, IFC provides a fairly active support to Russian transportation companies. What is the reason? 

 – In earnest, we embarked on financing infrastructure projects in 2003 and up to the present moment we have invested approximately USD 480 million into the above sector. Why had we paid less attention to this sector before 2003? At first, the crisis exploded, later the situation on the market did not favor long–term investments. Now, Russia enjoys a sustained economic growth, with the macroeconomic stability constantly improving. 

As far as our portfolio of investments into the transport sector is concerned, the greater part of projects is aimed at developing rail transportation and providing support to private carriers. As examples, I can mention the loan worth USD 40 million to the Severstal Group for expansion of Severstaltran’s rail tank car fleet, or the financing package (including a syndicated loan) worth USD 100 million to the Russkiy Mir for purchase of rail tank cars. We also have provided two loans, aggregate worth USD 150 million (including a syndicated loan), to the Eurosib Group. 

We have provided financing to Russian airline companies, e.g., projects with Volga–Dnepr, Sibirskiye Avialinii (Sibirskiye Airlines) and Airtaxi. Also, there are two projects in the river transport sector, namely, loans for a total of USD 89 million to Severo–Zapadnoye Parokhodstvo (North-Western Shipping Company) and Volzhskoye Parokhodstvo Shipping Companies for fleet modernization. The financing of construction and operation of the Kulon company’s up–to–date warehouses is an example of IFC’s investments in the warehousing sector. These are just a few largest projects to mention. At present our investment portfolio in the Russian infrastructure sector may not be large, but it is performing well. 

– Why is the preference being given to projects associated with purchase of rolling stock?

– We understand clearly that railways in Russia play a very important role in the domain of cargo transportation. It is railways that account for around 80 percent of the overall domestic cargo turnover. This mode of transportation is the most efficient for medium and long –distance deliveries of Russian raw materials and manufactures. In this context, railways are of paramount importance, supporting operations of Russian ports, export markets, foreign trade activities. Strong competitive positions of the railway transportation evidence that this sector is very promising from the viewpoint of profitability. Additionally, we note also a relatively fast growth of container transportation in Russia.

However, investments into the railway sector have been inadequate over the last 10–12 years. As a result, a pronounced shortage of railway cars has arisen. Therefore, after analyzing all these factors, we arrived at the conclusion that the sector is of interest for us and features a high potential.

It is also worth noting that IFC was the largest investor providing finance to private carriers in Russia for the past three years. At that time, there were very few sources of finance, the more so, long–term finance. The greater part of market players were newcomers, companies with short credit history, and many of them did not have IFRS financials. Certainly, it was risky, but once entered this sector at the early stage, we have established good partnership relations with Russia’s leading transportation companies. We saw their needs, particularly for long–term project financing. Also, we played a role of a «catalyst» in attracting other investors and mobilizing additional financing for our clients. Now, three years later, many domestic banks are willing to give loans to rail transportation companies. At that time, they were far less enthusiastic. 

Once IFC started working with private carriers we helped them to grow. With some of them, we are implementing a second or even third investment, and the scope of such projects is not limited to purchase of rolling stock, but extends to operational lease. Now, we are looking at other infrastructure projects, including, inland and port terminals, as well as repair depots.

– What are your predictions regarding air and water transports?

– Currently, airlines, both cargo and passenger businesses, and river shipping companies also require long term financing. 

For instance, air cargo and passenger traffic has been growing significantly over the last few years, whereas the supporting infrastructure has remained practically unchanged. Therefore, the aircraft fleet needs to be upgraded. Airports need upgrading, too. 

Similar trends are being observed in water transport – the share of river and sea transport in freight traffic, both domestic and export, is growing. Yet, the need for upgrading fleets of shipping companies and the water transport infrastructure remains acute. With regards to sea shipping now there are specialized shipping banks present on the market which effectively channel shipping finance. Therefore, IFC’s role in sea shipping finance is no longer significant. The situation with river shipping companies is quite different – very few investors still have any interest in them. So, we feel it necessary to be present on market segments where private investors are not ready to take risks. 

– Would you kindly share your experience regarding the difficulties IFC had to face with while doing business on the Russian market? 

 – First and foremost, it is legal environment. The level of its transparency and reliability affects the value of a project. To attract investors and creditors, the legal environment should secure a regime of transparency and honesty. We would be happy to work under a fair law of contracts which are enforceable. We do not mean that it does not exist, yet it is one of the points invariably mentioned by our clients as risky. This aspect invites some further efforts to be undertaken in Russia. 

Impartial arbitration is one more issue worth mentioning. Naturally, we are striving to take into account all the lessons learned in Russia and globally, and drawing inferences from mistakes committed, taking Russian realities into consideration. 

– Is IFC going to expand its investment portfolio in Russia’s transport sector? 

– Yes, we hope to provide support to both IFC’s current and new clients. We aim at increasing the volume of our investments into transport and infrastructure sectors in the region. As already mentioned, IFC’s current portfolio is worth ~ USD 500 million, and our target is to double or even triple this figure within 2–3 years. Russia’s needs for infrastructure modernization and maintenance are huge. For instance, according to the Russian Federation Government’s estimates, the annual need for investments into infrastructure is around USD 100 billion. In this regard, large–scale investment programs are being contemplated. 

Additionally, as distinct from the previous period of time, when we had no possibility to work with state–owned companies directly in Russia, now we can do it through concession agreements – the respective law was adopted in 2005. We hope that first PPP projects like Western High Speed Diameter in St. Petersburg and Moscow–St. Petersburg toll road will pave the way for other PPP projects in Russia. Today, concession bid documents are being prepared for these two large projects. At this stage, IFC has indicated the interest in providing financing to a winning concessionaire if the selection process is fair and transparent. 

At the same time, irrespective of how the situation will evolve, we hope that IFC’s practical experience in implementing large–scale infrastructure projects in Latin America, Asia, Eastern Europe, would be of help to both government and private sector investors in Russia. In turn, we are ready to continue providing support to developing the transport sector, within the scope of IFC’s mandate, that is, working with private sector companies and PPP investments based on the basis of transparency and in compliance with best international standards.



OLGA  GORBUNOVA
    [~DETAIL_TEXT] => While many international investors are still abstaining from putting money into the Russian economy, Russia has become the key client for the International Finance Corporation (IFC). As of now, Russian projects in IFC’s portfolio are worth USD 1.9 billion, with the infrastructure/transport sector accounting for more than 15% of the total volume of investments. The experience of IFC’s investments in Russia’s transport sector was the subject of our discussion with Ms. Milana Pirogova, Senior Investment Officer of IFC’s Central and Eastern Europe Department.



– Ms. Pirogova, as is well known, IFC provides a fairly active support to Russian transportation companies. What is the reason? 

 – In earnest, we embarked on financing infrastructure projects in 2003 and up to the present moment we have invested approximately USD 480 million into the above sector. Why had we paid less attention to this sector before 2003? At first, the crisis exploded, later the situation on the market did not favor long–term investments. Now, Russia enjoys a sustained economic growth, with the macroeconomic stability constantly improving. 

As far as our portfolio of investments into the transport sector is concerned, the greater part of projects is aimed at developing rail transportation and providing support to private carriers. As examples, I can mention the loan worth USD 40 million to the Severstal Group for expansion of Severstaltran’s rail tank car fleet, or the financing package (including a syndicated loan) worth USD 100 million to the Russkiy Mir for purchase of rail tank cars. We also have provided two loans, aggregate worth USD 150 million (including a syndicated loan), to the Eurosib Group. 

We have provided financing to Russian airline companies, e.g., projects with Volga–Dnepr, Sibirskiye Avialinii (Sibirskiye Airlines) and Airtaxi. Also, there are two projects in the river transport sector, namely, loans for a total of USD 89 million to Severo–Zapadnoye Parokhodstvo (North-Western Shipping Company) and Volzhskoye Parokhodstvo Shipping Companies for fleet modernization. The financing of construction and operation of the Kulon company’s up–to–date warehouses is an example of IFC’s investments in the warehousing sector. These are just a few largest projects to mention. At present our investment portfolio in the Russian infrastructure sector may not be large, but it is performing well. 

– Why is the preference being given to projects associated with purchase of rolling stock?

– We understand clearly that railways in Russia play a very important role in the domain of cargo transportation. It is railways that account for around 80 percent of the overall domestic cargo turnover. This mode of transportation is the most efficient for medium and long –distance deliveries of Russian raw materials and manufactures. In this context, railways are of paramount importance, supporting operations of Russian ports, export markets, foreign trade activities. Strong competitive positions of the railway transportation evidence that this sector is very promising from the viewpoint of profitability. Additionally, we note also a relatively fast growth of container transportation in Russia.

However, investments into the railway sector have been inadequate over the last 10–12 years. As a result, a pronounced shortage of railway cars has arisen. Therefore, after analyzing all these factors, we arrived at the conclusion that the sector is of interest for us and features a high potential.

It is also worth noting that IFC was the largest investor providing finance to private carriers in Russia for the past three years. At that time, there were very few sources of finance, the more so, long–term finance. The greater part of market players were newcomers, companies with short credit history, and many of them did not have IFRS financials. Certainly, it was risky, but once entered this sector at the early stage, we have established good partnership relations with Russia’s leading transportation companies. We saw their needs, particularly for long–term project financing. Also, we played a role of a «catalyst» in attracting other investors and mobilizing additional financing for our clients. Now, three years later, many domestic banks are willing to give loans to rail transportation companies. At that time, they were far less enthusiastic. 

Once IFC started working with private carriers we helped them to grow. With some of them, we are implementing a second or even third investment, and the scope of such projects is not limited to purchase of rolling stock, but extends to operational lease. Now, we are looking at other infrastructure projects, including, inland and port terminals, as well as repair depots.

– What are your predictions regarding air and water transports?

– Currently, airlines, both cargo and passenger businesses, and river shipping companies also require long term financing. 

For instance, air cargo and passenger traffic has been growing significantly over the last few years, whereas the supporting infrastructure has remained practically unchanged. Therefore, the aircraft fleet needs to be upgraded. Airports need upgrading, too. 

Similar trends are being observed in water transport – the share of river and sea transport in freight traffic, both domestic and export, is growing. Yet, the need for upgrading fleets of shipping companies and the water transport infrastructure remains acute. With regards to sea shipping now there are specialized shipping banks present on the market which effectively channel shipping finance. Therefore, IFC’s role in sea shipping finance is no longer significant. The situation with river shipping companies is quite different – very few investors still have any interest in them. So, we feel it necessary to be present on market segments where private investors are not ready to take risks. 

– Would you kindly share your experience regarding the difficulties IFC had to face with while doing business on the Russian market? 

 – First and foremost, it is legal environment. The level of its transparency and reliability affects the value of a project. To attract investors and creditors, the legal environment should secure a regime of transparency and honesty. We would be happy to work under a fair law of contracts which are enforceable. We do not mean that it does not exist, yet it is one of the points invariably mentioned by our clients as risky. This aspect invites some further efforts to be undertaken in Russia. 

Impartial arbitration is one more issue worth mentioning. Naturally, we are striving to take into account all the lessons learned in Russia and globally, and drawing inferences from mistakes committed, taking Russian realities into consideration. 

– Is IFC going to expand its investment portfolio in Russia’s transport sector? 

– Yes, we hope to provide support to both IFC’s current and new clients. We aim at increasing the volume of our investments into transport and infrastructure sectors in the region. As already mentioned, IFC’s current portfolio is worth ~ USD 500 million, and our target is to double or even triple this figure within 2–3 years. Russia’s needs for infrastructure modernization and maintenance are huge. For instance, according to the Russian Federation Government’s estimates, the annual need for investments into infrastructure is around USD 100 billion. In this regard, large–scale investment programs are being contemplated. 

Additionally, as distinct from the previous period of time, when we had no possibility to work with state–owned companies directly in Russia, now we can do it through concession agreements – the respective law was adopted in 2005. We hope that first PPP projects like Western High Speed Diameter in St. Petersburg and Moscow–St. Petersburg toll road will pave the way for other PPP projects in Russia. Today, concession bid documents are being prepared for these two large projects. At this stage, IFC has indicated the interest in providing financing to a winning concessionaire if the selection process is fair and transparent. 

At the same time, irrespective of how the situation will evolve, we hope that IFC’s practical experience in implementing large–scale infrastructure projects in Latin America, Asia, Eastern Europe, would be of help to both government and private sector investors in Russia. In turn, we are ready to continue providing support to developing the transport sector, within the scope of IFC’s mandate, that is, working with private sector companies and PPP investments based on the basis of transparency and in compliance with best international standards.



OLGA  GORBUNOVA
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    [DETAIL_TEXT] => While many international investors are still abstaining from putting money into the Russian economy, Russia has become the key client for the International Finance Corporation (IFC). As of now, Russian projects in IFC’s portfolio are worth USD 1.9 billion, with the infrastructure/transport sector accounting for more than 15% of the total volume of investments. The experience of IFC’s investments in Russia’s transport sector was the subject of our discussion with Ms. Milana Pirogova, Senior Investment Officer of IFC’s Central and Eastern Europe Department.



– Ms. Pirogova, as is well known, IFC provides a fairly active support to Russian transportation companies. What is the reason? 

 – In earnest, we embarked on financing infrastructure projects in 2003 and up to the present moment we have invested approximately USD 480 million into the above sector. Why had we paid less attention to this sector before 2003? At first, the crisis exploded, later the situation on the market did not favor long–term investments. Now, Russia enjoys a sustained economic growth, with the macroeconomic stability constantly improving. 

As far as our portfolio of investments into the transport sector is concerned, the greater part of projects is aimed at developing rail transportation and providing support to private carriers. As examples, I can mention the loan worth USD 40 million to the Severstal Group for expansion of Severstaltran’s rail tank car fleet, or the financing package (including a syndicated loan) worth USD 100 million to the Russkiy Mir for purchase of rail tank cars. We also have provided two loans, aggregate worth USD 150 million (including a syndicated loan), to the Eurosib Group. 

We have provided financing to Russian airline companies, e.g., projects with Volga–Dnepr, Sibirskiye Avialinii (Sibirskiye Airlines) and Airtaxi. Also, there are two projects in the river transport sector, namely, loans for a total of USD 89 million to Severo–Zapadnoye Parokhodstvo (North-Western Shipping Company) and Volzhskoye Parokhodstvo Shipping Companies for fleet modernization. The financing of construction and operation of the Kulon company’s up–to–date warehouses is an example of IFC’s investments in the warehousing sector. These are just a few largest projects to mention. At present our investment portfolio in the Russian infrastructure sector may not be large, but it is performing well. 

– Why is the preference being given to projects associated with purchase of rolling stock?

– We understand clearly that railways in Russia play a very important role in the domain of cargo transportation. It is railways that account for around 80 percent of the overall domestic cargo turnover. This mode of transportation is the most efficient for medium and long –distance deliveries of Russian raw materials and manufactures. In this context, railways are of paramount importance, supporting operations of Russian ports, export markets, foreign trade activities. Strong competitive positions of the railway transportation evidence that this sector is very promising from the viewpoint of profitability. Additionally, we note also a relatively fast growth of container transportation in Russia.

However, investments into the railway sector have been inadequate over the last 10–12 years. As a result, a pronounced shortage of railway cars has arisen. Therefore, after analyzing all these factors, we arrived at the conclusion that the sector is of interest for us and features a high potential.

It is also worth noting that IFC was the largest investor providing finance to private carriers in Russia for the past three years. At that time, there were very few sources of finance, the more so, long–term finance. The greater part of market players were newcomers, companies with short credit history, and many of them did not have IFRS financials. Certainly, it was risky, but once entered this sector at the early stage, we have established good partnership relations with Russia’s leading transportation companies. We saw their needs, particularly for long–term project financing. Also, we played a role of a «catalyst» in attracting other investors and mobilizing additional financing for our clients. Now, three years later, many domestic banks are willing to give loans to rail transportation companies. At that time, they were far less enthusiastic. 

Once IFC started working with private carriers we helped them to grow. With some of them, we are implementing a second or even third investment, and the scope of such projects is not limited to purchase of rolling stock, but extends to operational lease. Now, we are looking at other infrastructure projects, including, inland and port terminals, as well as repair depots.

– What are your predictions regarding air and water transports?

– Currently, airlines, both cargo and passenger businesses, and river shipping companies also require long term financing. 

For instance, air cargo and passenger traffic has been growing significantly over the last few years, whereas the supporting infrastructure has remained practically unchanged. Therefore, the aircraft fleet needs to be upgraded. Airports need upgrading, too. 

Similar trends are being observed in water transport – the share of river and sea transport in freight traffic, both domestic and export, is growing. Yet, the need for upgrading fleets of shipping companies and the water transport infrastructure remains acute. With regards to sea shipping now there are specialized shipping banks present on the market which effectively channel shipping finance. Therefore, IFC’s role in sea shipping finance is no longer significant. The situation with river shipping companies is quite different – very few investors still have any interest in them. So, we feel it necessary to be present on market segments where private investors are not ready to take risks. 

– Would you kindly share your experience regarding the difficulties IFC had to face with while doing business on the Russian market? 

 – First and foremost, it is legal environment. The level of its transparency and reliability affects the value of a project. To attract investors and creditors, the legal environment should secure a regime of transparency and honesty. We would be happy to work under a fair law of contracts which are enforceable. We do not mean that it does not exist, yet it is one of the points invariably mentioned by our clients as risky. This aspect invites some further efforts to be undertaken in Russia. 

Impartial arbitration is one more issue worth mentioning. Naturally, we are striving to take into account all the lessons learned in Russia and globally, and drawing inferences from mistakes committed, taking Russian realities into consideration. 

– Is IFC going to expand its investment portfolio in Russia’s transport sector? 

– Yes, we hope to provide support to both IFC’s current and new clients. We aim at increasing the volume of our investments into transport and infrastructure sectors in the region. As already mentioned, IFC’s current portfolio is worth ~ USD 500 million, and our target is to double or even triple this figure within 2–3 years. Russia’s needs for infrastructure modernization and maintenance are huge. For instance, according to the Russian Federation Government’s estimates, the annual need for investments into infrastructure is around USD 100 billion. In this regard, large–scale investment programs are being contemplated. 

Additionally, as distinct from the previous period of time, when we had no possibility to work with state–owned companies directly in Russia, now we can do it through concession agreements – the respective law was adopted in 2005. We hope that first PPP projects like Western High Speed Diameter in St. Petersburg and Moscow–St. Petersburg toll road will pave the way for other PPP projects in Russia. Today, concession bid documents are being prepared for these two large projects. At this stage, IFC has indicated the interest in providing financing to a winning concessionaire if the selection process is fair and transparent. 

At the same time, irrespective of how the situation will evolve, we hope that IFC’s practical experience in implementing large–scale infrastructure projects in Latin America, Asia, Eastern Europe, would be of help to both government and private sector investors in Russia. In turn, we are ready to continue providing support to developing the transport sector, within the scope of IFC’s mandate, that is, working with private sector companies and PPP investments based on the basis of transparency and in compliance with best international standards.



OLGA  GORBUNOVA
    [~DETAIL_TEXT] => While many international investors are still abstaining from putting money into the Russian economy, Russia has become the key client for the International Finance Corporation (IFC). As of now, Russian projects in IFC’s portfolio are worth USD 1.9 billion, with the infrastructure/transport sector accounting for more than 15% of the total volume of investments. The experience of IFC’s investments in Russia’s transport sector was the subject of our discussion with Ms. Milana Pirogova, Senior Investment Officer of IFC’s Central and Eastern Europe Department.



– Ms. Pirogova, as is well known, IFC provides a fairly active support to Russian transportation companies. What is the reason? 

 – In earnest, we embarked on financing infrastructure projects in 2003 and up to the present moment we have invested approximately USD 480 million into the above sector. Why had we paid less attention to this sector before 2003? At first, the crisis exploded, later the situation on the market did not favor long–term investments. Now, Russia enjoys a sustained economic growth, with the macroeconomic stability constantly improving. 

As far as our portfolio of investments into the transport sector is concerned, the greater part of projects is aimed at developing rail transportation and providing support to private carriers. As examples, I can mention the loan worth USD 40 million to the Severstal Group for expansion of Severstaltran’s rail tank car fleet, or the financing package (including a syndicated loan) worth USD 100 million to the Russkiy Mir for purchase of rail tank cars. We also have provided two loans, aggregate worth USD 150 million (including a syndicated loan), to the Eurosib Group. 

We have provided financing to Russian airline companies, e.g., projects with Volga–Dnepr, Sibirskiye Avialinii (Sibirskiye Airlines) and Airtaxi. Also, there are two projects in the river transport sector, namely, loans for a total of USD 89 million to Severo–Zapadnoye Parokhodstvo (North-Western Shipping Company) and Volzhskoye Parokhodstvo Shipping Companies for fleet modernization. The financing of construction and operation of the Kulon company’s up–to–date warehouses is an example of IFC’s investments in the warehousing sector. These are just a few largest projects to mention. At present our investment portfolio in the Russian infrastructure sector may not be large, but it is performing well. 

– Why is the preference being given to projects associated with purchase of rolling stock?

– We understand clearly that railways in Russia play a very important role in the domain of cargo transportation. It is railways that account for around 80 percent of the overall domestic cargo turnover. This mode of transportation is the most efficient for medium and long –distance deliveries of Russian raw materials and manufactures. In this context, railways are of paramount importance, supporting operations of Russian ports, export markets, foreign trade activities. Strong competitive positions of the railway transportation evidence that this sector is very promising from the viewpoint of profitability. Additionally, we note also a relatively fast growth of container transportation in Russia.

However, investments into the railway sector have been inadequate over the last 10–12 years. As a result, a pronounced shortage of railway cars has arisen. Therefore, after analyzing all these factors, we arrived at the conclusion that the sector is of interest for us and features a high potential.

It is also worth noting that IFC was the largest investor providing finance to private carriers in Russia for the past three years. At that time, there were very few sources of finance, the more so, long–term finance. The greater part of market players were newcomers, companies with short credit history, and many of them did not have IFRS financials. Certainly, it was risky, but once entered this sector at the early stage, we have established good partnership relations with Russia’s leading transportation companies. We saw their needs, particularly for long–term project financing. Also, we played a role of a «catalyst» in attracting other investors and mobilizing additional financing for our clients. Now, three years later, many domestic banks are willing to give loans to rail transportation companies. At that time, they were far less enthusiastic. 

Once IFC started working with private carriers we helped them to grow. With some of them, we are implementing a second or even third investment, and the scope of such projects is not limited to purchase of rolling stock, but extends to operational lease. Now, we are looking at other infrastructure projects, including, inland and port terminals, as well as repair depots.

– What are your predictions regarding air and water transports?

– Currently, airlines, both cargo and passenger businesses, and river shipping companies also require long term financing. 

For instance, air cargo and passenger traffic has been growing significantly over the last few years, whereas the supporting infrastructure has remained practically unchanged. Therefore, the aircraft fleet needs to be upgraded. Airports need upgrading, too. 

Similar trends are being observed in water transport – the share of river and sea transport in freight traffic, both domestic and export, is growing. Yet, the need for upgrading fleets of shipping companies and the water transport infrastructure remains acute. With regards to sea shipping now there are specialized shipping banks present on the market which effectively channel shipping finance. Therefore, IFC’s role in sea shipping finance is no longer significant. The situation with river shipping companies is quite different – very few investors still have any interest in them. So, we feel it necessary to be present on market segments where private investors are not ready to take risks. 

– Would you kindly share your experience regarding the difficulties IFC had to face with while doing business on the Russian market? 

 – First and foremost, it is legal environment. The level of its transparency and reliability affects the value of a project. To attract investors and creditors, the legal environment should secure a regime of transparency and honesty. We would be happy to work under a fair law of contracts which are enforceable. We do not mean that it does not exist, yet it is one of the points invariably mentioned by our clients as risky. This aspect invites some further efforts to be undertaken in Russia. 

Impartial arbitration is one more issue worth mentioning. Naturally, we are striving to take into account all the lessons learned in Russia and globally, and drawing inferences from mistakes committed, taking Russian realities into consideration. 

– Is IFC going to expand its investment portfolio in Russia’s transport sector? 

– Yes, we hope to provide support to both IFC’s current and new clients. We aim at increasing the volume of our investments into transport and infrastructure sectors in the region. As already mentioned, IFC’s current portfolio is worth ~ USD 500 million, and our target is to double or even triple this figure within 2–3 years. Russia’s needs for infrastructure modernization and maintenance are huge. For instance, according to the Russian Federation Government’s estimates, the annual need for investments into infrastructure is around USD 100 billion. In this regard, large–scale investment programs are being contemplated. 

Additionally, as distinct from the previous period of time, when we had no possibility to work with state–owned companies directly in Russia, now we can do it through concession agreements – the respective law was adopted in 2005. We hope that first PPP projects like Western High Speed Diameter in St. Petersburg and Moscow–St. Petersburg toll road will pave the way for other PPP projects in Russia. Today, concession bid documents are being prepared for these two large projects. At this stage, IFC has indicated the interest in providing financing to a winning concessionaire if the selection process is fair and transparent. 

At the same time, irrespective of how the situation will evolve, we hope that IFC’s practical experience in implementing large–scale infrastructure projects in Latin America, Asia, Eastern Europe, would be of help to both government and private sector investors in Russia. In turn, we are ready to continue providing support to developing the transport sector, within the scope of IFC’s mandate, that is, working with private sector companies and PPP investments based on the basis of transparency and in compliance with best international standards.



OLGA  GORBUNOVA
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    [DETAIL_TEXT] => On October 23, 2006, the Coordinating Council on Transport Policy was created in accordance with the decree of the RF Minister of Transport Igor Levitin. The Head of the Council is Alexander Misharin, Deputy Minister of Transport. The members of the Council are top-managers of transport associations, representatives of scientific and business sectors, and Ministry’s employees in charge.

The Council is to become a new form of cooperation between the RF Ministry of Transport and representatives of public organizations, unions and associations of the transport sector to carry out the Transport Strategy of the Russian Federation till 2020.

The main targets of the Coordinating Council are generating offers providing business participation in defining priorities and realization of the state transport policy; providing expert conclusions on projects of the transport sector development, as well as on ways to increase the competitiveness of transport systems and measures motivating the launch of national transport forwarding companies able to compete with foreign transnational companies on the domestic and foreign transportation market; development of mechanisms providing efficient interaction of the state and business to create and improve public-private partnership institutions and realize certain business projects. 



Russia-Germany: Declaration Signed

The Declaration of Cooperation in the Sector of Transport, Multimodal Transportation and Organization of Railway-Ferry Communication between the ports of the Russian Federation and Germany was signed by the RF Minister of Transport Igor Levitin and the German Federal Minister of Transport, Building and Urban Development Wolfgang Tiefensee in Berlin on October 19, 2006.

The Declaration envisages a more intensive cooperation in the sector of sea navigation and a launch of different lines, including railway ferries. In particular, the sides agreed to develop ferry communication between the ports of Ust-Luga–Baltiysk and the German ports at the Baltic Sea.



Joint Projects of OAO RZD and RF Regions

In 2006, OAO RZD and the RF regions have cooperated to invest into 159 objects of railway infrastructure. The total cost of the works is over RUR 3.6 billion, including RUR 1.8 billion invested by the subjects of the Russian Federation. 

In particular, investments are directed at the reconstruction of the railway stations in Ufa, Saransk, Omsk, Lipetsk and construction of suburban zones at the Chelyabinsk and Novosibirsk stations.

In 2004, there were joint investments into 76 objects for the total sum of RUR 3.7 billion, wherein RUR 901 million was given from the regional budgets. In 2005, OAO RZD in cooperation with the RF regions serviced 115 objects for the total sum of RUR 1.2 billion (regions invested RUR 885 million). Examples of such cooperation are reconstruction of the railway stations of Krasnoyarsk, Chelyabinsk-Glavny, Izhevsk and the passenger junction at the Vykhino station, as well as the launch of a multimodal line Moskva-Kievskaya – Vnukovo.

The regions’ investments into railway infrastructure grow, which shows that they are interested in the improvement of the transport system and the quality of services provided to passengers.



Russia and Kazakhstan Develop Railway Ferry Communication

On November 9, 2006, in Aktau the RF Minister of Transport Igor Levitin and the Minister of Transport and Communications of the Republic of Kazakhstan Serik Akhmetov signed the normative documents envisaged by the Agreement on the launch of direct railway-ferry communication between the ports of Makhachkala (Russia) and Aktau (Kazakhstan). The agreement was signed in Uralsk on October 3, 2006.

The normative documents include the Decree on Council of Joint Exploitation of the Railway Ferry; Rules of Freight Transportation in Direct International Railway Ferry Communication; Rules of Exploitation, Registration of Freight Wagons and Containers, and Calculation of Fees for Their Usage in Direct International Railway Ferry Communication.

«Now we plan that two ferries from each side will service the line. In case the transportation volume grows significantly, we will discuss the possibility of increasing the amount of ferries», stated RF Minister of Transport Igor Levitin.

He noted that oil products will make the larger share of the freight transportation volume at the new Caspian route. In future, the share of grain and bulk cargoes may increase.

According to forecasts, the total volume of Kazakhstan-Russia trade turnover will amount to USD 10 billion this year.



OAO RZD’s Projects Approved

On October 26, 2006, the RF Government approved the projects of the investment programme and the financial plans of OAO RZD for 2007 and for the period leading to 2009. Summing up the results of the discussion, Deputy Chairman of the RF Government, the Chairman of OAO RZD’s Board of Directors Alexander Zhukov noted that it was the first time that the company’s programme was formed using the project principle. «This will enable us to increase efficiency of investing expenses and transparency, as well as see the economic effect of separate projects implementation better», stressed Alexander Zhukov. 

The total volume of OAO RZD’s investment programme for 2007-2009 is RUR 694 billion. It is planned to spend RUR 210 billion in 2007, RUR 231 billion in 2008, and RUR 252 billion in 2009.



CIS Join Efforts to Increase Transit Potential

At XXVI meeting of the Coordinating Transport Summit (CTS) of the CIS, held in Moscow, issues of transit potential efficient use and increase of the CIS export services were discussed.

«Nowadays, the priority for CTS is the creation of transport communication uniting International Transport Corridor 7 and the transport route Danube – the Caspian Sea, as well as projects aimed to increase freight flows on the North-South and East-West destinations passing through the transport corridors of the CIS and using the inner waterways», said Igor Levitin, RF Minister of Transport, the Chairman of CTS.

The idea of the project to use Russian water-transport system in the international integration of the states of the Caspian, the Azov-Black Sea, and the Mediterranean basins envisages the launch of an international deep-water sea canal. In the words of I.Levitin, the new canal is especially important because it may be used as extension of the Seventh Danube Corridor, which will strengthen the positions of the Russian Federation in the Danube Committee.

Another transport project carried out with the help of the CIS CTS is the launch of regular ferry communication on Baku-Turkmenbashi line with the use of Russian railway ferries.

One more example of cooperation in the transport sphere is the construction at the Petrozavodsk shipyards (Russia) and launch of motor vessels of Karelia type for river-sea navigation. The first such vessel was designed in the Odessa Ship Building Bureau.

An important project of international cooperation is the multi-modal container terminal-depot created on the base of the port of Samara. The transporters of Ukraine, Kazakhstan and other Republics of Central Asia are interested in its construction.



New Logistic Centre to Be Launched in Ulyanovsk Region

OOO Kaskad-Ulyanovsk will attract RUR 200 million into construction of a logistic centre in the Ulyanovsk region, said Dmitry Shikov, the press-secretary of the Governor of the region. In his words, the complex is to start work at full capacity in 2008.

D. Shikov noted that the demand for high-quality warehousing and logistic services has been caused by the active economic development in the Ulyanovsk region. In the framework of the project, it is planned to repair and put into operation 17.5 thousand sq.m of warehouses, and another 70 thousand sq.m by the end of 2007. It is also planned to purchase special equipment. The budget efficiency of the project is RUR 30 million of tax payments annually. 

«Governor of the Ulyanovsk region Sergey Morozov supported the idea of the logistic centre launch. In his words, Ulyanovsk has everything necessary for it: two airports, one of which is international, two railway stations, passenger and freight river port. The Head of the region believes that both Russian and local transport and trade companies are interested in the project», said D.Shikov.



OAO RZD in Cooperation with Orient Express

OAO RZD and Orient Express will organize tours of Russia. A protocol of intentions was signed by Orient Express, OAO RZD and OOO RZD-Tour in the framework of the international tourist exhibition World Travel Market in London.

Vice-President of OAO RZD Mikhail Akulov explained that «the basic principles of further cooperation have been defined. We will use the technological potential of OAO RZD and the experience of Orient Express to carry out railway tours of high quality». «We assume that in 2007 we will launch the first project on the basis of OAO RZD’s rolling stock to service VIP clients on the jointly developed routes. Besides, we will have to develop such sectors of tourism that are absolutely new on the market, and no other company provides such services», said the Vice-President of OAO RZD. Regional partners will participate in organization of the tours. They will organize leisure time and cultural programmes in the towns on the route. Mikhail Akulov said that in the Russian regions there is serious infrastructure allowing the required level of service.



Improving International Rail Communication

On October 12, the proceedings of the 44th meeting of the Council for the CIS Railway Transport were signed in Erevan. It contains its members’ decisions on 16 most important issues of freight and passenger transportation, financial and technological interrelations, prospects of rolling stock park development and cooperation in the medicine sector.

In the freight transportation sector, it was recommended to the railway administrations to complete preparation for the launch of the automated system «Mesplan». The new technology of freight transportation planning will be put into operation on January 1, 2007.

New payment rates for rolling stock use, wagon idling etc. were corrected and put into operation for convenience. Amendments to the Instruction on oversize and heavy cargoes transportation along the CIS, Latvian, Lithuanian and Estonian railways were implemented.

The railway administrations are to work out the issue of the possibility of including expenses on current uncoupled repair of private cargo wagons into the tariff on transportation in private wagons. Besides, they are to make suggestions concerning potential amendments to the Rules of freight in universal containers transportation, to complete the development of the project of exploitation, registration and payment for the use of rented freight wagons belonging to the railway administrations parks that operate on international routes. 

According to the proceedings, railway administrations will start developing the train schedule for international communication for 2007-2008. It will include 284 pairs of passenger trains, 57 pairs of suburban trains, and 387 towed and direct wagons. To ensure the quality of the schedule, a meeting will be held in Kazan at the end of 2006. 

It was recommended to the CIS railways to discuss the opportunity of automated transfer of information about passengers, traveling in each wagon of an international train, to the check-point of the border station on the basis of ASU Express data. The next, 45th meeting, of the Railway Transport Council will be held in Astana in May 2007. It is planned to discuss issues of launching and carrying out joint investment projects of international transport corridors development, as well as creating a single informational area on the railways with 1520 mm gauge on the basis of modern IT technologies, e-document turnover, system of e-monitoring cargo transportation, and unification of standards according to the new types of freight wagons.

    [~DETAIL_TEXT] => On October 23, 2006, the Coordinating Council on Transport Policy was created in accordance with the decree of the RF Minister of Transport Igor Levitin. The Head of the Council is Alexander Misharin, Deputy Minister of Transport. The members of the Council are top-managers of transport associations, representatives of scientific and business sectors, and Ministry’s employees in charge.

The Council is to become a new form of cooperation between the RF Ministry of Transport and representatives of public organizations, unions and associations of the transport sector to carry out the Transport Strategy of the Russian Federation till 2020.

The main targets of the Coordinating Council are generating offers providing business participation in defining priorities and realization of the state transport policy; providing expert conclusions on projects of the transport sector development, as well as on ways to increase the competitiveness of transport systems and measures motivating the launch of national transport forwarding companies able to compete with foreign transnational companies on the domestic and foreign transportation market; development of mechanisms providing efficient interaction of the state and business to create and improve public-private partnership institutions and realize certain business projects. 



Russia-Germany: Declaration Signed

The Declaration of Cooperation in the Sector of Transport, Multimodal Transportation and Organization of Railway-Ferry Communication between the ports of the Russian Federation and Germany was signed by the RF Minister of Transport Igor Levitin and the German Federal Minister of Transport, Building and Urban Development Wolfgang Tiefensee in Berlin on October 19, 2006.

The Declaration envisages a more intensive cooperation in the sector of sea navigation and a launch of different lines, including railway ferries. In particular, the sides agreed to develop ferry communication between the ports of Ust-Luga–Baltiysk and the German ports at the Baltic Sea.



Joint Projects of OAO RZD and RF Regions

In 2006, OAO RZD and the RF regions have cooperated to invest into 159 objects of railway infrastructure. The total cost of the works is over RUR 3.6 billion, including RUR 1.8 billion invested by the subjects of the Russian Federation. 

In particular, investments are directed at the reconstruction of the railway stations in Ufa, Saransk, Omsk, Lipetsk and construction of suburban zones at the Chelyabinsk and Novosibirsk stations.

In 2004, there were joint investments into 76 objects for the total sum of RUR 3.7 billion, wherein RUR 901 million was given from the regional budgets. In 2005, OAO RZD in cooperation with the RF regions serviced 115 objects for the total sum of RUR 1.2 billion (regions invested RUR 885 million). Examples of such cooperation are reconstruction of the railway stations of Krasnoyarsk, Chelyabinsk-Glavny, Izhevsk and the passenger junction at the Vykhino station, as well as the launch of a multimodal line Moskva-Kievskaya – Vnukovo.

The regions’ investments into railway infrastructure grow, which shows that they are interested in the improvement of the transport system and the quality of services provided to passengers.



Russia and Kazakhstan Develop Railway Ferry Communication

On November 9, 2006, in Aktau the RF Minister of Transport Igor Levitin and the Minister of Transport and Communications of the Republic of Kazakhstan Serik Akhmetov signed the normative documents envisaged by the Agreement on the launch of direct railway-ferry communication between the ports of Makhachkala (Russia) and Aktau (Kazakhstan). The agreement was signed in Uralsk on October 3, 2006.

The normative documents include the Decree on Council of Joint Exploitation of the Railway Ferry; Rules of Freight Transportation in Direct International Railway Ferry Communication; Rules of Exploitation, Registration of Freight Wagons and Containers, and Calculation of Fees for Their Usage in Direct International Railway Ferry Communication.

«Now we plan that two ferries from each side will service the line. In case the transportation volume grows significantly, we will discuss the possibility of increasing the amount of ferries», stated RF Minister of Transport Igor Levitin.

He noted that oil products will make the larger share of the freight transportation volume at the new Caspian route. In future, the share of grain and bulk cargoes may increase.

According to forecasts, the total volume of Kazakhstan-Russia trade turnover will amount to USD 10 billion this year.



OAO RZD’s Projects Approved

On October 26, 2006, the RF Government approved the projects of the investment programme and the financial plans of OAO RZD for 2007 and for the period leading to 2009. Summing up the results of the discussion, Deputy Chairman of the RF Government, the Chairman of OAO RZD’s Board of Directors Alexander Zhukov noted that it was the first time that the company’s programme was formed using the project principle. «This will enable us to increase efficiency of investing expenses and transparency, as well as see the economic effect of separate projects implementation better», stressed Alexander Zhukov. 

The total volume of OAO RZD’s investment programme for 2007-2009 is RUR 694 billion. It is planned to spend RUR 210 billion in 2007, RUR 231 billion in 2008, and RUR 252 billion in 2009.



CIS Join Efforts to Increase Transit Potential

At XXVI meeting of the Coordinating Transport Summit (CTS) of the CIS, held in Moscow, issues of transit potential efficient use and increase of the CIS export services were discussed.

«Nowadays, the priority for CTS is the creation of transport communication uniting International Transport Corridor 7 and the transport route Danube – the Caspian Sea, as well as projects aimed to increase freight flows on the North-South and East-West destinations passing through the transport corridors of the CIS and using the inner waterways», said Igor Levitin, RF Minister of Transport, the Chairman of CTS.

The idea of the project to use Russian water-transport system in the international integration of the states of the Caspian, the Azov-Black Sea, and the Mediterranean basins envisages the launch of an international deep-water sea canal. In the words of I.Levitin, the new canal is especially important because it may be used as extension of the Seventh Danube Corridor, which will strengthen the positions of the Russian Federation in the Danube Committee.

Another transport project carried out with the help of the CIS CTS is the launch of regular ferry communication on Baku-Turkmenbashi line with the use of Russian railway ferries.

One more example of cooperation in the transport sphere is the construction at the Petrozavodsk shipyards (Russia) and launch of motor vessels of Karelia type for river-sea navigation. The first such vessel was designed in the Odessa Ship Building Bureau.

An important project of international cooperation is the multi-modal container terminal-depot created on the base of the port of Samara. The transporters of Ukraine, Kazakhstan and other Republics of Central Asia are interested in its construction.



New Logistic Centre to Be Launched in Ulyanovsk Region

OOO Kaskad-Ulyanovsk will attract RUR 200 million into construction of a logistic centre in the Ulyanovsk region, said Dmitry Shikov, the press-secretary of the Governor of the region. In his words, the complex is to start work at full capacity in 2008.

D. Shikov noted that the demand for high-quality warehousing and logistic services has been caused by the active economic development in the Ulyanovsk region. In the framework of the project, it is planned to repair and put into operation 17.5 thousand sq.m of warehouses, and another 70 thousand sq.m by the end of 2007. It is also planned to purchase special equipment. The budget efficiency of the project is RUR 30 million of tax payments annually. 

«Governor of the Ulyanovsk region Sergey Morozov supported the idea of the logistic centre launch. In his words, Ulyanovsk has everything necessary for it: two airports, one of which is international, two railway stations, passenger and freight river port. The Head of the region believes that both Russian and local transport and trade companies are interested in the project», said D.Shikov.



OAO RZD in Cooperation with Orient Express

OAO RZD and Orient Express will organize tours of Russia. A protocol of intentions was signed by Orient Express, OAO RZD and OOO RZD-Tour in the framework of the international tourist exhibition World Travel Market in London.

Vice-President of OAO RZD Mikhail Akulov explained that «the basic principles of further cooperation have been defined. We will use the technological potential of OAO RZD and the experience of Orient Express to carry out railway tours of high quality». «We assume that in 2007 we will launch the first project on the basis of OAO RZD’s rolling stock to service VIP clients on the jointly developed routes. Besides, we will have to develop such sectors of tourism that are absolutely new on the market, and no other company provides such services», said the Vice-President of OAO RZD. Regional partners will participate in organization of the tours. They will organize leisure time and cultural programmes in the towns on the route. Mikhail Akulov said that in the Russian regions there is serious infrastructure allowing the required level of service.



Improving International Rail Communication

On October 12, the proceedings of the 44th meeting of the Council for the CIS Railway Transport were signed in Erevan. It contains its members’ decisions on 16 most important issues of freight and passenger transportation, financial and technological interrelations, prospects of rolling stock park development and cooperation in the medicine sector.

In the freight transportation sector, it was recommended to the railway administrations to complete preparation for the launch of the automated system «Mesplan». The new technology of freight transportation planning will be put into operation on January 1, 2007.

New payment rates for rolling stock use, wagon idling etc. were corrected and put into operation for convenience. Amendments to the Instruction on oversize and heavy cargoes transportation along the CIS, Latvian, Lithuanian and Estonian railways were implemented.

The railway administrations are to work out the issue of the possibility of including expenses on current uncoupled repair of private cargo wagons into the tariff on transportation in private wagons. Besides, they are to make suggestions concerning potential amendments to the Rules of freight in universal containers transportation, to complete the development of the project of exploitation, registration and payment for the use of rented freight wagons belonging to the railway administrations parks that operate on international routes. 

According to the proceedings, railway administrations will start developing the train schedule for international communication for 2007-2008. It will include 284 pairs of passenger trains, 57 pairs of suburban trains, and 387 towed and direct wagons. To ensure the quality of the schedule, a meeting will be held in Kazan at the end of 2006. 

It was recommended to the CIS railways to discuss the opportunity of automated transfer of information about passengers, traveling in each wagon of an international train, to the check-point of the border station on the basis of ASU Express data. The next, 45th meeting, of the Railway Transport Council will be held in Astana in May 2007. It is planned to discuss issues of launching and carrying out joint investment projects of international transport corridors development, as well as creating a single informational area on the railways with 1520 mm gauge on the basis of modern IT technologies, e-document turnover, system of e-monitoring cargo transportation, and unification of standards according to the new types of freight wagons.

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    [DETAIL_TEXT] => On October 23, 2006, the Coordinating Council on Transport Policy was created in accordance with the decree of the RF Minister of Transport Igor Levitin. The Head of the Council is Alexander Misharin, Deputy Minister of Transport. The members of the Council are top-managers of transport associations, representatives of scientific and business sectors, and Ministry’s employees in charge.

The Council is to become a new form of cooperation between the RF Ministry of Transport and representatives of public organizations, unions and associations of the transport sector to carry out the Transport Strategy of the Russian Federation till 2020.

The main targets of the Coordinating Council are generating offers providing business participation in defining priorities and realization of the state transport policy; providing expert conclusions on projects of the transport sector development, as well as on ways to increase the competitiveness of transport systems and measures motivating the launch of national transport forwarding companies able to compete with foreign transnational companies on the domestic and foreign transportation market; development of mechanisms providing efficient interaction of the state and business to create and improve public-private partnership institutions and realize certain business projects. 



Russia-Germany: Declaration Signed

The Declaration of Cooperation in the Sector of Transport, Multimodal Transportation and Organization of Railway-Ferry Communication between the ports of the Russian Federation and Germany was signed by the RF Minister of Transport Igor Levitin and the German Federal Minister of Transport, Building and Urban Development Wolfgang Tiefensee in Berlin on October 19, 2006.

The Declaration envisages a more intensive cooperation in the sector of sea navigation and a launch of different lines, including railway ferries. In particular, the sides agreed to develop ferry communication between the ports of Ust-Luga–Baltiysk and the German ports at the Baltic Sea.



Joint Projects of OAO RZD and RF Regions

In 2006, OAO RZD and the RF regions have cooperated to invest into 159 objects of railway infrastructure. The total cost of the works is over RUR 3.6 billion, including RUR 1.8 billion invested by the subjects of the Russian Federation. 

In particular, investments are directed at the reconstruction of the railway stations in Ufa, Saransk, Omsk, Lipetsk and construction of suburban zones at the Chelyabinsk and Novosibirsk stations.

In 2004, there were joint investments into 76 objects for the total sum of RUR 3.7 billion, wherein RUR 901 million was given from the regional budgets. In 2005, OAO RZD in cooperation with the RF regions serviced 115 objects for the total sum of RUR 1.2 billion (regions invested RUR 885 million). Examples of such cooperation are reconstruction of the railway stations of Krasnoyarsk, Chelyabinsk-Glavny, Izhevsk and the passenger junction at the Vykhino station, as well as the launch of a multimodal line Moskva-Kievskaya – Vnukovo.

The regions’ investments into railway infrastructure grow, which shows that they are interested in the improvement of the transport system and the quality of services provided to passengers.



Russia and Kazakhstan Develop Railway Ferry Communication

On November 9, 2006, in Aktau the RF Minister of Transport Igor Levitin and the Minister of Transport and Communications of the Republic of Kazakhstan Serik Akhmetov signed the normative documents envisaged by the Agreement on the launch of direct railway-ferry communication between the ports of Makhachkala (Russia) and Aktau (Kazakhstan). The agreement was signed in Uralsk on October 3, 2006.

The normative documents include the Decree on Council of Joint Exploitation of the Railway Ferry; Rules of Freight Transportation in Direct International Railway Ferry Communication; Rules of Exploitation, Registration of Freight Wagons and Containers, and Calculation of Fees for Their Usage in Direct International Railway Ferry Communication.

«Now we plan that two ferries from each side will service the line. In case the transportation volume grows significantly, we will discuss the possibility of increasing the amount of ferries», stated RF Minister of Transport Igor Levitin.

He noted that oil products will make the larger share of the freight transportation volume at the new Caspian route. In future, the share of grain and bulk cargoes may increase.

According to forecasts, the total volume of Kazakhstan-Russia trade turnover will amount to USD 10 billion this year.



OAO RZD’s Projects Approved

On October 26, 2006, the RF Government approved the projects of the investment programme and the financial plans of OAO RZD for 2007 and for the period leading to 2009. Summing up the results of the discussion, Deputy Chairman of the RF Government, the Chairman of OAO RZD’s Board of Directors Alexander Zhukov noted that it was the first time that the company’s programme was formed using the project principle. «This will enable us to increase efficiency of investing expenses and transparency, as well as see the economic effect of separate projects implementation better», stressed Alexander Zhukov. 

The total volume of OAO RZD’s investment programme for 2007-2009 is RUR 694 billion. It is planned to spend RUR 210 billion in 2007, RUR 231 billion in 2008, and RUR 252 billion in 2009.



CIS Join Efforts to Increase Transit Potential

At XXVI meeting of the Coordinating Transport Summit (CTS) of the CIS, held in Moscow, issues of transit potential efficient use and increase of the CIS export services were discussed.

«Nowadays, the priority for CTS is the creation of transport communication uniting International Transport Corridor 7 and the transport route Danube – the Caspian Sea, as well as projects aimed to increase freight flows on the North-South and East-West destinations passing through the transport corridors of the CIS and using the inner waterways», said Igor Levitin, RF Minister of Transport, the Chairman of CTS.

The idea of the project to use Russian water-transport system in the international integration of the states of the Caspian, the Azov-Black Sea, and the Mediterranean basins envisages the launch of an international deep-water sea canal. In the words of I.Levitin, the new canal is especially important because it may be used as extension of the Seventh Danube Corridor, which will strengthen the positions of the Russian Federation in the Danube Committee.

Another transport project carried out with the help of the CIS CTS is the launch of regular ferry communication on Baku-Turkmenbashi line with the use of Russian railway ferries.

One more example of cooperation in the transport sphere is the construction at the Petrozavodsk shipyards (Russia) and launch of motor vessels of Karelia type for river-sea navigation. The first such vessel was designed in the Odessa Ship Building Bureau.

An important project of international cooperation is the multi-modal container terminal-depot created on the base of the port of Samara. The transporters of Ukraine, Kazakhstan and other Republics of Central Asia are interested in its construction.



New Logistic Centre to Be Launched in Ulyanovsk Region

OOO Kaskad-Ulyanovsk will attract RUR 200 million into construction of a logistic centre in the Ulyanovsk region, said Dmitry Shikov, the press-secretary of the Governor of the region. In his words, the complex is to start work at full capacity in 2008.

D. Shikov noted that the demand for high-quality warehousing and logistic services has been caused by the active economic development in the Ulyanovsk region. In the framework of the project, it is planned to repair and put into operation 17.5 thousand sq.m of warehouses, and another 70 thousand sq.m by the end of 2007. It is also planned to purchase special equipment. The budget efficiency of the project is RUR 30 million of tax payments annually. 

«Governor of the Ulyanovsk region Sergey Morozov supported the idea of the logistic centre launch. In his words, Ulyanovsk has everything necessary for it: two airports, one of which is international, two railway stations, passenger and freight river port. The Head of the region believes that both Russian and local transport and trade companies are interested in the project», said D.Shikov.



OAO RZD in Cooperation with Orient Express

OAO RZD and Orient Express will organize tours of Russia. A protocol of intentions was signed by Orient Express, OAO RZD and OOO RZD-Tour in the framework of the international tourist exhibition World Travel Market in London.

Vice-President of OAO RZD Mikhail Akulov explained that «the basic principles of further cooperation have been defined. We will use the technological potential of OAO RZD and the experience of Orient Express to carry out railway tours of high quality». «We assume that in 2007 we will launch the first project on the basis of OAO RZD’s rolling stock to service VIP clients on the jointly developed routes. Besides, we will have to develop such sectors of tourism that are absolutely new on the market, and no other company provides such services», said the Vice-President of OAO RZD. Regional partners will participate in organization of the tours. They will organize leisure time and cultural programmes in the towns on the route. Mikhail Akulov said that in the Russian regions there is serious infrastructure allowing the required level of service.



Improving International Rail Communication

On October 12, the proceedings of the 44th meeting of the Council for the CIS Railway Transport were signed in Erevan. It contains its members’ decisions on 16 most important issues of freight and passenger transportation, financial and technological interrelations, prospects of rolling stock park development and cooperation in the medicine sector.

In the freight transportation sector, it was recommended to the railway administrations to complete preparation for the launch of the automated system «Mesplan». The new technology of freight transportation planning will be put into operation on January 1, 2007.

New payment rates for rolling stock use, wagon idling etc. were corrected and put into operation for convenience. Amendments to the Instruction on oversize and heavy cargoes transportation along the CIS, Latvian, Lithuanian and Estonian railways were implemented.

The railway administrations are to work out the issue of the possibility of including expenses on current uncoupled repair of private cargo wagons into the tariff on transportation in private wagons. Besides, they are to make suggestions concerning potential amendments to the Rules of freight in universal containers transportation, to complete the development of the project of exploitation, registration and payment for the use of rented freight wagons belonging to the railway administrations parks that operate on international routes. 

According to the proceedings, railway administrations will start developing the train schedule for international communication for 2007-2008. It will include 284 pairs of passenger trains, 57 pairs of suburban trains, and 387 towed and direct wagons. To ensure the quality of the schedule, a meeting will be held in Kazan at the end of 2006. 

It was recommended to the CIS railways to discuss the opportunity of automated transfer of information about passengers, traveling in each wagon of an international train, to the check-point of the border station on the basis of ASU Express data. The next, 45th meeting, of the Railway Transport Council will be held in Astana in May 2007. It is planned to discuss issues of launching and carrying out joint investment projects of international transport corridors development, as well as creating a single informational area on the railways with 1520 mm gauge on the basis of modern IT technologies, e-document turnover, system of e-monitoring cargo transportation, and unification of standards according to the new types of freight wagons.

    [~DETAIL_TEXT] => On October 23, 2006, the Coordinating Council on Transport Policy was created in accordance with the decree of the RF Minister of Transport Igor Levitin. The Head of the Council is Alexander Misharin, Deputy Minister of Transport. The members of the Council are top-managers of transport associations, representatives of scientific and business sectors, and Ministry’s employees in charge.

The Council is to become a new form of cooperation between the RF Ministry of Transport and representatives of public organizations, unions and associations of the transport sector to carry out the Transport Strategy of the Russian Federation till 2020.

The main targets of the Coordinating Council are generating offers providing business participation in defining priorities and realization of the state transport policy; providing expert conclusions on projects of the transport sector development, as well as on ways to increase the competitiveness of transport systems and measures motivating the launch of national transport forwarding companies able to compete with foreign transnational companies on the domestic and foreign transportation market; development of mechanisms providing efficient interaction of the state and business to create and improve public-private partnership institutions and realize certain business projects. 



Russia-Germany: Declaration Signed

The Declaration of Cooperation in the Sector of Transport, Multimodal Transportation and Organization of Railway-Ferry Communication between the ports of the Russian Federation and Germany was signed by the RF Minister of Transport Igor Levitin and the German Federal Minister of Transport, Building and Urban Development Wolfgang Tiefensee in Berlin on October 19, 2006.

The Declaration envisages a more intensive cooperation in the sector of sea navigation and a launch of different lines, including railway ferries. In particular, the sides agreed to develop ferry communication between the ports of Ust-Luga–Baltiysk and the German ports at the Baltic Sea.



Joint Projects of OAO RZD and RF Regions

In 2006, OAO RZD and the RF regions have cooperated to invest into 159 objects of railway infrastructure. The total cost of the works is over RUR 3.6 billion, including RUR 1.8 billion invested by the subjects of the Russian Federation. 

In particular, investments are directed at the reconstruction of the railway stations in Ufa, Saransk, Omsk, Lipetsk and construction of suburban zones at the Chelyabinsk and Novosibirsk stations.

In 2004, there were joint investments into 76 objects for the total sum of RUR 3.7 billion, wherein RUR 901 million was given from the regional budgets. In 2005, OAO RZD in cooperation with the RF regions serviced 115 objects for the total sum of RUR 1.2 billion (regions invested RUR 885 million). Examples of such cooperation are reconstruction of the railway stations of Krasnoyarsk, Chelyabinsk-Glavny, Izhevsk and the passenger junction at the Vykhino station, as well as the launch of a multimodal line Moskva-Kievskaya – Vnukovo.

The regions’ investments into railway infrastructure grow, which shows that they are interested in the improvement of the transport system and the quality of services provided to passengers.



Russia and Kazakhstan Develop Railway Ferry Communication

On November 9, 2006, in Aktau the RF Minister of Transport Igor Levitin and the Minister of Transport and Communications of the Republic of Kazakhstan Serik Akhmetov signed the normative documents envisaged by the Agreement on the launch of direct railway-ferry communication between the ports of Makhachkala (Russia) and Aktau (Kazakhstan). The agreement was signed in Uralsk on October 3, 2006.

The normative documents include the Decree on Council of Joint Exploitation of the Railway Ferry; Rules of Freight Transportation in Direct International Railway Ferry Communication; Rules of Exploitation, Registration of Freight Wagons and Containers, and Calculation of Fees for Their Usage in Direct International Railway Ferry Communication.

«Now we plan that two ferries from each side will service the line. In case the transportation volume grows significantly, we will discuss the possibility of increasing the amount of ferries», stated RF Minister of Transport Igor Levitin.

He noted that oil products will make the larger share of the freight transportation volume at the new Caspian route. In future, the share of grain and bulk cargoes may increase.

According to forecasts, the total volume of Kazakhstan-Russia trade turnover will amount to USD 10 billion this year.



OAO RZD’s Projects Approved

On October 26, 2006, the RF Government approved the projects of the investment programme and the financial plans of OAO RZD for 2007 and for the period leading to 2009. Summing up the results of the discussion, Deputy Chairman of the RF Government, the Chairman of OAO RZD’s Board of Directors Alexander Zhukov noted that it was the first time that the company’s programme was formed using the project principle. «This will enable us to increase efficiency of investing expenses and transparency, as well as see the economic effect of separate projects implementation better», stressed Alexander Zhukov. 

The total volume of OAO RZD’s investment programme for 2007-2009 is RUR 694 billion. It is planned to spend RUR 210 billion in 2007, RUR 231 billion in 2008, and RUR 252 billion in 2009.



CIS Join Efforts to Increase Transit Potential

At XXVI meeting of the Coordinating Transport Summit (CTS) of the CIS, held in Moscow, issues of transit potential efficient use and increase of the CIS export services were discussed.

«Nowadays, the priority for CTS is the creation of transport communication uniting International Transport Corridor 7 and the transport route Danube – the Caspian Sea, as well as projects aimed to increase freight flows on the North-South and East-West destinations passing through the transport corridors of the CIS and using the inner waterways», said Igor Levitin, RF Minister of Transport, the Chairman of CTS.

The idea of the project to use Russian water-transport system in the international integration of the states of the Caspian, the Azov-Black Sea, and the Mediterranean basins envisages the launch of an international deep-water sea canal. In the words of I.Levitin, the new canal is especially important because it may be used as extension of the Seventh Danube Corridor, which will strengthen the positions of the Russian Federation in the Danube Committee.

Another transport project carried out with the help of the CIS CTS is the launch of regular ferry communication on Baku-Turkmenbashi line with the use of Russian railway ferries.

One more example of cooperation in the transport sphere is the construction at the Petrozavodsk shipyards (Russia) and launch of motor vessels of Karelia type for river-sea navigation. The first such vessel was designed in the Odessa Ship Building Bureau.

An important project of international cooperation is the multi-modal container terminal-depot created on the base of the port of Samara. The transporters of Ukraine, Kazakhstan and other Republics of Central Asia are interested in its construction.



New Logistic Centre to Be Launched in Ulyanovsk Region

OOO Kaskad-Ulyanovsk will attract RUR 200 million into construction of a logistic centre in the Ulyanovsk region, said Dmitry Shikov, the press-secretary of the Governor of the region. In his words, the complex is to start work at full capacity in 2008.

D. Shikov noted that the demand for high-quality warehousing and logistic services has been caused by the active economic development in the Ulyanovsk region. In the framework of the project, it is planned to repair and put into operation 17.5 thousand sq.m of warehouses, and another 70 thousand sq.m by the end of 2007. It is also planned to purchase special equipment. The budget efficiency of the project is RUR 30 million of tax payments annually. 

«Governor of the Ulyanovsk region Sergey Morozov supported the idea of the logistic centre launch. In his words, Ulyanovsk has everything necessary for it: two airports, one of which is international, two railway stations, passenger and freight river port. The Head of the region believes that both Russian and local transport and trade companies are interested in the project», said D.Shikov.



OAO RZD in Cooperation with Orient Express

OAO RZD and Orient Express will organize tours of Russia. A protocol of intentions was signed by Orient Express, OAO RZD and OOO RZD-Tour in the framework of the international tourist exhibition World Travel Market in London.

Vice-President of OAO RZD Mikhail Akulov explained that «the basic principles of further cooperation have been defined. We will use the technological potential of OAO RZD and the experience of Orient Express to carry out railway tours of high quality». «We assume that in 2007 we will launch the first project on the basis of OAO RZD’s rolling stock to service VIP clients on the jointly developed routes. Besides, we will have to develop such sectors of tourism that are absolutely new on the market, and no other company provides such services», said the Vice-President of OAO RZD. Regional partners will participate in organization of the tours. They will organize leisure time and cultural programmes in the towns on the route. Mikhail Akulov said that in the Russian regions there is serious infrastructure allowing the required level of service.



Improving International Rail Communication

On October 12, the proceedings of the 44th meeting of the Council for the CIS Railway Transport were signed in Erevan. It contains its members’ decisions on 16 most important issues of freight and passenger transportation, financial and technological interrelations, prospects of rolling stock park development and cooperation in the medicine sector.

In the freight transportation sector, it was recommended to the railway administrations to complete preparation for the launch of the automated system «Mesplan». The new technology of freight transportation planning will be put into operation on January 1, 2007.

New payment rates for rolling stock use, wagon idling etc. were corrected and put into operation for convenience. Amendments to the Instruction on oversize and heavy cargoes transportation along the CIS, Latvian, Lithuanian and Estonian railways were implemented.

The railway administrations are to work out the issue of the possibility of including expenses on current uncoupled repair of private cargo wagons into the tariff on transportation in private wagons. Besides, they are to make suggestions concerning potential amendments to the Rules of freight in universal containers transportation, to complete the development of the project of exploitation, registration and payment for the use of rented freight wagons belonging to the railway administrations parks that operate on international routes. 

According to the proceedings, railway administrations will start developing the train schedule for international communication for 2007-2008. It will include 284 pairs of passenger trains, 57 pairs of suburban trains, and 387 towed and direct wagons. To ensure the quality of the schedule, a meeting will be held in Kazan at the end of 2006. 

It was recommended to the CIS railways to discuss the opportunity of automated transfer of information about passengers, traveling in each wagon of an international train, to the check-point of the border station on the basis of ASU Express data. The next, 45th meeting, of the Railway Transport Council will be held in Astana in May 2007. It is planned to discuss issues of launching and carrying out joint investment projects of international transport corridors development, as well as creating a single informational area on the railways with 1520 mm gauge on the basis of modern IT technologies, e-document turnover, system of e-monitoring cargo transportation, and unification of standards according to the new types of freight wagons.

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As before, the port of Tallinn keeps its leading position among ports of the Baltic region. During 8 months of 2006, it handled some 27.76 million tons of cargo (+5.4% year-on-year). Volume of dry and break cargo increased by 42.4% (2.339 million tons), while general cargo volumes grew by 7.6% (2.246 million tons). Handling volume of liquid bulk dropped by 7.1% coming up to 1.269 million tons. The largest part of cargo in the general structure of the port took liquid bulk (60.3%). From January to August, the port of Tallinn serviced 7.4% more cargo vessels, while number of passenger vessels calling the ports decreased by 12,3%.

Ventspils free port comes second, having handled 19.67 million tons of cargo, against 20.11 million tons made during the same period of 2005. The drop in handling dry and break cargo amounted to 22.3% or 5.57 million tons. General cargo handling volumes grew by 3.4 times (to1.67 million tons), while liquid bulk grew by 12.44 million tons.

Ro-ro cargo handling also grew (+1064 thousand tons), as well as crude oil (+724 thousand tons) and ammoniac (+172 thousand tons).

However, the results made by basic transit cargo – oil, products and mineral fertilizers - reached 899 thousand tons and 1375 thousand tons respectively. Riga free port joins the first three leaders. During 8 months of 2006 it handled 17.62 million tons (+7.5% year-on-year).

The largest part was taken by dry and break bulk (over 10.99 million tons), with an increase of 13.4% or 1.298 million tons.

Some 23.2 thousand tons of fertilizers were handled (-2.4% year-on-year). Coal grew by 9.7% and reached 686.8 thousand tons; as a result, it amounted to 44.2% of all cargoes handled by the port. 

The port of Riga handled 3.36 million tons (-22.4% year-on-year). From the general tonnage, timber made 2.020 million tons (-25.9%), and containerized cargo – 1.067 million tons (+2.9%). Liquid bulk volume increased by 38.4% during January-August, as compared to the analogous period of 2005, and amounted to 3.27 million tons, wherein 3.23 million tons are oil products (+43,9%).

The fourth place belongs to the Lithuanian port of Klaipeda with the cargo turnover volume of 15.55 million tons (+11.5% year-on-year).

From January to August handling volumes for all cargo nomenclatures went up. Thus, liquid bulk increased by 24.8% (+5,780 million tons), dry and break bulk by 3.6% (+4.810 million tons), and general cargo by 6.3% (4.963 million tons).

Liquid bulk grew due to such factors as growth made in oil products handling (in 2005 during 8 months period some 3.80 million tons was handled, in 2006 during the same period – 4.92 million tons), and also handling of molasses cargo flow grew by 3.7 times. Compared to the last year results, the port increased handling of peat by 1.8 times, mineral fertilizers (+28.2%), agricultural products (+14.0%) and ro-ro cargo by 28.4% in terms of tonnage. 

However, the port decreased handling of raw materials by 4.4%, fertilizers bags by 26.7%, timber by 23.3%, and iron and steel production by 11.0%.

During the reporting period, 130771 vehicles were handled (+23.8%) and 143527 containers (+2.1%).

The Latvian port of Liepaja handled 2.71 million tons of cargo (-9% year-on-year). Liquid bulk handling shows 668.1 thousand tons (+49.5%); dry and break cargo – 1.048 million tons (+28.7%). This increase was made due to the growth in handling of agricultural production, metal scrap and oil products. 

However, general cargo dropped from 1.721 million tons to 996.9 thousand tons (-42.1%). This influenced the general decrease of cargo turnover of the port. 

The major drop made ro-ro cargo (-412.5 thousand tons), timber (-154.6 thousand tons) and ferrous metals (-105.6 thousand tons).

In Klaipeda growth of ro-ro cargo (+23.8%) is explained by the growing amount of trailers, motor trailers and lorries. In August some 20.7 thousand units were handled, which was a record breaking result for a month in 2006. 

From January to August, the port of Klaipeda serviced 5049 vessels (-4.7% year-on-year) and 166.7 thousand passengers (+6.5%).

The port of Kaliningrad handled 10.59 million tons of cargo (+6.9% year-on-year). Oil and products grew by 16.2% (954.3 thousand tons). The port handled 118.1 thousand tons of dry and break cargo (+9,1%). General cargo dropped. From January to August 2006, some 1,899 million tons were handled, as compared to the results of 2005 – 2.375 million tons, which can be explained by a decrease of metal and timber handling volumes. Growth of dry and break cargo had a major impact on Kaliningrad port turnover.



TATYANA  TOKAREVA
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As before, the port of Tallinn keeps its leading position among ports of the Baltic region. During 8 months of 2006, it handled some 27.76 million tons of cargo (+5.4% year-on-year). Volume of dry and break cargo increased by 42.4% (2.339 million tons), while general cargo volumes grew by 7.6% (2.246 million tons). Handling volume of liquid bulk dropped by 7.1% coming up to 1.269 million tons. The largest part of cargo in the general structure of the port took liquid bulk (60.3%). From January to August, the port of Tallinn serviced 7.4% more cargo vessels, while number of passenger vessels calling the ports decreased by 12,3%.

Ventspils free port comes second, having handled 19.67 million tons of cargo, against 20.11 million tons made during the same period of 2005. The drop in handling dry and break cargo amounted to 22.3% or 5.57 million tons. General cargo handling volumes grew by 3.4 times (to1.67 million tons), while liquid bulk grew by 12.44 million tons.

Ro-ro cargo handling also grew (+1064 thousand tons), as well as crude oil (+724 thousand tons) and ammoniac (+172 thousand tons).

However, the results made by basic transit cargo – oil, products and mineral fertilizers - reached 899 thousand tons and 1375 thousand tons respectively. Riga free port joins the first three leaders. During 8 months of 2006 it handled 17.62 million tons (+7.5% year-on-year).

The largest part was taken by dry and break bulk (over 10.99 million tons), with an increase of 13.4% or 1.298 million tons.

Some 23.2 thousand tons of fertilizers were handled (-2.4% year-on-year). Coal grew by 9.7% and reached 686.8 thousand tons; as a result, it amounted to 44.2% of all cargoes handled by the port. 

The port of Riga handled 3.36 million tons (-22.4% year-on-year). From the general tonnage, timber made 2.020 million tons (-25.9%), and containerized cargo – 1.067 million tons (+2.9%). Liquid bulk volume increased by 38.4% during January-August, as compared to the analogous period of 2005, and amounted to 3.27 million tons, wherein 3.23 million tons are oil products (+43,9%).

The fourth place belongs to the Lithuanian port of Klaipeda with the cargo turnover volume of 15.55 million tons (+11.5% year-on-year).

From January to August handling volumes for all cargo nomenclatures went up. Thus, liquid bulk increased by 24.8% (+5,780 million tons), dry and break bulk by 3.6% (+4.810 million tons), and general cargo by 6.3% (4.963 million tons).

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However, the port decreased handling of raw materials by 4.4%, fertilizers bags by 26.7%, timber by 23.3%, and iron and steel production by 11.0%.

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The port of Kaliningrad handled 10.59 million tons of cargo (+6.9% year-on-year). Oil and products grew by 16.2% (954.3 thousand tons). The port handled 118.1 thousand tons of dry and break cargo (+9,1%). General cargo dropped. From January to August 2006, some 1,899 million tons were handled, as compared to the results of 2005 – 2.375 million tons, which can be explained by a decrease of metal and timber handling volumes. Growth of dry and break cargo had a major impact on Kaliningrad port turnover.



TATYANA  TOKAREVA
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As before, the port of Tallinn keeps its leading position among ports of the Baltic region. During 8 months of 2006, it handled some 27.76 million tons of cargo (+5.4% year-on-year). Volume of dry and break cargo increased by 42.4% (2.339 million tons), while general cargo volumes grew by 7.6% (2.246 million tons). Handling volume of liquid bulk dropped by 7.1% coming up to 1.269 million tons. The largest part of cargo in the general structure of the port took liquid bulk (60.3%). From January to August, the port of Tallinn serviced 7.4% more cargo vessels, while number of passenger vessels calling the ports decreased by 12,3%.

Ventspils free port comes second, having handled 19.67 million tons of cargo, against 20.11 million tons made during the same period of 2005. The drop in handling dry and break cargo amounted to 22.3% or 5.57 million tons. General cargo handling volumes grew by 3.4 times (to1.67 million tons), while liquid bulk grew by 12.44 million tons.

Ro-ro cargo handling also grew (+1064 thousand tons), as well as crude oil (+724 thousand tons) and ammoniac (+172 thousand tons).

However, the results made by basic transit cargo – oil, products and mineral fertilizers - reached 899 thousand tons and 1375 thousand tons respectively. Riga free port joins the first three leaders. During 8 months of 2006 it handled 17.62 million tons (+7.5% year-on-year).

The largest part was taken by dry and break bulk (over 10.99 million tons), with an increase of 13.4% or 1.298 million tons.

Some 23.2 thousand tons of fertilizers were handled (-2.4% year-on-year). Coal grew by 9.7% and reached 686.8 thousand tons; as a result, it amounted to 44.2% of all cargoes handled by the port. 

The port of Riga handled 3.36 million tons (-22.4% year-on-year). From the general tonnage, timber made 2.020 million tons (-25.9%), and containerized cargo – 1.067 million tons (+2.9%). Liquid bulk volume increased by 38.4% during January-August, as compared to the analogous period of 2005, and amounted to 3.27 million tons, wherein 3.23 million tons are oil products (+43,9%).

The fourth place belongs to the Lithuanian port of Klaipeda with the cargo turnover volume of 15.55 million tons (+11.5% year-on-year).

From January to August handling volumes for all cargo nomenclatures went up. Thus, liquid bulk increased by 24.8% (+5,780 million tons), dry and break bulk by 3.6% (+4.810 million tons), and general cargo by 6.3% (4.963 million tons).

Liquid bulk grew due to such factors as growth made in oil products handling (in 2005 during 8 months period some 3.80 million tons was handled, in 2006 during the same period – 4.92 million tons), and also handling of molasses cargo flow grew by 3.7 times. Compared to the last year results, the port increased handling of peat by 1.8 times, mineral fertilizers (+28.2%), agricultural products (+14.0%) and ro-ro cargo by 28.4% in terms of tonnage. 

However, the port decreased handling of raw materials by 4.4%, fertilizers bags by 26.7%, timber by 23.3%, and iron and steel production by 11.0%.

During the reporting period, 130771 vehicles were handled (+23.8%) and 143527 containers (+2.1%).

The Latvian port of Liepaja handled 2.71 million tons of cargo (-9% year-on-year). Liquid bulk handling shows 668.1 thousand tons (+49.5%); dry and break cargo – 1.048 million tons (+28.7%). This increase was made due to the growth in handling of agricultural production, metal scrap and oil products. 

However, general cargo dropped from 1.721 million tons to 996.9 thousand tons (-42.1%). This influenced the general decrease of cargo turnover of the port. 

The major drop made ro-ro cargo (-412.5 thousand tons), timber (-154.6 thousand tons) and ferrous metals (-105.6 thousand tons).

In Klaipeda growth of ro-ro cargo (+23.8%) is explained by the growing amount of trailers, motor trailers and lorries. In August some 20.7 thousand units were handled, which was a record breaking result for a month in 2006. 

From January to August, the port of Klaipeda serviced 5049 vessels (-4.7% year-on-year) and 166.7 thousand passengers (+6.5%).

The port of Kaliningrad handled 10.59 million tons of cargo (+6.9% year-on-year). Oil and products grew by 16.2% (954.3 thousand tons). The port handled 118.1 thousand tons of dry and break cargo (+9,1%). General cargo dropped. From January to August 2006, some 1,899 million tons were handled, as compared to the results of 2005 – 2.375 million tons, which can be explained by a decrease of metal and timber handling volumes. Growth of dry and break cargo had a major impact on Kaliningrad port turnover.



TATYANA  TOKAREVA
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As before, the port of Tallinn keeps its leading position among ports of the Baltic region. During 8 months of 2006, it handled some 27.76 million tons of cargo (+5.4% year-on-year). Volume of dry and break cargo increased by 42.4% (2.339 million tons), while general cargo volumes grew by 7.6% (2.246 million tons). Handling volume of liquid bulk dropped by 7.1% coming up to 1.269 million tons. The largest part of cargo in the general structure of the port took liquid bulk (60.3%). From January to August, the port of Tallinn serviced 7.4% more cargo vessels, while number of passenger vessels calling the ports decreased by 12,3%.

Ventspils free port comes second, having handled 19.67 million tons of cargo, against 20.11 million tons made during the same period of 2005. The drop in handling dry and break cargo amounted to 22.3% or 5.57 million tons. General cargo handling volumes grew by 3.4 times (to1.67 million tons), while liquid bulk grew by 12.44 million tons.

Ro-ro cargo handling also grew (+1064 thousand tons), as well as crude oil (+724 thousand tons) and ammoniac (+172 thousand tons).

However, the results made by basic transit cargo – oil, products and mineral fertilizers - reached 899 thousand tons and 1375 thousand tons respectively. Riga free port joins the first three leaders. During 8 months of 2006 it handled 17.62 million tons (+7.5% year-on-year).

The largest part was taken by dry and break bulk (over 10.99 million tons), with an increase of 13.4% or 1.298 million tons.

Some 23.2 thousand tons of fertilizers were handled (-2.4% year-on-year). Coal grew by 9.7% and reached 686.8 thousand tons; as a result, it amounted to 44.2% of all cargoes handled by the port. 

The port of Riga handled 3.36 million tons (-22.4% year-on-year). From the general tonnage, timber made 2.020 million tons (-25.9%), and containerized cargo – 1.067 million tons (+2.9%). Liquid bulk volume increased by 38.4% during January-August, as compared to the analogous period of 2005, and amounted to 3.27 million tons, wherein 3.23 million tons are oil products (+43,9%).

The fourth place belongs to the Lithuanian port of Klaipeda with the cargo turnover volume of 15.55 million tons (+11.5% year-on-year).

From January to August handling volumes for all cargo nomenclatures went up. Thus, liquid bulk increased by 24.8% (+5,780 million tons), dry and break bulk by 3.6% (+4.810 million tons), and general cargo by 6.3% (4.963 million tons).

Liquid bulk grew due to such factors as growth made in oil products handling (in 2005 during 8 months period some 3.80 million tons was handled, in 2006 during the same period – 4.92 million tons), and also handling of molasses cargo flow grew by 3.7 times. Compared to the last year results, the port increased handling of peat by 1.8 times, mineral fertilizers (+28.2%), agricultural products (+14.0%) and ro-ro cargo by 28.4% in terms of tonnage. 

However, the port decreased handling of raw materials by 4.4%, fertilizers bags by 26.7%, timber by 23.3%, and iron and steel production by 11.0%.

During the reporting period, 130771 vehicles were handled (+23.8%) and 143527 containers (+2.1%).

The Latvian port of Liepaja handled 2.71 million tons of cargo (-9% year-on-year). Liquid bulk handling shows 668.1 thousand tons (+49.5%); dry and break cargo – 1.048 million tons (+28.7%). This increase was made due to the growth in handling of agricultural production, metal scrap and oil products. 

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The port of Kaliningrad handled 10.59 million tons of cargo (+6.9% year-on-year). Oil and products grew by 16.2% (954.3 thousand tons). The port handled 118.1 thousand tons of dry and break cargo (+9,1%). General cargo dropped. From January to August 2006, some 1,899 million tons were handled, as compared to the results of 2005 – 2.375 million tons, which can be explained by a decrease of metal and timber handling volumes. Growth of dry and break cargo had a major impact on Kaliningrad port turnover.



TATYANA  TOKAREVA
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Diagnosis Is Atrophy

Constructed during many decades, the unique transport river system has fallen into decay after the years of reforms that took place in the Russian Federation. That is why, although Russia has a branchy network of inner waterways used for navigation, nowadays only 31.2 thousand km out of 101.7 thousand km has the guaranteed dimensioned fairways. According to the data of the Federal Agency of Sea and River Transport of the RF Ministry of Transport (Rosmorrechflot), there are illuminated navigation marks at 19.98 thousand km of waterways, reflecting navigation marks at 3.82 thousand km, and unlit ones at 7.37 thousand km.

Statistics show that the parameters of fairways become worse every year. Comparing to 1991, the length of the sections meeting the requirements reduced by 31% in 2004, by 51% in 2005, and over twofold in 2006. According to the specialists of the RF Ministry of Transport, it is because only 50% of necessary measures are taken. For example, during last year navigation, the volume of dredging operations at the navigable waterways amounted to 22.6 mln cubic m, which is less than 23% of the required volume.

The most critical situation is at the Volgo-Baltic waterway, where the length amounted to 3.4 m (the reduction made 15%), while the width in some sectors decreased from 80 to 37 m. That is why one-way traffic of vessels was implemented at many sections of the canal, thus, the time of the round trip Yaroslavl-Saint-Petersburg has doubled for tankers. According to Head of the Federal State Institution Volgo-Baltic State Basin Management of Waterways and Navigation Vladimir Nikolaev, if no proper dredging works are held, 5,000 tons dwt vessels will not be able to pass along the Volgo-Baltic system as of 2007 because of canals and locks shallowing. 

However, the situation on the Volgo-Baltic canal is not an exception. According to the data of Rosmorrechflot, dimensions are reduced at the Lower Volga, the Kama, the Ob, the Irtysh, the Amur, the Severnaya Dvina and the Lena. Because of the insufficient depth of the Kochetkovsky hydrojunction sill at the Lower Don, the fleet floating there is loaded by 75-80%. The Cheboksary reservoir is not filled up to the project level: it takes large-capacity vessels two or three days to float along the Nizhny Novgorod-Gorodets section with the length of 60 km. Besides, during navigation 2006, the Moskva and the lower Oka rivers were excluded from the Programme of Guaranteed Dimensions of Fairways. Navigation there became possible only due to shipping companies. 

There are over 700 navigable hydrotechnical constructions (locks, pumping facilities, pressure embankments, dams), which are also in poor condition. Over 50% of the acting navigable hydrotechnical constructions have been exploited during 50-75 years, 11% of them have been used during 76-100 years. 12% of the constructions have been in operation for more than a century. Thus, the age of the engineering constructions of the Belomoro-Baltic canal is 73 years; the ones of the Moscow Canal and the Volgo-Don Canal are 66 and 50 years respectively. Other examples include the Verkhne-Tsninskaya dam, which has been used since 1786, the Kemetskaya dam, which has been functioning since 1834, pressure embankments of the Kishemsky Canal, in use since 1885. Naturally, after such terms, processes of physical deterioration and ageing of concrete and ferroconcrete constructions, metal constructions, mechanical and electric-technical equipment are in place. Such technical state of the navigable hydrotechnical constructions reduces the safety of exploitation of the constructions and increases the risk of emergencies. Thus, according to the results of navigable hydrotechnical constructions safety declaration, only 21% of the constructions meets safety requirements, 57.7% has a low safety level, 16.5% is in improper state, and 4.8% is dangerous. Specialists state that the ratio of repair and reconstruction works falls behind the progressive processes of destruction. In particular, in 2005, the amount of dangerous objects increased twofold. 

For example, most objects of the Federal State Unitary Enterprise Moscow Canal have a low level of safety. Some of them are in emergency condition, and measures should be taken to provide for their exploitation parameters. «The security threat is so real, that if nothing is changed, in two years Dubna may be submerged. And if the dam of the Khimkinskoe reservoir is broken, Moscow and neighbouring towns will suffer greatly», states Andrey Dubinsky, Head of the Enterprise. In any case, the parameters of inner waterways and navigable hydrotechnical constructions, especially interbasin canals, are critical. Scientists forecast that if the state of the river system is not improved now, in a decade Russia will have no river transport. For example, according to specialists’ evaluations, in 7-9 years the Volga can be divided into the Northern and the Southern basins near Nizhny Novgorod. 



Financial Shoal

The main reason for such a crisis of the Russian inner waterways and hydrotechnical constructions is the long-term insufficient financing from the budget. The specialists of the RF Ministry of Transport note that only 40-50% of the standard sums is given for the purpose. In particular, according to the standards, in 2006 the financial provision of the current maintenance of inner waterways and hydro constructions is to amount to RUR 8.8. bln; however, the Federal Budget envisages the allocation of RUR 4.7 bln only, thus, the deficiency makes over RUR 4 bln.

Obviously, organizations that maintain the inner waterways and navigable hydrotechnical constructions (there are 15 state basin administrations of waterways and navigation (GBUVPiS) and the Federal State Unitary Enterprise «Moscow Canal») are not able to satisfy the norms and safety requirements during exploitation, repair and reconstruction, or develop the systems of control for their state and create financial and material reserves to eliminate the damage.

Experts believe that all the difficulties come from the adjustment of the necessary budget expenses on water transport with the Ministry of Economic Development and Trade and the Ministry of Finance. Specialists of Rosmorrechflot complain that many problems arise because in 2005 one of the most important reserves of infrastructure maintenance financing – budgets of the Russian Federation subjects – was lost. According to the acting legislation, they are not to provide federal needs with funds. And this means millions and millions of roubles.

There remains another reserve of financing, i.e. revenues from GBUVPiS business activities, provided on the basis of the general license given to the Federal Agency of Sea and River Transport by the RF Ministry of Finance. Thus, in 2005 RUR 650 mln from the revenues was invested into the maintenance of the inner waterways and navigable hydrotechnical constructions, in 2007 the sum is to increase to RUR 800 mln. However, in spite of the growth of non-budget financing volume, its share does not increase, because the majority of funds is spent on paying land tax, property tax, and guarding hydroconstructions. Besides, business activities, for which GBUVPiS has licenses, are restricted by the acting legislation, thus, specialists of the RF Ministry of Transport forecast that non-budget revenues will hardly increase significantly. 



Last Hope

Being aware of the critical situation in the river shipping sector, RF President Vladimir Putin charged the Government to improve the efficiency of the inner waterways management by the state, to provide the safety of navigation and reliable exploitation of navigable hydrotechnical constructions, including solution of financial issues. 

Nowadays, the Ministry of Transport, in cooperation with federal bodies in charge, has worked out a plan of measures to fulfill the President’s instructions. However, additional means will be required to carry it out. Taking into account the lack of repair and reconstruction works at the hydroconstructions, renewal and reconstruction of technical vessels, means of navigational fences, required volumes of finance are quite significant. According to the preliminary evaluation, the required once-and-for-all costs are to make about RUR 166 bln, then RUR 10 bln is to be invested into the sector annually.

By now, the document has not been adjusted by the Ministry of Finance, which has some remarks to it. However, hopes are pinned on the President’s order and the measures to be taken to fulfill it. Otherwise, who else can change the situation at the Russian inner waterways completely? Moreover, it is envisaged that the realization of the planned measures will enable to optimize the preparation of Russian inner waterways for foreign vessels. The concept of Russian inner waterways development defines the terms when the preparation is to be over; however, nowadays specialists believe that the work is insufficient. Earlier it was planned to complete the works by 2009; however, experts are skeptical about the date: they believe that it will not happen in the next 3-5 years. 



BY OLGA GORBUNOVA
    [~DETAIL_TEXT] => 

Diagnosis Is Atrophy

Constructed during many decades, the unique transport river system has fallen into decay after the years of reforms that took place in the Russian Federation. That is why, although Russia has a branchy network of inner waterways used for navigation, nowadays only 31.2 thousand km out of 101.7 thousand km has the guaranteed dimensioned fairways. According to the data of the Federal Agency of Sea and River Transport of the RF Ministry of Transport (Rosmorrechflot), there are illuminated navigation marks at 19.98 thousand km of waterways, reflecting navigation marks at 3.82 thousand km, and unlit ones at 7.37 thousand km.

Statistics show that the parameters of fairways become worse every year. Comparing to 1991, the length of the sections meeting the requirements reduced by 31% in 2004, by 51% in 2005, and over twofold in 2006. According to the specialists of the RF Ministry of Transport, it is because only 50% of necessary measures are taken. For example, during last year navigation, the volume of dredging operations at the navigable waterways amounted to 22.6 mln cubic m, which is less than 23% of the required volume.

The most critical situation is at the Volgo-Baltic waterway, where the length amounted to 3.4 m (the reduction made 15%), while the width in some sectors decreased from 80 to 37 m. That is why one-way traffic of vessels was implemented at many sections of the canal, thus, the time of the round trip Yaroslavl-Saint-Petersburg has doubled for tankers. According to Head of the Federal State Institution Volgo-Baltic State Basin Management of Waterways and Navigation Vladimir Nikolaev, if no proper dredging works are held, 5,000 tons dwt vessels will not be able to pass along the Volgo-Baltic system as of 2007 because of canals and locks shallowing. 

However, the situation on the Volgo-Baltic canal is not an exception. According to the data of Rosmorrechflot, dimensions are reduced at the Lower Volga, the Kama, the Ob, the Irtysh, the Amur, the Severnaya Dvina and the Lena. Because of the insufficient depth of the Kochetkovsky hydrojunction sill at the Lower Don, the fleet floating there is loaded by 75-80%. The Cheboksary reservoir is not filled up to the project level: it takes large-capacity vessels two or three days to float along the Nizhny Novgorod-Gorodets section with the length of 60 km. Besides, during navigation 2006, the Moskva and the lower Oka rivers were excluded from the Programme of Guaranteed Dimensions of Fairways. Navigation there became possible only due to shipping companies. 

There are over 700 navigable hydrotechnical constructions (locks, pumping facilities, pressure embankments, dams), which are also in poor condition. Over 50% of the acting navigable hydrotechnical constructions have been exploited during 50-75 years, 11% of them have been used during 76-100 years. 12% of the constructions have been in operation for more than a century. Thus, the age of the engineering constructions of the Belomoro-Baltic canal is 73 years; the ones of the Moscow Canal and the Volgo-Don Canal are 66 and 50 years respectively. Other examples include the Verkhne-Tsninskaya dam, which has been used since 1786, the Kemetskaya dam, which has been functioning since 1834, pressure embankments of the Kishemsky Canal, in use since 1885. Naturally, after such terms, processes of physical deterioration and ageing of concrete and ferroconcrete constructions, metal constructions, mechanical and electric-technical equipment are in place. Such technical state of the navigable hydrotechnical constructions reduces the safety of exploitation of the constructions and increases the risk of emergencies. Thus, according to the results of navigable hydrotechnical constructions safety declaration, only 21% of the constructions meets safety requirements, 57.7% has a low safety level, 16.5% is in improper state, and 4.8% is dangerous. Specialists state that the ratio of repair and reconstruction works falls behind the progressive processes of destruction. In particular, in 2005, the amount of dangerous objects increased twofold. 

For example, most objects of the Federal State Unitary Enterprise Moscow Canal have a low level of safety. Some of them are in emergency condition, and measures should be taken to provide for their exploitation parameters. «The security threat is so real, that if nothing is changed, in two years Dubna may be submerged. And if the dam of the Khimkinskoe reservoir is broken, Moscow and neighbouring towns will suffer greatly», states Andrey Dubinsky, Head of the Enterprise. In any case, the parameters of inner waterways and navigable hydrotechnical constructions, especially interbasin canals, are critical. Scientists forecast that if the state of the river system is not improved now, in a decade Russia will have no river transport. For example, according to specialists’ evaluations, in 7-9 years the Volga can be divided into the Northern and the Southern basins near Nizhny Novgorod. 



Financial Shoal

The main reason for such a crisis of the Russian inner waterways and hydrotechnical constructions is the long-term insufficient financing from the budget. The specialists of the RF Ministry of Transport note that only 40-50% of the standard sums is given for the purpose. In particular, according to the standards, in 2006 the financial provision of the current maintenance of inner waterways and hydro constructions is to amount to RUR 8.8. bln; however, the Federal Budget envisages the allocation of RUR 4.7 bln only, thus, the deficiency makes over RUR 4 bln.

Obviously, organizations that maintain the inner waterways and navigable hydrotechnical constructions (there are 15 state basin administrations of waterways and navigation (GBUVPiS) and the Federal State Unitary Enterprise «Moscow Canal») are not able to satisfy the norms and safety requirements during exploitation, repair and reconstruction, or develop the systems of control for their state and create financial and material reserves to eliminate the damage.

Experts believe that all the difficulties come from the adjustment of the necessary budget expenses on water transport with the Ministry of Economic Development and Trade and the Ministry of Finance. Specialists of Rosmorrechflot complain that many problems arise because in 2005 one of the most important reserves of infrastructure maintenance financing – budgets of the Russian Federation subjects – was lost. According to the acting legislation, they are not to provide federal needs with funds. And this means millions and millions of roubles.

There remains another reserve of financing, i.e. revenues from GBUVPiS business activities, provided on the basis of the general license given to the Federal Agency of Sea and River Transport by the RF Ministry of Finance. Thus, in 2005 RUR 650 mln from the revenues was invested into the maintenance of the inner waterways and navigable hydrotechnical constructions, in 2007 the sum is to increase to RUR 800 mln. However, in spite of the growth of non-budget financing volume, its share does not increase, because the majority of funds is spent on paying land tax, property tax, and guarding hydroconstructions. Besides, business activities, for which GBUVPiS has licenses, are restricted by the acting legislation, thus, specialists of the RF Ministry of Transport forecast that non-budget revenues will hardly increase significantly. 



Last Hope

Being aware of the critical situation in the river shipping sector, RF President Vladimir Putin charged the Government to improve the efficiency of the inner waterways management by the state, to provide the safety of navigation and reliable exploitation of navigable hydrotechnical constructions, including solution of financial issues. 

Nowadays, the Ministry of Transport, in cooperation with federal bodies in charge, has worked out a plan of measures to fulfill the President’s instructions. However, additional means will be required to carry it out. Taking into account the lack of repair and reconstruction works at the hydroconstructions, renewal and reconstruction of technical vessels, means of navigational fences, required volumes of finance are quite significant. According to the preliminary evaluation, the required once-and-for-all costs are to make about RUR 166 bln, then RUR 10 bln is to be invested into the sector annually.

By now, the document has not been adjusted by the Ministry of Finance, which has some remarks to it. However, hopes are pinned on the President’s order and the measures to be taken to fulfill it. Otherwise, who else can change the situation at the Russian inner waterways completely? Moreover, it is envisaged that the realization of the planned measures will enable to optimize the preparation of Russian inner waterways for foreign vessels. The concept of Russian inner waterways development defines the terms when the preparation is to be over; however, nowadays specialists believe that the work is insufficient. Earlier it was planned to complete the works by 2009; however, experts are skeptical about the date: they believe that it will not happen in the next 3-5 years. 



BY OLGA GORBUNOVA
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Diagnosis Is Atrophy

Constructed during many decades, the unique transport river system has fallen into decay after the years of reforms that took place in the Russian Federation. That is why, although Russia has a branchy network of inner waterways used for navigation, nowadays only 31.2 thousand km out of 101.7 thousand km has the guaranteed dimensioned fairways. According to the data of the Federal Agency of Sea and River Transport of the RF Ministry of Transport (Rosmorrechflot), there are illuminated navigation marks at 19.98 thousand km of waterways, reflecting navigation marks at 3.82 thousand km, and unlit ones at 7.37 thousand km.

Statistics show that the parameters of fairways become worse every year. Comparing to 1991, the length of the sections meeting the requirements reduced by 31% in 2004, by 51% in 2005, and over twofold in 2006. According to the specialists of the RF Ministry of Transport, it is because only 50% of necessary measures are taken. For example, during last year navigation, the volume of dredging operations at the navigable waterways amounted to 22.6 mln cubic m, which is less than 23% of the required volume.

The most critical situation is at the Volgo-Baltic waterway, where the length amounted to 3.4 m (the reduction made 15%), while the width in some sectors decreased from 80 to 37 m. That is why one-way traffic of vessels was implemented at many sections of the canal, thus, the time of the round trip Yaroslavl-Saint-Petersburg has doubled for tankers. According to Head of the Federal State Institution Volgo-Baltic State Basin Management of Waterways and Navigation Vladimir Nikolaev, if no proper dredging works are held, 5,000 tons dwt vessels will not be able to pass along the Volgo-Baltic system as of 2007 because of canals and locks shallowing. 

However, the situation on the Volgo-Baltic canal is not an exception. According to the data of Rosmorrechflot, dimensions are reduced at the Lower Volga, the Kama, the Ob, the Irtysh, the Amur, the Severnaya Dvina and the Lena. Because of the insufficient depth of the Kochetkovsky hydrojunction sill at the Lower Don, the fleet floating there is loaded by 75-80%. The Cheboksary reservoir is not filled up to the project level: it takes large-capacity vessels two or three days to float along the Nizhny Novgorod-Gorodets section with the length of 60 km. Besides, during navigation 2006, the Moskva and the lower Oka rivers were excluded from the Programme of Guaranteed Dimensions of Fairways. Navigation there became possible only due to shipping companies. 

There are over 700 navigable hydrotechnical constructions (locks, pumping facilities, pressure embankments, dams), which are also in poor condition. Over 50% of the acting navigable hydrotechnical constructions have been exploited during 50-75 years, 11% of them have been used during 76-100 years. 12% of the constructions have been in operation for more than a century. Thus, the age of the engineering constructions of the Belomoro-Baltic canal is 73 years; the ones of the Moscow Canal and the Volgo-Don Canal are 66 and 50 years respectively. Other examples include the Verkhne-Tsninskaya dam, which has been used since 1786, the Kemetskaya dam, which has been functioning since 1834, pressure embankments of the Kishemsky Canal, in use since 1885. Naturally, after such terms, processes of physical deterioration and ageing of concrete and ferroconcrete constructions, metal constructions, mechanical and electric-technical equipment are in place. Such technical state of the navigable hydrotechnical constructions reduces the safety of exploitation of the constructions and increases the risk of emergencies. Thus, according to the results of navigable hydrotechnical constructions safety declaration, only 21% of the constructions meets safety requirements, 57.7% has a low safety level, 16.5% is in improper state, and 4.8% is dangerous. Specialists state that the ratio of repair and reconstruction works falls behind the progressive processes of destruction. In particular, in 2005, the amount of dangerous objects increased twofold. 

For example, most objects of the Federal State Unitary Enterprise Moscow Canal have a low level of safety. Some of them are in emergency condition, and measures should be taken to provide for their exploitation parameters. «The security threat is so real, that if nothing is changed, in two years Dubna may be submerged. And if the dam of the Khimkinskoe reservoir is broken, Moscow and neighbouring towns will suffer greatly», states Andrey Dubinsky, Head of the Enterprise. In any case, the parameters of inner waterways and navigable hydrotechnical constructions, especially interbasin canals, are critical. Scientists forecast that if the state of the river system is not improved now, in a decade Russia will have no river transport. For example, according to specialists’ evaluations, in 7-9 years the Volga can be divided into the Northern and the Southern basins near Nizhny Novgorod. 



Financial Shoal

The main reason for such a crisis of the Russian inner waterways and hydrotechnical constructions is the long-term insufficient financing from the budget. The specialists of the RF Ministry of Transport note that only 40-50% of the standard sums is given for the purpose. In particular, according to the standards, in 2006 the financial provision of the current maintenance of inner waterways and hydro constructions is to amount to RUR 8.8. bln; however, the Federal Budget envisages the allocation of RUR 4.7 bln only, thus, the deficiency makes over RUR 4 bln.

Obviously, organizations that maintain the inner waterways and navigable hydrotechnical constructions (there are 15 state basin administrations of waterways and navigation (GBUVPiS) and the Federal State Unitary Enterprise «Moscow Canal») are not able to satisfy the norms and safety requirements during exploitation, repair and reconstruction, or develop the systems of control for their state and create financial and material reserves to eliminate the damage.

Experts believe that all the difficulties come from the adjustment of the necessary budget expenses on water transport with the Ministry of Economic Development and Trade and the Ministry of Finance. Specialists of Rosmorrechflot complain that many problems arise because in 2005 one of the most important reserves of infrastructure maintenance financing – budgets of the Russian Federation subjects – was lost. According to the acting legislation, they are not to provide federal needs with funds. And this means millions and millions of roubles.

There remains another reserve of financing, i.e. revenues from GBUVPiS business activities, provided on the basis of the general license given to the Federal Agency of Sea and River Transport by the RF Ministry of Finance. Thus, in 2005 RUR 650 mln from the revenues was invested into the maintenance of the inner waterways and navigable hydrotechnical constructions, in 2007 the sum is to increase to RUR 800 mln. However, in spite of the growth of non-budget financing volume, its share does not increase, because the majority of funds is spent on paying land tax, property tax, and guarding hydroconstructions. Besides, business activities, for which GBUVPiS has licenses, are restricted by the acting legislation, thus, specialists of the RF Ministry of Transport forecast that non-budget revenues will hardly increase significantly. 



Last Hope

Being aware of the critical situation in the river shipping sector, RF President Vladimir Putin charged the Government to improve the efficiency of the inner waterways management by the state, to provide the safety of navigation and reliable exploitation of navigable hydrotechnical constructions, including solution of financial issues. 

Nowadays, the Ministry of Transport, in cooperation with federal bodies in charge, has worked out a plan of measures to fulfill the President’s instructions. However, additional means will be required to carry it out. Taking into account the lack of repair and reconstruction works at the hydroconstructions, renewal and reconstruction of technical vessels, means of navigational fences, required volumes of finance are quite significant. According to the preliminary evaluation, the required once-and-for-all costs are to make about RUR 166 bln, then RUR 10 bln is to be invested into the sector annually.

By now, the document has not been adjusted by the Ministry of Finance, which has some remarks to it. However, hopes are pinned on the President’s order and the measures to be taken to fulfill it. Otherwise, who else can change the situation at the Russian inner waterways completely? Moreover, it is envisaged that the realization of the planned measures will enable to optimize the preparation of Russian inner waterways for foreign vessels. The concept of Russian inner waterways development defines the terms when the preparation is to be over; however, nowadays specialists believe that the work is insufficient. Earlier it was planned to complete the works by 2009; however, experts are skeptical about the date: they believe that it will not happen in the next 3-5 years. 



BY OLGA GORBUNOVA
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Diagnosis Is Atrophy

Constructed during many decades, the unique transport river system has fallen into decay after the years of reforms that took place in the Russian Federation. That is why, although Russia has a branchy network of inner waterways used for navigation, nowadays only 31.2 thousand km out of 101.7 thousand km has the guaranteed dimensioned fairways. According to the data of the Federal Agency of Sea and River Transport of the RF Ministry of Transport (Rosmorrechflot), there are illuminated navigation marks at 19.98 thousand km of waterways, reflecting navigation marks at 3.82 thousand km, and unlit ones at 7.37 thousand km.

Statistics show that the parameters of fairways become worse every year. Comparing to 1991, the length of the sections meeting the requirements reduced by 31% in 2004, by 51% in 2005, and over twofold in 2006. According to the specialists of the RF Ministry of Transport, it is because only 50% of necessary measures are taken. For example, during last year navigation, the volume of dredging operations at the navigable waterways amounted to 22.6 mln cubic m, which is less than 23% of the required volume.

The most critical situation is at the Volgo-Baltic waterway, where the length amounted to 3.4 m (the reduction made 15%), while the width in some sectors decreased from 80 to 37 m. That is why one-way traffic of vessels was implemented at many sections of the canal, thus, the time of the round trip Yaroslavl-Saint-Petersburg has doubled for tankers. According to Head of the Federal State Institution Volgo-Baltic State Basin Management of Waterways and Navigation Vladimir Nikolaev, if no proper dredging works are held, 5,000 tons dwt vessels will not be able to pass along the Volgo-Baltic system as of 2007 because of canals and locks shallowing. 

However, the situation on the Volgo-Baltic canal is not an exception. According to the data of Rosmorrechflot, dimensions are reduced at the Lower Volga, the Kama, the Ob, the Irtysh, the Amur, the Severnaya Dvina and the Lena. Because of the insufficient depth of the Kochetkovsky hydrojunction sill at the Lower Don, the fleet floating there is loaded by 75-80%. The Cheboksary reservoir is not filled up to the project level: it takes large-capacity vessels two or three days to float along the Nizhny Novgorod-Gorodets section with the length of 60 km. Besides, during navigation 2006, the Moskva and the lower Oka rivers were excluded from the Programme of Guaranteed Dimensions of Fairways. Navigation there became possible only due to shipping companies. 

There are over 700 navigable hydrotechnical constructions (locks, pumping facilities, pressure embankments, dams), which are also in poor condition. Over 50% of the acting navigable hydrotechnical constructions have been exploited during 50-75 years, 11% of them have been used during 76-100 years. 12% of the constructions have been in operation for more than a century. Thus, the age of the engineering constructions of the Belomoro-Baltic canal is 73 years; the ones of the Moscow Canal and the Volgo-Don Canal are 66 and 50 years respectively. Other examples include the Verkhne-Tsninskaya dam, which has been used since 1786, the Kemetskaya dam, which has been functioning since 1834, pressure embankments of the Kishemsky Canal, in use since 1885. Naturally, after such terms, processes of physical deterioration and ageing of concrete and ferroconcrete constructions, metal constructions, mechanical and electric-technical equipment are in place. Such technical state of the navigable hydrotechnical constructions reduces the safety of exploitation of the constructions and increases the risk of emergencies. Thus, according to the results of navigable hydrotechnical constructions safety declaration, only 21% of the constructions meets safety requirements, 57.7% has a low safety level, 16.5% is in improper state, and 4.8% is dangerous. Specialists state that the ratio of repair and reconstruction works falls behind the progressive processes of destruction. In particular, in 2005, the amount of dangerous objects increased twofold. 

For example, most objects of the Federal State Unitary Enterprise Moscow Canal have a low level of safety. Some of them are in emergency condition, and measures should be taken to provide for their exploitation parameters. «The security threat is so real, that if nothing is changed, in two years Dubna may be submerged. And if the dam of the Khimkinskoe reservoir is broken, Moscow and neighbouring towns will suffer greatly», states Andrey Dubinsky, Head of the Enterprise. In any case, the parameters of inner waterways and navigable hydrotechnical constructions, especially interbasin canals, are critical. Scientists forecast that if the state of the river system is not improved now, in a decade Russia will have no river transport. For example, according to specialists’ evaluations, in 7-9 years the Volga can be divided into the Northern and the Southern basins near Nizhny Novgorod. 



Financial Shoal

The main reason for such a crisis of the Russian inner waterways and hydrotechnical constructions is the long-term insufficient financing from the budget. The specialists of the RF Ministry of Transport note that only 40-50% of the standard sums is given for the purpose. In particular, according to the standards, in 2006 the financial provision of the current maintenance of inner waterways and hydro constructions is to amount to RUR 8.8. bln; however, the Federal Budget envisages the allocation of RUR 4.7 bln only, thus, the deficiency makes over RUR 4 bln.

Obviously, organizations that maintain the inner waterways and navigable hydrotechnical constructions (there are 15 state basin administrations of waterways and navigation (GBUVPiS) and the Federal State Unitary Enterprise «Moscow Canal») are not able to satisfy the norms and safety requirements during exploitation, repair and reconstruction, or develop the systems of control for their state and create financial and material reserves to eliminate the damage.

Experts believe that all the difficulties come from the adjustment of the necessary budget expenses on water transport with the Ministry of Economic Development and Trade and the Ministry of Finance. Specialists of Rosmorrechflot complain that many problems arise because in 2005 one of the most important reserves of infrastructure maintenance financing – budgets of the Russian Federation subjects – was lost. According to the acting legislation, they are not to provide federal needs with funds. And this means millions and millions of roubles.

There remains another reserve of financing, i.e. revenues from GBUVPiS business activities, provided on the basis of the general license given to the Federal Agency of Sea and River Transport by the RF Ministry of Finance. Thus, in 2005 RUR 650 mln from the revenues was invested into the maintenance of the inner waterways and navigable hydrotechnical constructions, in 2007 the sum is to increase to RUR 800 mln. However, in spite of the growth of non-budget financing volume, its share does not increase, because the majority of funds is spent on paying land tax, property tax, and guarding hydroconstructions. Besides, business activities, for which GBUVPiS has licenses, are restricted by the acting legislation, thus, specialists of the RF Ministry of Transport forecast that non-budget revenues will hardly increase significantly. 



Last Hope

Being aware of the critical situation in the river shipping sector, RF President Vladimir Putin charged the Government to improve the efficiency of the inner waterways management by the state, to provide the safety of navigation and reliable exploitation of navigable hydrotechnical constructions, including solution of financial issues. 

Nowadays, the Ministry of Transport, in cooperation with federal bodies in charge, has worked out a plan of measures to fulfill the President’s instructions. However, additional means will be required to carry it out. Taking into account the lack of repair and reconstruction works at the hydroconstructions, renewal and reconstruction of technical vessels, means of navigational fences, required volumes of finance are quite significant. According to the preliminary evaluation, the required once-and-for-all costs are to make about RUR 166 bln, then RUR 10 bln is to be invested into the sector annually.

By now, the document has not been adjusted by the Ministry of Finance, which has some remarks to it. However, hopes are pinned on the President’s order and the measures to be taken to fulfill it. Otherwise, who else can change the situation at the Russian inner waterways completely? Moreover, it is envisaged that the realization of the planned measures will enable to optimize the preparation of Russian inner waterways for foreign vessels. The concept of Russian inner waterways development defines the terms when the preparation is to be over; however, nowadays specialists believe that the work is insufficient. Earlier it was planned to complete the works by 2009; however, experts are skeptical about the date: they believe that it will not happen in the next 3-5 years. 



BY OLGA GORBUNOVA
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Sovcomflot Increases Fleet

The results of nine months of 2006 show that the revenue of the Russian largest vessel owner (in terms of deadweight) OAO Sovcomflot amounted to USD 380.4 mln (27.6% up year-on-year), and its profit made USD 124.2 mln (40% up year-on-year).

During 2006 Sovcomflot has continued to enlarge its fleet, realizing the target of entering new markets which have a nice potential of growth on the basis of Russian and foreign freight base. Undoubtedly, the company’s most important purchase is the large-capacity tanker «Vladimir Tikhonov», named in honour of one of the founders of Sovcomflot. The 162 th tons dwt vessel is the largest one in the history of the Russian trade fleet. It was designed specially to transport oil from the port of Primorsk: the draft of the vessel enables to take aboard 1 mln barrels of oil, i.e. by 50% more than the draft of other vessels operating in the Baltic region. 

Besides, the company’s fleet enlarged by three tankers for oil products transportation in 2006. As a result, by the middle of November, there are 56 vessels with the total deadweight of 4.33 mln tons in the company’s fleet (at the beginning of the year, the figure was 50 vessels), not taking into account the 12 tankers for chemicals transportation with the total deadweight of 130 thousand tons, purchased in cooperation with OAO Novoship from Marpetrol company. 

The company continued its active cooperation with FGUP Admiralty Shipyards. They concluded a contract for construction of two Arctic tankers-shuttles, designed to transport oil from the Prirazlomnoe field as of 2008, and three 47 th.tons dwt tankers for oil products transportation, thus proceeding with the batch of six vessels, ordered from Admiralty Shipyards before. In the company’s stock of orders there are 21 vessels more with the total deadweight of about 1.36 mln tons (15 tankers and 6 vessels for LNG transportation).

The agreement concluded by OAO Gazprom, OAO Sovcomflot and ZAO Sevmorneftegaz concerns oil transportation from the Prirazlomnoe field, and plays an essential role in the development of the company. It is planned that the maximum annual volume of the transported oil will amount to 6.5 mln tons. Having concluded the contract, Sovcomflot enlarged its stock of industrial projects, including Sakhalin-1 and Sakhalin-2, Varandey and Tangu.

In November 2006, Sovcomflot started to transport hydrocarbon fuel, extracted at the Sakhalin shelf, together with Primorsk Shipping Company. These two shipping companies constructed five tankers of 100,000 tons displacement specially for the project. Now the vessels are chartered by Exxon company for a 10 years term. Annually about 12.5 mln tons of oil will be carried from the port of De-Kastri during 40 years.

Along with the priority development of energy projects in Russia, OAO Sovcomflot actively develops its international business. In September 2006, OAO Sovcomflot, Japanese shipping company NYK, Indonesian company Samudera Shipping Services and a bank consortium concluded a credit agreement. The long-term credit of USD 400 mln was destined to construct and purchase two tankers for LNG transportation, which are to start work in the framework of the Tangu international project in 2008. The vessels, chartered for 16 and 20 years, will transport LNG to consumers in the USA and Asia. A Russian vessel owner’s participation in transportation of LNG from Indonesia was the result of Sovcomflot’s victory in an international tender, held in 2005. 



No Agreement, No Success

However, the most important projects of OAO Sovcomflot carried out this year are the ones realized in cooperation with OAO Novorossiysk Shipping Company (Novoship): joint insurance of both companies’ fleet, which enabled to save about USD 1 mln, and purchase of W.W. Marpetrol, S.A, a shipping company leading in the Spanish chemical transportation market. The last contract enables both companies to strengthen their positions in the European segment of a prospective market of chemicals transportation by sea. Besides, such a purchase enlarges the pack of services offered by Russian carriers to national and foreign clients.

The two largest Russian shipping companies have been cooperating in different sectors from significant joint purchases to staff training for several years. It is no secret that if they are merged, the new shipping company will be one of the top five largest tanker companies in terms of the fleet deadweight (about 7.7 mln tons), and it will be the third in terms of the assets value (up to USD 4 bln). As a reminder, while Sovcomflot is currently the largest Russian vessel owner according to fleet tonnage, Novoship is the leader among the Russian companies according to the amount of private shareholders and vessels (in 2006 the company owns 62 vessels with the total deadweight of 3.8 mln tons).

On the one hand, the idea of consolidation is the effect of the processes that take place on the world shipping. It is necessary to provide the proper level of service and safety standards, which is required by clients – Russian and international oil and gas companies. The merge is also necessary because of the increasing capital intensity of the sector, the growing cost of vessels and large scale transportation processes (the price of a vessel for LNG transportation is about USD 250 mln), and it is much easier for big companies to raise funds from the financial markets.

On the other hand, prospects and rates of the Russian economy also show that such transformation is necessary. Firstly, extraction volume and export of Russian and transit oil by sea via the Russian ports increase, and there is a growth potential for Russian gas demand (pictures 1, 2). Secondly, consolidation of shipping companies corresponds to the course of Russian economy and state policy development.

The companies may be merged in different ways, including the one when both companies remain juridically independent and keep their brands, which would be reasonable for each participant. Nowadays, there are a lot of examples of it in the world: Frontline – Ship Finance; Stena Bulk – Arlington Tankers; Teekay Shipping – Teekay LNG; OSG – Double Hull Tankers.

The idea of the shipping companies merge is almost six years old; however till recently it had more opponents than supporters: the top-managers of both companies, minority shareholders of Novoship, administration of the Krasnoyarsk region and other interested persons were against the merge. Nowadays, the companies Boards of Directors have already approved the scheme of the merge, according to which Novoship is to become a daughter company of Sovcomflot, paying by its state shareholding for the additional issue of the shares of the latter.

In October 2006, when the Ministry of Transport only had to get the approval from the RF Government to complete the deal, the Ministry of Economic Development and Trade opposed it on the basis of the lack of clear evaluation for the offered scheme, as well as for alternative versions of the merge. Equally in the documents, there are no offers by the Ministry of Transport or terms of the future privatization of the united shipping company by means of IPO or direct sale.

Using this delay, the top-management of Novoship proclaimed that the company should not become totally dependent on Sovcomflot, which is owned by the state (the state owns 50.3% of Novoship shares or 67.1% of voting shares). The President of the company Sergey Terekhin commented on the idea of merging the shipping companies, «It is hard to answer the question. The only thing I can confirm is that Sovcomflot has plans to obtain Novoship’s shareholding. There were also oral assurances that the structure of Novoship joint-stock company will not change, i.e. there will be a company with shareholders, company’s charter, regulations on the Board of Directors and the Board. If the scheme of the merge is realized this way, I believe that it is not a problem. Our company will develop, and Sovcomflot will control us for the benefit of all the shareholders». S.Terekhin also mentioned some pros and contras of the future integration. On the one hand, these are joint projects, sharing of risks, reduction of expenses, and no competition. On the other hand, he would like to avoid such a situation when Sovcomflot will be the only one to make decisions.

Thus, the sixth year in the history of the two largest Russian ship owners’ merge is almost over, and the situation seems to resume its own course, while no agreement has been reached either between the companies or by the RF Government. The majority of the experts in the sector believe that the key decisions on the companies’ integration will hardly be made before 2008.



Ambitions of Primorye

In spite of significant losses suffered by the Russian top three shipping company OAO Primorsk Shipping Company because of the breakage of the fleet and long-term fleet idling before loading at the beginning of the year, in 2006 the company has the most ambitious projects.

In the framework of fleet enlargement, this year the shipping company has obtained an ice-breaking towboat «Polar Pevek», constructed in cooperation with the Norwegian largest shipping company RIEBER Shipping AS. Besides, in April 2006, the Russian flag was hoisted at the ice-breaking supply vessel «Pacific Endeavour», which was the first from the series of special vessels constructed by the joint company PRISCO SWIRE Offshore to work at the Sakhalin-2 project. As a result, by the end of 2006, the company’s fleet amounts to 34 tankers of different types with the total deadweight of about two mln tons.

In 2006 the shipping company approved the strategy aiming to enlarge its fleet by several times: by 2015 the total deadweight of the company’s tanker fleet is to increase fourfold to 4 mln tons. The realization of the programme has already started. Seven new tankers of ice class with the deadweight of 50 thousand tons each are being constructed at the shipbuilding yards of South Korea. The vessels will join PRISCO’s fleet by 2009.

According to the chairperson of the PRISCO’s Board of Directors Alexander Kirilichev, the project cost is USD 250 mln: it will be financed by credits taken from foreign banks. The total cost of the programme is USD 2.5 bln. It is planned to construct no less than 20 new tankers that will be able to work under the complicated ice conditions of the Far Eastern sea basin and on the Northern sea route. Each of the vessels will cost USD 53.6 mln. The company chose South Korean shipbuilding yards because no Russian enterprise constructs vessels with the deadweight of more than 50 thousand tons. 

As it has been already mentioned, in 2006 the shipping company in cooperation with OAO Sovcomflot won a tender on export transportation of crude oil from the De-Kastri terminal in the frameworks of Sakhalin-1 project. The first consignment was loaded on the aframax type tanker «Viktor Titov», owned by PRISCO.

In the framework of Sakhalin-2 project, PRISCO and Sakhalin Energy concluded a contract on charter of two aframax type tankers. The contract envisages that the tankers «Governor Farhutdinov» and «Sakhalin Island» with the deadweight of 108 thousand tons each will transport oil from the Sakhalin shelf. 

All company’s projects are oriented at the Russian freight base (firstly, at the Sakhalin oil projects). The company plans to increase cargo transportation from the Sakhalin shelf to 4 mln tons annually. Besides, PRISCO is going to participate in transportation of oil to the countries of Asian Pacific Region from the oil pipeline Eastern Siberia – the Pacific Ocean.

A.Kirilichev notes that when carrying out the projects, the company will compete with the Russian largest vessel owner Sovcomflot. However, competition makes work even more interesting. For example, LNG transportation is a new business for Russian shipping companies, and both companies are just beginners in the sector.

To carry out the project, the shipping company plans to use means acquired from shares exchange sale as investment resources. The issuance was held specially for it by means of shareholding split, and nowadays about 16% of the company’s shares are traded on the exchange. In case loan funds are not enough to construct the vessels, PRISCO is ready to sell additional 5% shareholding on the exchange, which will enable to earn another USD 40 mln.

Taking the development strategy into account, the company’s capitalization may increase by 30-40% in the next 3-4 years. Experts believe that in spite of the fact that PRISCO is able to realize the projects of tanker fleet development and become the leader among Russian shipping companies, it will hardly manage it, especially taking into consideration the future merge of the two largest vessel owners. Meanwhile, PRISCO, in contrast to Sovcomflot and Novoship, which are owned by the state, is a private shipping company, so it has much more freedom and stronger motivation to get maximum revenue.



Headed for Intermodal System

The year of 2006 was successful for the Far Eastern Shipping Company, Russian largest company specializing in container transportation. Its total fleet deadweight has amounted to 1.1 mln tons, whereof 40% are vessels for container transportation, and the rest 60% are vessels of other types. The container fleet of FESCO consists of 28 vessels with the carrying capacity of 32,000 TEU (56% up comparing to the figures at the beginning of 2006). The company’s container transportation volume increases constantly: in 2005 it was 400,000 TEU (sea transportation mainly), in 2006 it is expected to amount to 450,000 TEU.

In February, 2006, the state’s shareholding in the shipping company was purchased by ZAO Agency of Investments and Fuel and Energy Complex Development (a subsidiary of Industrial Investors group of companies, which controlled 62% of FESCO’s shares). During 2006, the group of companies was actively carrying out the strategic plan of Intermodal transport system creation. The target of the latter is to provide through multimodal transportation (by sea, railway and road hauliers) of containerized cargoes on the territory of the Russian Federation and neighbouring states. Taking into account the vast territory of Russia, Intermodal through transportation is the basic service, most popular with foreign trade clients. Part of the company’s common strategy aimed at launching such business is intensive renewal and simultaneous increase of the amount and capacity of the container fleet. As a result, the volume of investments into the fleet reached USD 270 mln in 2006, and about USD 400 mln according to the contracts for the next three years. Nowadays, the company ordered 10 vessels, including three ships for container transportation with the capacity of 1,080 TEU each, which are being constructed at the Jinling shipyard (China), three vessels with the capacity of 1,730 TEU and four vessels with the capacity of 3,091 TEU, being constructed at the Szczecin shipyard (Poland). All the vessels will join FESCO’s fleet before the end of 2009, so its container carrying capacity will increase to 50,000 TEU.

Thus, it is possible to say that during the next three years, FESCO’s container fleet will mainly consist of new high-speed vessels of the type and size most suitable for being serviced in the Russian ports, and when the charter contracts are over, it will be re-routed to the company’s own lines.

Another direction of the company’s development in the framework of the chosen strategy besides fleet renewal is enlargement and purchase of railway, terminal and motor companies, improvement of their interaction, development of the infrastructure and the scheme of work according to the «one-window» principle. FESCO continues to construct its own special port railway terminal in Vladivostok. The terminal is aimed to handle, warehouse and service freight in refrigerated containers. 

Besides, in 2006 Fest Qantum group of companies and the Far Eastern Shipping Company launched a strategic alliance for joint management and development of the First Container Terminal (FCT, the port of Saint-Petersburg) and the Baltic Container Terminal (the port of Ust-Luga). Nowadays, FCT is the leader of the terminal business in the RF (according to forecasts, the container handling volume is to amount to 870,000 TEU in 2006), and the project capacity of the first stage of the Baltic terminal is 600,000 TEU. Each of the parts will own 50% shareholding in the terminals. The united efforts of the two largest Russian companies operating on the container transportation market will enable to provide Russian and foreign cargo owners with door-to-door delivery in accordance with the world standards. It is to make for container transportation growth on the territory of the RF, firstly in the framework of the transport corridors «East-West» and «North-South».

As for the company’s work on the international container transportation market, in November 2006, FESCO and Wallem Shipmanagement Limited (Hong Kong) launched a joint venture. The new company will manage FESCO’s container fleet operating in the Pacific basin and flying foreign flags. For partial financing of the purchases, the shipping company attracted a USD 300 mln loan from ING Bank NV (London). The company is to pay it back by issuing shares and bonds in Q2 of 2007 (in order to create a reserve capital to pay credits back, FESCO sold 10 refrigerated vessels to South Korean company Yenwin International Freight Ltd for USD 55 mln).

FESCO also actively participates in the development of transportation along the Russian Railways network: a joint venture ZAO Russian Troyka, launched on parity basis with OAO RZD in 2004, specializes in container transportation operates the Transsib. Another company - Incotec Trans Service - operates in the North-Western region and on the Transsiberian railway. It specializes in container transportation, especially aluminium, using its own and rented rolling stock. Besides, the shipping company’s assets include Dalreftrans, one of Russia’s largest multimodal carriers of containerized refrigerated cargoes, and TIS forwarding company, providing 34% of container transportation along the Transsib. 

By the end of 2006, the Industrial Investors group of companies completed the next stage of Intermodal transport holding company creation on the basis of the Far Eastern Shipping Company. It concluded a contract for step-by-step purchase of one of the largest Russian railway operators – Transgarant company. As a result, the railway companies incorporated into the FESCO group of companies operate a wagon park of over 14,000 units, whereof 70% are the property of the group. 

FESCO has purchased 50% of Transgarant company at the next stage the shareholders of the remaining shares will exchange them for the shipping company’s shares, for which an additional issue of FESCO’s shares is to be held. Thus, Transgarant will be a 100% subsidiary of the enlarged holding company FESCO, and its owners will become shareholders of FESCO and partners of the Industrial Investors. This stage is to be completed in Q1 of 2007.

The top-management of the Industrial Investors group of companies believe that the merge of Transgarant and OAO FESCO will enable to provide clients with a new complex service of «door-to-door» delivering of all bulk and non-containerized cargoes, similar to the container transportation service provided by Russian Troyka since 2005. The experience of the new partners will enable to improve the efficiency of management of all the railway assets of the group and provide a strong impulse for their further development. 



«Natali» Comes Out

OAO Murmansk Sea Shipping Company, another large Russian vessel owner, transports 40% of the total volume of cargo carried by vessels flying the RF flag. The company plays the key role in freight delivering to the Arctic regions of Russia, providing up to 80% of transportation on the North Sea Route in the recent years. The fleet consists of 47 vessels with the deadweight of 874 thousand tons.

The most prospective direction of the shipping company’s development is the participation in hydrocarbon raw materials transportation to Europe and the USA. To realize the plans, construction of 47 th. tons dwt. tankers and purchase of sue tanker are necessary.

To improve the company’s competitiveness on the charter market, the Murmansk Sea Shipping Company carries out the programme of fleet renewal, cooperating actively with Chinese ship builders. The most important purchase of 2006 is the new bulk carrier «Grumant». It is the first vessel of the series of bulk carriers ordered at the Chinese shipyard Cxengxi Shipyard (JianYyin). The company ordered the aggregates for the bulk carriers constructed in China at Bryansk machine building plant. They concluded a contract for construction of three marine engines with the power of 9,480 kilowatt and the rotation frequency of 127 revs per minute. Bryansk machine building plant is to produce the first engine in February 2007, the second – in May 2007, and the last one – in April 2008. The vessels will transport freight in the Baltic and the White Seas. 

Moreover, in 2006 the company completed the unique modernization of the supertanker «Natali», purchased in 2005. It is one of the largest tankers flying the Russian flag. Until nowadays, no shipping company in the world succeeded in the re-equipment of a vessel with the deadweight of over 140 thousand tons. Now «Natali» meets all the international requirements to tanker exploitation. 

Using its available resource potential to the maximum, the company initiates and implements efficient business projects, including the ones concerning vessel modernization, oil terminals construction etc. Thus, in 2006, the company purchased 55.3% of OAO Northern River Shipping Company (Arkhangelsk). The cost of the contract amounted to RUR 94.5 mln.

The financing of the mentioned items amounted to RUR 2.3 bln, in spite of the significant reduction of the revenue from the state ice-breaking fleet asset management. The reasons for the latter are the lack of financing from the budget, and the refusal of several users of the North Sea Route to pay for piloting services. 



To Sum Up

The large scale of the projects carried out by the shipping companies in 2006 justifies the largest Russian vessel owners’ course for closer cooperation when realizing most important projects (not excluding competition). Besides, recently there is a tendency of companies enlargement by purchasing adjacent businesses and investing funds into development of the most prospective sectors of sea transportation. It is too early to speak of a companies’ consolidation in the sector (especially, of the merge of Sovcomflot and Novoship), although, some steps are already being made. Perhaps, the ambitions of the shipping companies prevent them from making a compromise, in spite of the fact that it is much easier for large companies to compensate for the losses from charter rates changes, because they can react to the changes of demand in different sectors of the market faster. Large companies also have more opportunities to renew and modernize their tanker fleet. The worsening market situation and vessel owners significant obligations stimulate the consolidation processes in the sector.



NADEZHDA VTORUSHINA
    [~DETAIL_TEXT] => 

Sovcomflot Increases Fleet

The results of nine months of 2006 show that the revenue of the Russian largest vessel owner (in terms of deadweight) OAO Sovcomflot amounted to USD 380.4 mln (27.6% up year-on-year), and its profit made USD 124.2 mln (40% up year-on-year).

During 2006 Sovcomflot has continued to enlarge its fleet, realizing the target of entering new markets which have a nice potential of growth on the basis of Russian and foreign freight base. Undoubtedly, the company’s most important purchase is the large-capacity tanker «Vladimir Tikhonov», named in honour of one of the founders of Sovcomflot. The 162 th tons dwt vessel is the largest one in the history of the Russian trade fleet. It was designed specially to transport oil from the port of Primorsk: the draft of the vessel enables to take aboard 1 mln barrels of oil, i.e. by 50% more than the draft of other vessels operating in the Baltic region. 

Besides, the company’s fleet enlarged by three tankers for oil products transportation in 2006. As a result, by the middle of November, there are 56 vessels with the total deadweight of 4.33 mln tons in the company’s fleet (at the beginning of the year, the figure was 50 vessels), not taking into account the 12 tankers for chemicals transportation with the total deadweight of 130 thousand tons, purchased in cooperation with OAO Novoship from Marpetrol company. 

The company continued its active cooperation with FGUP Admiralty Shipyards. They concluded a contract for construction of two Arctic tankers-shuttles, designed to transport oil from the Prirazlomnoe field as of 2008, and three 47 th.tons dwt tankers for oil products transportation, thus proceeding with the batch of six vessels, ordered from Admiralty Shipyards before. In the company’s stock of orders there are 21 vessels more with the total deadweight of about 1.36 mln tons (15 tankers and 6 vessels for LNG transportation).

The agreement concluded by OAO Gazprom, OAO Sovcomflot and ZAO Sevmorneftegaz concerns oil transportation from the Prirazlomnoe field, and plays an essential role in the development of the company. It is planned that the maximum annual volume of the transported oil will amount to 6.5 mln tons. Having concluded the contract, Sovcomflot enlarged its stock of industrial projects, including Sakhalin-1 and Sakhalin-2, Varandey and Tangu.

In November 2006, Sovcomflot started to transport hydrocarbon fuel, extracted at the Sakhalin shelf, together with Primorsk Shipping Company. These two shipping companies constructed five tankers of 100,000 tons displacement specially for the project. Now the vessels are chartered by Exxon company for a 10 years term. Annually about 12.5 mln tons of oil will be carried from the port of De-Kastri during 40 years.

Along with the priority development of energy projects in Russia, OAO Sovcomflot actively develops its international business. In September 2006, OAO Sovcomflot, Japanese shipping company NYK, Indonesian company Samudera Shipping Services and a bank consortium concluded a credit agreement. The long-term credit of USD 400 mln was destined to construct and purchase two tankers for LNG transportation, which are to start work in the framework of the Tangu international project in 2008. The vessels, chartered for 16 and 20 years, will transport LNG to consumers in the USA and Asia. A Russian vessel owner’s participation in transportation of LNG from Indonesia was the result of Sovcomflot’s victory in an international tender, held in 2005. 



No Agreement, No Success

However, the most important projects of OAO Sovcomflot carried out this year are the ones realized in cooperation with OAO Novorossiysk Shipping Company (Novoship): joint insurance of both companies’ fleet, which enabled to save about USD 1 mln, and purchase of W.W. Marpetrol, S.A, a shipping company leading in the Spanish chemical transportation market. The last contract enables both companies to strengthen their positions in the European segment of a prospective market of chemicals transportation by sea. Besides, such a purchase enlarges the pack of services offered by Russian carriers to national and foreign clients.

The two largest Russian shipping companies have been cooperating in different sectors from significant joint purchases to staff training for several years. It is no secret that if they are merged, the new shipping company will be one of the top five largest tanker companies in terms of the fleet deadweight (about 7.7 mln tons), and it will be the third in terms of the assets value (up to USD 4 bln). As a reminder, while Sovcomflot is currently the largest Russian vessel owner according to fleet tonnage, Novoship is the leader among the Russian companies according to the amount of private shareholders and vessels (in 2006 the company owns 62 vessels with the total deadweight of 3.8 mln tons).

On the one hand, the idea of consolidation is the effect of the processes that take place on the world shipping. It is necessary to provide the proper level of service and safety standards, which is required by clients – Russian and international oil and gas companies. The merge is also necessary because of the increasing capital intensity of the sector, the growing cost of vessels and large scale transportation processes (the price of a vessel for LNG transportation is about USD 250 mln), and it is much easier for big companies to raise funds from the financial markets.

On the other hand, prospects and rates of the Russian economy also show that such transformation is necessary. Firstly, extraction volume and export of Russian and transit oil by sea via the Russian ports increase, and there is a growth potential for Russian gas demand (pictures 1, 2). Secondly, consolidation of shipping companies corresponds to the course of Russian economy and state policy development.

The companies may be merged in different ways, including the one when both companies remain juridically independent and keep their brands, which would be reasonable for each participant. Nowadays, there are a lot of examples of it in the world: Frontline – Ship Finance; Stena Bulk – Arlington Tankers; Teekay Shipping – Teekay LNG; OSG – Double Hull Tankers.

The idea of the shipping companies merge is almost six years old; however till recently it had more opponents than supporters: the top-managers of both companies, minority shareholders of Novoship, administration of the Krasnoyarsk region and other interested persons were against the merge. Nowadays, the companies Boards of Directors have already approved the scheme of the merge, according to which Novoship is to become a daughter company of Sovcomflot, paying by its state shareholding for the additional issue of the shares of the latter.

In October 2006, when the Ministry of Transport only had to get the approval from the RF Government to complete the deal, the Ministry of Economic Development and Trade opposed it on the basis of the lack of clear evaluation for the offered scheme, as well as for alternative versions of the merge. Equally in the documents, there are no offers by the Ministry of Transport or terms of the future privatization of the united shipping company by means of IPO or direct sale.

Using this delay, the top-management of Novoship proclaimed that the company should not become totally dependent on Sovcomflot, which is owned by the state (the state owns 50.3% of Novoship shares or 67.1% of voting shares). The President of the company Sergey Terekhin commented on the idea of merging the shipping companies, «It is hard to answer the question. The only thing I can confirm is that Sovcomflot has plans to obtain Novoship’s shareholding. There were also oral assurances that the structure of Novoship joint-stock company will not change, i.e. there will be a company with shareholders, company’s charter, regulations on the Board of Directors and the Board. If the scheme of the merge is realized this way, I believe that it is not a problem. Our company will develop, and Sovcomflot will control us for the benefit of all the shareholders». S.Terekhin also mentioned some pros and contras of the future integration. On the one hand, these are joint projects, sharing of risks, reduction of expenses, and no competition. On the other hand, he would like to avoid such a situation when Sovcomflot will be the only one to make decisions.

Thus, the sixth year in the history of the two largest Russian ship owners’ merge is almost over, and the situation seems to resume its own course, while no agreement has been reached either between the companies or by the RF Government. The majority of the experts in the sector believe that the key decisions on the companies’ integration will hardly be made before 2008.



Ambitions of Primorye

In spite of significant losses suffered by the Russian top three shipping company OAO Primorsk Shipping Company because of the breakage of the fleet and long-term fleet idling before loading at the beginning of the year, in 2006 the company has the most ambitious projects.

In the framework of fleet enlargement, this year the shipping company has obtained an ice-breaking towboat «Polar Pevek», constructed in cooperation with the Norwegian largest shipping company RIEBER Shipping AS. Besides, in April 2006, the Russian flag was hoisted at the ice-breaking supply vessel «Pacific Endeavour», which was the first from the series of special vessels constructed by the joint company PRISCO SWIRE Offshore to work at the Sakhalin-2 project. As a result, by the end of 2006, the company’s fleet amounts to 34 tankers of different types with the total deadweight of about two mln tons.

In 2006 the shipping company approved the strategy aiming to enlarge its fleet by several times: by 2015 the total deadweight of the company’s tanker fleet is to increase fourfold to 4 mln tons. The realization of the programme has already started. Seven new tankers of ice class with the deadweight of 50 thousand tons each are being constructed at the shipbuilding yards of South Korea. The vessels will join PRISCO’s fleet by 2009.

According to the chairperson of the PRISCO’s Board of Directors Alexander Kirilichev, the project cost is USD 250 mln: it will be financed by credits taken from foreign banks. The total cost of the programme is USD 2.5 bln. It is planned to construct no less than 20 new tankers that will be able to work under the complicated ice conditions of the Far Eastern sea basin and on the Northern sea route. Each of the vessels will cost USD 53.6 mln. The company chose South Korean shipbuilding yards because no Russian enterprise constructs vessels with the deadweight of more than 50 thousand tons. 

As it has been already mentioned, in 2006 the shipping company in cooperation with OAO Sovcomflot won a tender on export transportation of crude oil from the De-Kastri terminal in the frameworks of Sakhalin-1 project. The first consignment was loaded on the aframax type tanker «Viktor Titov», owned by PRISCO.

In the framework of Sakhalin-2 project, PRISCO and Sakhalin Energy concluded a contract on charter of two aframax type tankers. The contract envisages that the tankers «Governor Farhutdinov» and «Sakhalin Island» with the deadweight of 108 thousand tons each will transport oil from the Sakhalin shelf. 

All company’s projects are oriented at the Russian freight base (firstly, at the Sakhalin oil projects). The company plans to increase cargo transportation from the Sakhalin shelf to 4 mln tons annually. Besides, PRISCO is going to participate in transportation of oil to the countries of Asian Pacific Region from the oil pipeline Eastern Siberia – the Pacific Ocean.

A.Kirilichev notes that when carrying out the projects, the company will compete with the Russian largest vessel owner Sovcomflot. However, competition makes work even more interesting. For example, LNG transportation is a new business for Russian shipping companies, and both companies are just beginners in the sector.

To carry out the project, the shipping company plans to use means acquired from shares exchange sale as investment resources. The issuance was held specially for it by means of shareholding split, and nowadays about 16% of the company’s shares are traded on the exchange. In case loan funds are not enough to construct the vessels, PRISCO is ready to sell additional 5% shareholding on the exchange, which will enable to earn another USD 40 mln.

Taking the development strategy into account, the company’s capitalization may increase by 30-40% in the next 3-4 years. Experts believe that in spite of the fact that PRISCO is able to realize the projects of tanker fleet development and become the leader among Russian shipping companies, it will hardly manage it, especially taking into consideration the future merge of the two largest vessel owners. Meanwhile, PRISCO, in contrast to Sovcomflot and Novoship, which are owned by the state, is a private shipping company, so it has much more freedom and stronger motivation to get maximum revenue.



Headed for Intermodal System

The year of 2006 was successful for the Far Eastern Shipping Company, Russian largest company specializing in container transportation. Its total fleet deadweight has amounted to 1.1 mln tons, whereof 40% are vessels for container transportation, and the rest 60% are vessels of other types. The container fleet of FESCO consists of 28 vessels with the carrying capacity of 32,000 TEU (56% up comparing to the figures at the beginning of 2006). The company’s container transportation volume increases constantly: in 2005 it was 400,000 TEU (sea transportation mainly), in 2006 it is expected to amount to 450,000 TEU.

In February, 2006, the state’s shareholding in the shipping company was purchased by ZAO Agency of Investments and Fuel and Energy Complex Development (a subsidiary of Industrial Investors group of companies, which controlled 62% of FESCO’s shares). During 2006, the group of companies was actively carrying out the strategic plan of Intermodal transport system creation. The target of the latter is to provide through multimodal transportation (by sea, railway and road hauliers) of containerized cargoes on the territory of the Russian Federation and neighbouring states. Taking into account the vast territory of Russia, Intermodal through transportation is the basic service, most popular with foreign trade clients. Part of the company’s common strategy aimed at launching such business is intensive renewal and simultaneous increase of the amount and capacity of the container fleet. As a result, the volume of investments into the fleet reached USD 270 mln in 2006, and about USD 400 mln according to the contracts for the next three years. Nowadays, the company ordered 10 vessels, including three ships for container transportation with the capacity of 1,080 TEU each, which are being constructed at the Jinling shipyard (China), three vessels with the capacity of 1,730 TEU and four vessels with the capacity of 3,091 TEU, being constructed at the Szczecin shipyard (Poland). All the vessels will join FESCO’s fleet before the end of 2009, so its container carrying capacity will increase to 50,000 TEU.

Thus, it is possible to say that during the next three years, FESCO’s container fleet will mainly consist of new high-speed vessels of the type and size most suitable for being serviced in the Russian ports, and when the charter contracts are over, it will be re-routed to the company’s own lines.

Another direction of the company’s development in the framework of the chosen strategy besides fleet renewal is enlargement and purchase of railway, terminal and motor companies, improvement of their interaction, development of the infrastructure and the scheme of work according to the «one-window» principle. FESCO continues to construct its own special port railway terminal in Vladivostok. The terminal is aimed to handle, warehouse and service freight in refrigerated containers. 

Besides, in 2006 Fest Qantum group of companies and the Far Eastern Shipping Company launched a strategic alliance for joint management and development of the First Container Terminal (FCT, the port of Saint-Petersburg) and the Baltic Container Terminal (the port of Ust-Luga). Nowadays, FCT is the leader of the terminal business in the RF (according to forecasts, the container handling volume is to amount to 870,000 TEU in 2006), and the project capacity of the first stage of the Baltic terminal is 600,000 TEU. Each of the parts will own 50% shareholding in the terminals. The united efforts of the two largest Russian companies operating on the container transportation market will enable to provide Russian and foreign cargo owners with door-to-door delivery in accordance with the world standards. It is to make for container transportation growth on the territory of the RF, firstly in the framework of the transport corridors «East-West» and «North-South».

As for the company’s work on the international container transportation market, in November 2006, FESCO and Wallem Shipmanagement Limited (Hong Kong) launched a joint venture. The new company will manage FESCO’s container fleet operating in the Pacific basin and flying foreign flags. For partial financing of the purchases, the shipping company attracted a USD 300 mln loan from ING Bank NV (London). The company is to pay it back by issuing shares and bonds in Q2 of 2007 (in order to create a reserve capital to pay credits back, FESCO sold 10 refrigerated vessels to South Korean company Yenwin International Freight Ltd for USD 55 mln).

FESCO also actively participates in the development of transportation along the Russian Railways network: a joint venture ZAO Russian Troyka, launched on parity basis with OAO RZD in 2004, specializes in container transportation operates the Transsib. Another company - Incotec Trans Service - operates in the North-Western region and on the Transsiberian railway. It specializes in container transportation, especially aluminium, using its own and rented rolling stock. Besides, the shipping company’s assets include Dalreftrans, one of Russia’s largest multimodal carriers of containerized refrigerated cargoes, and TIS forwarding company, providing 34% of container transportation along the Transsib. 

By the end of 2006, the Industrial Investors group of companies completed the next stage of Intermodal transport holding company creation on the basis of the Far Eastern Shipping Company. It concluded a contract for step-by-step purchase of one of the largest Russian railway operators – Transgarant company. As a result, the railway companies incorporated into the FESCO group of companies operate a wagon park of over 14,000 units, whereof 70% are the property of the group. 

FESCO has purchased 50% of Transgarant company at the next stage the shareholders of the remaining shares will exchange them for the shipping company’s shares, for which an additional issue of FESCO’s shares is to be held. Thus, Transgarant will be a 100% subsidiary of the enlarged holding company FESCO, and its owners will become shareholders of FESCO and partners of the Industrial Investors. This stage is to be completed in Q1 of 2007.

The top-management of the Industrial Investors group of companies believe that the merge of Transgarant and OAO FESCO will enable to provide clients with a new complex service of «door-to-door» delivering of all bulk and non-containerized cargoes, similar to the container transportation service provided by Russian Troyka since 2005. The experience of the new partners will enable to improve the efficiency of management of all the railway assets of the group and provide a strong impulse for their further development. 



«Natali» Comes Out

OAO Murmansk Sea Shipping Company, another large Russian vessel owner, transports 40% of the total volume of cargo carried by vessels flying the RF flag. The company plays the key role in freight delivering to the Arctic regions of Russia, providing up to 80% of transportation on the North Sea Route in the recent years. The fleet consists of 47 vessels with the deadweight of 874 thousand tons.

The most prospective direction of the shipping company’s development is the participation in hydrocarbon raw materials transportation to Europe and the USA. To realize the plans, construction of 47 th. tons dwt. tankers and purchase of sue tanker are necessary.

To improve the company’s competitiveness on the charter market, the Murmansk Sea Shipping Company carries out the programme of fleet renewal, cooperating actively with Chinese ship builders. The most important purchase of 2006 is the new bulk carrier «Grumant». It is the first vessel of the series of bulk carriers ordered at the Chinese shipyard Cxengxi Shipyard (JianYyin). The company ordered the aggregates for the bulk carriers constructed in China at Bryansk machine building plant. They concluded a contract for construction of three marine engines with the power of 9,480 kilowatt and the rotation frequency of 127 revs per minute. Bryansk machine building plant is to produce the first engine in February 2007, the second – in May 2007, and the last one – in April 2008. The vessels will transport freight in the Baltic and the White Seas. 

Moreover, in 2006 the company completed the unique modernization of the supertanker «Natali», purchased in 2005. It is one of the largest tankers flying the Russian flag. Until nowadays, no shipping company in the world succeeded in the re-equipment of a vessel with the deadweight of over 140 thousand tons. Now «Natali» meets all the international requirements to tanker exploitation. 

Using its available resource potential to the maximum, the company initiates and implements efficient business projects, including the ones concerning vessel modernization, oil terminals construction etc. Thus, in 2006, the company purchased 55.3% of OAO Northern River Shipping Company (Arkhangelsk). The cost of the contract amounted to RUR 94.5 mln.

The financing of the mentioned items amounted to RUR 2.3 bln, in spite of the significant reduction of the revenue from the state ice-breaking fleet asset management. The reasons for the latter are the lack of financing from the budget, and the refusal of several users of the North Sea Route to pay for piloting services. 



To Sum Up

The large scale of the projects carried out by the shipping companies in 2006 justifies the largest Russian vessel owners’ course for closer cooperation when realizing most important projects (not excluding competition). Besides, recently there is a tendency of companies enlargement by purchasing adjacent businesses and investing funds into development of the most prospective sectors of sea transportation. It is too early to speak of a companies’ consolidation in the sector (especially, of the merge of Sovcomflot and Novoship), although, some steps are already being made. Perhaps, the ambitions of the shipping companies prevent them from making a compromise, in spite of the fact that it is much easier for large companies to compensate for the losses from charter rates changes, because they can react to the changes of demand in different sectors of the market faster. Large companies also have more opportunities to renew and modernize their tanker fleet. The worsening market situation and vessel owners significant obligations stimulate the consolidation processes in the sector.



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Sovcomflot Increases Fleet

The results of nine months of 2006 show that the revenue of the Russian largest vessel owner (in terms of deadweight) OAO Sovcomflot amounted to USD 380.4 mln (27.6% up year-on-year), and its profit made USD 124.2 mln (40% up year-on-year).

During 2006 Sovcomflot has continued to enlarge its fleet, realizing the target of entering new markets which have a nice potential of growth on the basis of Russian and foreign freight base. Undoubtedly, the company’s most important purchase is the large-capacity tanker «Vladimir Tikhonov», named in honour of one of the founders of Sovcomflot. The 162 th tons dwt vessel is the largest one in the history of the Russian trade fleet. It was designed specially to transport oil from the port of Primorsk: the draft of the vessel enables to take aboard 1 mln barrels of oil, i.e. by 50% more than the draft of other vessels operating in the Baltic region. 

Besides, the company’s fleet enlarged by three tankers for oil products transportation in 2006. As a result, by the middle of November, there are 56 vessels with the total deadweight of 4.33 mln tons in the company’s fleet (at the beginning of the year, the figure was 50 vessels), not taking into account the 12 tankers for chemicals transportation with the total deadweight of 130 thousand tons, purchased in cooperation with OAO Novoship from Marpetrol company. 

The company continued its active cooperation with FGUP Admiralty Shipyards. They concluded a contract for construction of two Arctic tankers-shuttles, designed to transport oil from the Prirazlomnoe field as of 2008, and three 47 th.tons dwt tankers for oil products transportation, thus proceeding with the batch of six vessels, ordered from Admiralty Shipyards before. In the company’s stock of orders there are 21 vessels more with the total deadweight of about 1.36 mln tons (15 tankers and 6 vessels for LNG transportation).

The agreement concluded by OAO Gazprom, OAO Sovcomflot and ZAO Sevmorneftegaz concerns oil transportation from the Prirazlomnoe field, and plays an essential role in the development of the company. It is planned that the maximum annual volume of the transported oil will amount to 6.5 mln tons. Having concluded the contract, Sovcomflot enlarged its stock of industrial projects, including Sakhalin-1 and Sakhalin-2, Varandey and Tangu.

In November 2006, Sovcomflot started to transport hydrocarbon fuel, extracted at the Sakhalin shelf, together with Primorsk Shipping Company. These two shipping companies constructed five tankers of 100,000 tons displacement specially for the project. Now the vessels are chartered by Exxon company for a 10 years term. Annually about 12.5 mln tons of oil will be carried from the port of De-Kastri during 40 years.

Along with the priority development of energy projects in Russia, OAO Sovcomflot actively develops its international business. In September 2006, OAO Sovcomflot, Japanese shipping company NYK, Indonesian company Samudera Shipping Services and a bank consortium concluded a credit agreement. The long-term credit of USD 400 mln was destined to construct and purchase two tankers for LNG transportation, which are to start work in the framework of the Tangu international project in 2008. The vessels, chartered for 16 and 20 years, will transport LNG to consumers in the USA and Asia. A Russian vessel owner’s participation in transportation of LNG from Indonesia was the result of Sovcomflot’s victory in an international tender, held in 2005. 



No Agreement, No Success

However, the most important projects of OAO Sovcomflot carried out this year are the ones realized in cooperation with OAO Novorossiysk Shipping Company (Novoship): joint insurance of both companies’ fleet, which enabled to save about USD 1 mln, and purchase of W.W. Marpetrol, S.A, a shipping company leading in the Spanish chemical transportation market. The last contract enables both companies to strengthen their positions in the European segment of a prospective market of chemicals transportation by sea. Besides, such a purchase enlarges the pack of services offered by Russian carriers to national and foreign clients.

The two largest Russian shipping companies have been cooperating in different sectors from significant joint purchases to staff training for several years. It is no secret that if they are merged, the new shipping company will be one of the top five largest tanker companies in terms of the fleet deadweight (about 7.7 mln tons), and it will be the third in terms of the assets value (up to USD 4 bln). As a reminder, while Sovcomflot is currently the largest Russian vessel owner according to fleet tonnage, Novoship is the leader among the Russian companies according to the amount of private shareholders and vessels (in 2006 the company owns 62 vessels with the total deadweight of 3.8 mln tons).

On the one hand, the idea of consolidation is the effect of the processes that take place on the world shipping. It is necessary to provide the proper level of service and safety standards, which is required by clients – Russian and international oil and gas companies. The merge is also necessary because of the increasing capital intensity of the sector, the growing cost of vessels and large scale transportation processes (the price of a vessel for LNG transportation is about USD 250 mln), and it is much easier for big companies to raise funds from the financial markets.

On the other hand, prospects and rates of the Russian economy also show that such transformation is necessary. Firstly, extraction volume and export of Russian and transit oil by sea via the Russian ports increase, and there is a growth potential for Russian gas demand (pictures 1, 2). Secondly, consolidation of shipping companies corresponds to the course of Russian economy and state policy development.

The companies may be merged in different ways, including the one when both companies remain juridically independent and keep their brands, which would be reasonable for each participant. Nowadays, there are a lot of examples of it in the world: Frontline – Ship Finance; Stena Bulk – Arlington Tankers; Teekay Shipping – Teekay LNG; OSG – Double Hull Tankers.

The idea of the shipping companies merge is almost six years old; however till recently it had more opponents than supporters: the top-managers of both companies, minority shareholders of Novoship, administration of the Krasnoyarsk region and other interested persons were against the merge. Nowadays, the companies Boards of Directors have already approved the scheme of the merge, according to which Novoship is to become a daughter company of Sovcomflot, paying by its state shareholding for the additional issue of the shares of the latter.

In October 2006, when the Ministry of Transport only had to get the approval from the RF Government to complete the deal, the Ministry of Economic Development and Trade opposed it on the basis of the lack of clear evaluation for the offered scheme, as well as for alternative versions of the merge. Equally in the documents, there are no offers by the Ministry of Transport or terms of the future privatization of the united shipping company by means of IPO or direct sale.

Using this delay, the top-management of Novoship proclaimed that the company should not become totally dependent on Sovcomflot, which is owned by the state (the state owns 50.3% of Novoship shares or 67.1% of voting shares). The President of the company Sergey Terekhin commented on the idea of merging the shipping companies, «It is hard to answer the question. The only thing I can confirm is that Sovcomflot has plans to obtain Novoship’s shareholding. There were also oral assurances that the structure of Novoship joint-stock company will not change, i.e. there will be a company with shareholders, company’s charter, regulations on the Board of Directors and the Board. If the scheme of the merge is realized this way, I believe that it is not a problem. Our company will develop, and Sovcomflot will control us for the benefit of all the shareholders». S.Terekhin also mentioned some pros and contras of the future integration. On the one hand, these are joint projects, sharing of risks, reduction of expenses, and no competition. On the other hand, he would like to avoid such a situation when Sovcomflot will be the only one to make decisions.

Thus, the sixth year in the history of the two largest Russian ship owners’ merge is almost over, and the situation seems to resume its own course, while no agreement has been reached either between the companies or by the RF Government. The majority of the experts in the sector believe that the key decisions on the companies’ integration will hardly be made before 2008.



Ambitions of Primorye

In spite of significant losses suffered by the Russian top three shipping company OAO Primorsk Shipping Company because of the breakage of the fleet and long-term fleet idling before loading at the beginning of the year, in 2006 the company has the most ambitious projects.

In the framework of fleet enlargement, this year the shipping company has obtained an ice-breaking towboat «Polar Pevek», constructed in cooperation with the Norwegian largest shipping company RIEBER Shipping AS. Besides, in April 2006, the Russian flag was hoisted at the ice-breaking supply vessel «Pacific Endeavour», which was the first from the series of special vessels constructed by the joint company PRISCO SWIRE Offshore to work at the Sakhalin-2 project. As a result, by the end of 2006, the company’s fleet amounts to 34 tankers of different types with the total deadweight of about two mln tons.

In 2006 the shipping company approved the strategy aiming to enlarge its fleet by several times: by 2015 the total deadweight of the company’s tanker fleet is to increase fourfold to 4 mln tons. The realization of the programme has already started. Seven new tankers of ice class with the deadweight of 50 thousand tons each are being constructed at the shipbuilding yards of South Korea. The vessels will join PRISCO’s fleet by 2009.

According to the chairperson of the PRISCO’s Board of Directors Alexander Kirilichev, the project cost is USD 250 mln: it will be financed by credits taken from foreign banks. The total cost of the programme is USD 2.5 bln. It is planned to construct no less than 20 new tankers that will be able to work under the complicated ice conditions of the Far Eastern sea basin and on the Northern sea route. Each of the vessels will cost USD 53.6 mln. The company chose South Korean shipbuilding yards because no Russian enterprise constructs vessels with the deadweight of more than 50 thousand tons. 

As it has been already mentioned, in 2006 the shipping company in cooperation with OAO Sovcomflot won a tender on export transportation of crude oil from the De-Kastri terminal in the frameworks of Sakhalin-1 project. The first consignment was loaded on the aframax type tanker «Viktor Titov», owned by PRISCO.

In the framework of Sakhalin-2 project, PRISCO and Sakhalin Energy concluded a contract on charter of two aframax type tankers. The contract envisages that the tankers «Governor Farhutdinov» and «Sakhalin Island» with the deadweight of 108 thousand tons each will transport oil from the Sakhalin shelf. 

All company’s projects are oriented at the Russian freight base (firstly, at the Sakhalin oil projects). The company plans to increase cargo transportation from the Sakhalin shelf to 4 mln tons annually. Besides, PRISCO is going to participate in transportation of oil to the countries of Asian Pacific Region from the oil pipeline Eastern Siberia – the Pacific Ocean.

A.Kirilichev notes that when carrying out the projects, the company will compete with the Russian largest vessel owner Sovcomflot. However, competition makes work even more interesting. For example, LNG transportation is a new business for Russian shipping companies, and both companies are just beginners in the sector.

To carry out the project, the shipping company plans to use means acquired from shares exchange sale as investment resources. The issuance was held specially for it by means of shareholding split, and nowadays about 16% of the company’s shares are traded on the exchange. In case loan funds are not enough to construct the vessels, PRISCO is ready to sell additional 5% shareholding on the exchange, which will enable to earn another USD 40 mln.

Taking the development strategy into account, the company’s capitalization may increase by 30-40% in the next 3-4 years. Experts believe that in spite of the fact that PRISCO is able to realize the projects of tanker fleet development and become the leader among Russian shipping companies, it will hardly manage it, especially taking into consideration the future merge of the two largest vessel owners. Meanwhile, PRISCO, in contrast to Sovcomflot and Novoship, which are owned by the state, is a private shipping company, so it has much more freedom and stronger motivation to get maximum revenue.



Headed for Intermodal System

The year of 2006 was successful for the Far Eastern Shipping Company, Russian largest company specializing in container transportation. Its total fleet deadweight has amounted to 1.1 mln tons, whereof 40% are vessels for container transportation, and the rest 60% are vessels of other types. The container fleet of FESCO consists of 28 vessels with the carrying capacity of 32,000 TEU (56% up comparing to the figures at the beginning of 2006). The company’s container transportation volume increases constantly: in 2005 it was 400,000 TEU (sea transportation mainly), in 2006 it is expected to amount to 450,000 TEU.

In February, 2006, the state’s shareholding in the shipping company was purchased by ZAO Agency of Investments and Fuel and Energy Complex Development (a subsidiary of Industrial Investors group of companies, which controlled 62% of FESCO’s shares). During 2006, the group of companies was actively carrying out the strategic plan of Intermodal transport system creation. The target of the latter is to provide through multimodal transportation (by sea, railway and road hauliers) of containerized cargoes on the territory of the Russian Federation and neighbouring states. Taking into account the vast territory of Russia, Intermodal through transportation is the basic service, most popular with foreign trade clients. Part of the company’s common strategy aimed at launching such business is intensive renewal and simultaneous increase of the amount and capacity of the container fleet. As a result, the volume of investments into the fleet reached USD 270 mln in 2006, and about USD 400 mln according to the contracts for the next three years. Nowadays, the company ordered 10 vessels, including three ships for container transportation with the capacity of 1,080 TEU each, which are being constructed at the Jinling shipyard (China), three vessels with the capacity of 1,730 TEU and four vessels with the capacity of 3,091 TEU, being constructed at the Szczecin shipyard (Poland). All the vessels will join FESCO’s fleet before the end of 2009, so its container carrying capacity will increase to 50,000 TEU.

Thus, it is possible to say that during the next three years, FESCO’s container fleet will mainly consist of new high-speed vessels of the type and size most suitable for being serviced in the Russian ports, and when the charter contracts are over, it will be re-routed to the company’s own lines.

Another direction of the company’s development in the framework of the chosen strategy besides fleet renewal is enlargement and purchase of railway, terminal and motor companies, improvement of their interaction, development of the infrastructure and the scheme of work according to the «one-window» principle. FESCO continues to construct its own special port railway terminal in Vladivostok. The terminal is aimed to handle, warehouse and service freight in refrigerated containers. 

Besides, in 2006 Fest Qantum group of companies and the Far Eastern Shipping Company launched a strategic alliance for joint management and development of the First Container Terminal (FCT, the port of Saint-Petersburg) and the Baltic Container Terminal (the port of Ust-Luga). Nowadays, FCT is the leader of the terminal business in the RF (according to forecasts, the container handling volume is to amount to 870,000 TEU in 2006), and the project capacity of the first stage of the Baltic terminal is 600,000 TEU. Each of the parts will own 50% shareholding in the terminals. The united efforts of the two largest Russian companies operating on the container transportation market will enable to provide Russian and foreign cargo owners with door-to-door delivery in accordance with the world standards. It is to make for container transportation growth on the territory of the RF, firstly in the framework of the transport corridors «East-West» and «North-South».

As for the company’s work on the international container transportation market, in November 2006, FESCO and Wallem Shipmanagement Limited (Hong Kong) launched a joint venture. The new company will manage FESCO’s container fleet operating in the Pacific basin and flying foreign flags. For partial financing of the purchases, the shipping company attracted a USD 300 mln loan from ING Bank NV (London). The company is to pay it back by issuing shares and bonds in Q2 of 2007 (in order to create a reserve capital to pay credits back, FESCO sold 10 refrigerated vessels to South Korean company Yenwin International Freight Ltd for USD 55 mln).

FESCO also actively participates in the development of transportation along the Russian Railways network: a joint venture ZAO Russian Troyka, launched on parity basis with OAO RZD in 2004, specializes in container transportation operates the Transsib. Another company - Incotec Trans Service - operates in the North-Western region and on the Transsiberian railway. It specializes in container transportation, especially aluminium, using its own and rented rolling stock. Besides, the shipping company’s assets include Dalreftrans, one of Russia’s largest multimodal carriers of containerized refrigerated cargoes, and TIS forwarding company, providing 34% of container transportation along the Transsib. 

By the end of 2006, the Industrial Investors group of companies completed the next stage of Intermodal transport holding company creation on the basis of the Far Eastern Shipping Company. It concluded a contract for step-by-step purchase of one of the largest Russian railway operators – Transgarant company. As a result, the railway companies incorporated into the FESCO group of companies operate a wagon park of over 14,000 units, whereof 70% are the property of the group. 

FESCO has purchased 50% of Transgarant company at the next stage the shareholders of the remaining shares will exchange them for the shipping company’s shares, for which an additional issue of FESCO’s shares is to be held. Thus, Transgarant will be a 100% subsidiary of the enlarged holding company FESCO, and its owners will become shareholders of FESCO and partners of the Industrial Investors. This stage is to be completed in Q1 of 2007.

The top-management of the Industrial Investors group of companies believe that the merge of Transgarant and OAO FESCO will enable to provide clients with a new complex service of «door-to-door» delivering of all bulk and non-containerized cargoes, similar to the container transportation service provided by Russian Troyka since 2005. The experience of the new partners will enable to improve the efficiency of management of all the railway assets of the group and provide a strong impulse for their further development. 



«Natali» Comes Out

OAO Murmansk Sea Shipping Company, another large Russian vessel owner, transports 40% of the total volume of cargo carried by vessels flying the RF flag. The company plays the key role in freight delivering to the Arctic regions of Russia, providing up to 80% of transportation on the North Sea Route in the recent years. The fleet consists of 47 vessels with the deadweight of 874 thousand tons.

The most prospective direction of the shipping company’s development is the participation in hydrocarbon raw materials transportation to Europe and the USA. To realize the plans, construction of 47 th. tons dwt. tankers and purchase of sue tanker are necessary.

To improve the company’s competitiveness on the charter market, the Murmansk Sea Shipping Company carries out the programme of fleet renewal, cooperating actively with Chinese ship builders. The most important purchase of 2006 is the new bulk carrier «Grumant». It is the first vessel of the series of bulk carriers ordered at the Chinese shipyard Cxengxi Shipyard (JianYyin). The company ordered the aggregates for the bulk carriers constructed in China at Bryansk machine building plant. They concluded a contract for construction of three marine engines with the power of 9,480 kilowatt and the rotation frequency of 127 revs per minute. Bryansk machine building plant is to produce the first engine in February 2007, the second – in May 2007, and the last one – in April 2008. The vessels will transport freight in the Baltic and the White Seas. 

Moreover, in 2006 the company completed the unique modernization of the supertanker «Natali», purchased in 2005. It is one of the largest tankers flying the Russian flag. Until nowadays, no shipping company in the world succeeded in the re-equipment of a vessel with the deadweight of over 140 thousand tons. Now «Natali» meets all the international requirements to tanker exploitation. 

Using its available resource potential to the maximum, the company initiates and implements efficient business projects, including the ones concerning vessel modernization, oil terminals construction etc. Thus, in 2006, the company purchased 55.3% of OAO Northern River Shipping Company (Arkhangelsk). The cost of the contract amounted to RUR 94.5 mln.

The financing of the mentioned items amounted to RUR 2.3 bln, in spite of the significant reduction of the revenue from the state ice-breaking fleet asset management. The reasons for the latter are the lack of financing from the budget, and the refusal of several users of the North Sea Route to pay for piloting services. 



To Sum Up

The large scale of the projects carried out by the shipping companies in 2006 justifies the largest Russian vessel owners’ course for closer cooperation when realizing most important projects (not excluding competition). Besides, recently there is a tendency of companies enlargement by purchasing adjacent businesses and investing funds into development of the most prospective sectors of sea transportation. It is too early to speak of a companies’ consolidation in the sector (especially, of the merge of Sovcomflot and Novoship), although, some steps are already being made. Perhaps, the ambitions of the shipping companies prevent them from making a compromise, in spite of the fact that it is much easier for large companies to compensate for the losses from charter rates changes, because they can react to the changes of demand in different sectors of the market faster. Large companies also have more opportunities to renew and modernize their tanker fleet. The worsening market situation and vessel owners significant obligations stimulate the consolidation processes in the sector.



NADEZHDA VTORUSHINA
    [~DETAIL_TEXT] => 

Sovcomflot Increases Fleet

The results of nine months of 2006 show that the revenue of the Russian largest vessel owner (in terms of deadweight) OAO Sovcomflot amounted to USD 380.4 mln (27.6% up year-on-year), and its profit made USD 124.2 mln (40% up year-on-year).

During 2006 Sovcomflot has continued to enlarge its fleet, realizing the target of entering new markets which have a nice potential of growth on the basis of Russian and foreign freight base. Undoubtedly, the company’s most important purchase is the large-capacity tanker «Vladimir Tikhonov», named in honour of one of the founders of Sovcomflot. The 162 th tons dwt vessel is the largest one in the history of the Russian trade fleet. It was designed specially to transport oil from the port of Primorsk: the draft of the vessel enables to take aboard 1 mln barrels of oil, i.e. by 50% more than the draft of other vessels operating in the Baltic region. 

Besides, the company’s fleet enlarged by three tankers for oil products transportation in 2006. As a result, by the middle of November, there are 56 vessels with the total deadweight of 4.33 mln tons in the company’s fleet (at the beginning of the year, the figure was 50 vessels), not taking into account the 12 tankers for chemicals transportation with the total deadweight of 130 thousand tons, purchased in cooperation with OAO Novoship from Marpetrol company. 

The company continued its active cooperation with FGUP Admiralty Shipyards. They concluded a contract for construction of two Arctic tankers-shuttles, designed to transport oil from the Prirazlomnoe field as of 2008, and three 47 th.tons dwt tankers for oil products transportation, thus proceeding with the batch of six vessels, ordered from Admiralty Shipyards before. In the company’s stock of orders there are 21 vessels more with the total deadweight of about 1.36 mln tons (15 tankers and 6 vessels for LNG transportation).

The agreement concluded by OAO Gazprom, OAO Sovcomflot and ZAO Sevmorneftegaz concerns oil transportation from the Prirazlomnoe field, and plays an essential role in the development of the company. It is planned that the maximum annual volume of the transported oil will amount to 6.5 mln tons. Having concluded the contract, Sovcomflot enlarged its stock of industrial projects, including Sakhalin-1 and Sakhalin-2, Varandey and Tangu.

In November 2006, Sovcomflot started to transport hydrocarbon fuel, extracted at the Sakhalin shelf, together with Primorsk Shipping Company. These two shipping companies constructed five tankers of 100,000 tons displacement specially for the project. Now the vessels are chartered by Exxon company for a 10 years term. Annually about 12.5 mln tons of oil will be carried from the port of De-Kastri during 40 years.

Along with the priority development of energy projects in Russia, OAO Sovcomflot actively develops its international business. In September 2006, OAO Sovcomflot, Japanese shipping company NYK, Indonesian company Samudera Shipping Services and a bank consortium concluded a credit agreement. The long-term credit of USD 400 mln was destined to construct and purchase two tankers for LNG transportation, which are to start work in the framework of the Tangu international project in 2008. The vessels, chartered for 16 and 20 years, will transport LNG to consumers in the USA and Asia. A Russian vessel owner’s participation in transportation of LNG from Indonesia was the result of Sovcomflot’s victory in an international tender, held in 2005. 



No Agreement, No Success

However, the most important projects of OAO Sovcomflot carried out this year are the ones realized in cooperation with OAO Novorossiysk Shipping Company (Novoship): joint insurance of both companies’ fleet, which enabled to save about USD 1 mln, and purchase of W.W. Marpetrol, S.A, a shipping company leading in the Spanish chemical transportation market. The last contract enables both companies to strengthen their positions in the European segment of a prospective market of chemicals transportation by sea. Besides, such a purchase enlarges the pack of services offered by Russian carriers to national and foreign clients.

The two largest Russian shipping companies have been cooperating in different sectors from significant joint purchases to staff training for several years. It is no secret that if they are merged, the new shipping company will be one of the top five largest tanker companies in terms of the fleet deadweight (about 7.7 mln tons), and it will be the third in terms of the assets value (up to USD 4 bln). As a reminder, while Sovcomflot is currently the largest Russian vessel owner according to fleet tonnage, Novoship is the leader among the Russian companies according to the amount of private shareholders and vessels (in 2006 the company owns 62 vessels with the total deadweight of 3.8 mln tons).

On the one hand, the idea of consolidation is the effect of the processes that take place on the world shipping. It is necessary to provide the proper level of service and safety standards, which is required by clients – Russian and international oil and gas companies. The merge is also necessary because of the increasing capital intensity of the sector, the growing cost of vessels and large scale transportation processes (the price of a vessel for LNG transportation is about USD 250 mln), and it is much easier for big companies to raise funds from the financial markets.

On the other hand, prospects and rates of the Russian economy also show that such transformation is necessary. Firstly, extraction volume and export of Russian and transit oil by sea via the Russian ports increase, and there is a growth potential for Russian gas demand (pictures 1, 2). Secondly, consolidation of shipping companies corresponds to the course of Russian economy and state policy development.

The companies may be merged in different ways, including the one when both companies remain juridically independent and keep their brands, which would be reasonable for each participant. Nowadays, there are a lot of examples of it in the world: Frontline – Ship Finance; Stena Bulk – Arlington Tankers; Teekay Shipping – Teekay LNG; OSG – Double Hull Tankers.

The idea of the shipping companies merge is almost six years old; however till recently it had more opponents than supporters: the top-managers of both companies, minority shareholders of Novoship, administration of the Krasnoyarsk region and other interested persons were against the merge. Nowadays, the companies Boards of Directors have already approved the scheme of the merge, according to which Novoship is to become a daughter company of Sovcomflot, paying by its state shareholding for the additional issue of the shares of the latter.

In October 2006, when the Ministry of Transport only had to get the approval from the RF Government to complete the deal, the Ministry of Economic Development and Trade opposed it on the basis of the lack of clear evaluation for the offered scheme, as well as for alternative versions of the merge. Equally in the documents, there are no offers by the Ministry of Transport or terms of the future privatization of the united shipping company by means of IPO or direct sale.

Using this delay, the top-management of Novoship proclaimed that the company should not become totally dependent on Sovcomflot, which is owned by the state (the state owns 50.3% of Novoship shares or 67.1% of voting shares). The President of the company Sergey Terekhin commented on the idea of merging the shipping companies, «It is hard to answer the question. The only thing I can confirm is that Sovcomflot has plans to obtain Novoship’s shareholding. There were also oral assurances that the structure of Novoship joint-stock company will not change, i.e. there will be a company with shareholders, company’s charter, regulations on the Board of Directors and the Board. If the scheme of the merge is realized this way, I believe that it is not a problem. Our company will develop, and Sovcomflot will control us for the benefit of all the shareholders». S.Terekhin also mentioned some pros and contras of the future integration. On the one hand, these are joint projects, sharing of risks, reduction of expenses, and no competition. On the other hand, he would like to avoid such a situation when Sovcomflot will be the only one to make decisions.

Thus, the sixth year in the history of the two largest Russian ship owners’ merge is almost over, and the situation seems to resume its own course, while no agreement has been reached either between the companies or by the RF Government. The majority of the experts in the sector believe that the key decisions on the companies’ integration will hardly be made before 2008.



Ambitions of Primorye

In spite of significant losses suffered by the Russian top three shipping company OAO Primorsk Shipping Company because of the breakage of the fleet and long-term fleet idling before loading at the beginning of the year, in 2006 the company has the most ambitious projects.

In the framework of fleet enlargement, this year the shipping company has obtained an ice-breaking towboat «Polar Pevek», constructed in cooperation with the Norwegian largest shipping company RIEBER Shipping AS. Besides, in April 2006, the Russian flag was hoisted at the ice-breaking supply vessel «Pacific Endeavour», which was the first from the series of special vessels constructed by the joint company PRISCO SWIRE Offshore to work at the Sakhalin-2 project. As a result, by the end of 2006, the company’s fleet amounts to 34 tankers of different types with the total deadweight of about two mln tons.

In 2006 the shipping company approved the strategy aiming to enlarge its fleet by several times: by 2015 the total deadweight of the company’s tanker fleet is to increase fourfold to 4 mln tons. The realization of the programme has already started. Seven new tankers of ice class with the deadweight of 50 thousand tons each are being constructed at the shipbuilding yards of South Korea. The vessels will join PRISCO’s fleet by 2009.

According to the chairperson of the PRISCO’s Board of Directors Alexander Kirilichev, the project cost is USD 250 mln: it will be financed by credits taken from foreign banks. The total cost of the programme is USD 2.5 bln. It is planned to construct no less than 20 new tankers that will be able to work under the complicated ice conditions of the Far Eastern sea basin and on the Northern sea route. Each of the vessels will cost USD 53.6 mln. The company chose South Korean shipbuilding yards because no Russian enterprise constructs vessels with the deadweight of more than 50 thousand tons. 

As it has been already mentioned, in 2006 the shipping company in cooperation with OAO Sovcomflot won a tender on export transportation of crude oil from the De-Kastri terminal in the frameworks of Sakhalin-1 project. The first consignment was loaded on the aframax type tanker «Viktor Titov», owned by PRISCO.

In the framework of Sakhalin-2 project, PRISCO and Sakhalin Energy concluded a contract on charter of two aframax type tankers. The contract envisages that the tankers «Governor Farhutdinov» and «Sakhalin Island» with the deadweight of 108 thousand tons each will transport oil from the Sakhalin shelf. 

All company’s projects are oriented at the Russian freight base (firstly, at the Sakhalin oil projects). The company plans to increase cargo transportation from the Sakhalin shelf to 4 mln tons annually. Besides, PRISCO is going to participate in transportation of oil to the countries of Asian Pacific Region from the oil pipeline Eastern Siberia – the Pacific Ocean.

A.Kirilichev notes that when carrying out the projects, the company will compete with the Russian largest vessel owner Sovcomflot. However, competition makes work even more interesting. For example, LNG transportation is a new business for Russian shipping companies, and both companies are just beginners in the sector.

To carry out the project, the shipping company plans to use means acquired from shares exchange sale as investment resources. The issuance was held specially for it by means of shareholding split, and nowadays about 16% of the company’s shares are traded on the exchange. In case loan funds are not enough to construct the vessels, PRISCO is ready to sell additional 5% shareholding on the exchange, which will enable to earn another USD 40 mln.

Taking the development strategy into account, the company’s capitalization may increase by 30-40% in the next 3-4 years. Experts believe that in spite of the fact that PRISCO is able to realize the projects of tanker fleet development and become the leader among Russian shipping companies, it will hardly manage it, especially taking into consideration the future merge of the two largest vessel owners. Meanwhile, PRISCO, in contrast to Sovcomflot and Novoship, which are owned by the state, is a private shipping company, so it has much more freedom and stronger motivation to get maximum revenue.



Headed for Intermodal System

The year of 2006 was successful for the Far Eastern Shipping Company, Russian largest company specializing in container transportation. Its total fleet deadweight has amounted to 1.1 mln tons, whereof 40% are vessels for container transportation, and the rest 60% are vessels of other types. The container fleet of FESCO consists of 28 vessels with the carrying capacity of 32,000 TEU (56% up comparing to the figures at the beginning of 2006). The company’s container transportation volume increases constantly: in 2005 it was 400,000 TEU (sea transportation mainly), in 2006 it is expected to amount to 450,000 TEU.

In February, 2006, the state’s shareholding in the shipping company was purchased by ZAO Agency of Investments and Fuel and Energy Complex Development (a subsidiary of Industrial Investors group of companies, which controlled 62% of FESCO’s shares). During 2006, the group of companies was actively carrying out the strategic plan of Intermodal transport system creation. The target of the latter is to provide through multimodal transportation (by sea, railway and road hauliers) of containerized cargoes on the territory of the Russian Federation and neighbouring states. Taking into account the vast territory of Russia, Intermodal through transportation is the basic service, most popular with foreign trade clients. Part of the company’s common strategy aimed at launching such business is intensive renewal and simultaneous increase of the amount and capacity of the container fleet. As a result, the volume of investments into the fleet reached USD 270 mln in 2006, and about USD 400 mln according to the contracts for the next three years. Nowadays, the company ordered 10 vessels, including three ships for container transportation with the capacity of 1,080 TEU each, which are being constructed at the Jinling shipyard (China), three vessels with the capacity of 1,730 TEU and four vessels with the capacity of 3,091 TEU, being constructed at the Szczecin shipyard (Poland). All the vessels will join FESCO’s fleet before the end of 2009, so its container carrying capacity will increase to 50,000 TEU.

Thus, it is possible to say that during the next three years, FESCO’s container fleet will mainly consist of new high-speed vessels of the type and size most suitable for being serviced in the Russian ports, and when the charter contracts are over, it will be re-routed to the company’s own lines.

Another direction of the company’s development in the framework of the chosen strategy besides fleet renewal is enlargement and purchase of railway, terminal and motor companies, improvement of their interaction, development of the infrastructure and the scheme of work according to the «one-window» principle. FESCO continues to construct its own special port railway terminal in Vladivostok. The terminal is aimed to handle, warehouse and service freight in refrigerated containers. 

Besides, in 2006 Fest Qantum group of companies and the Far Eastern Shipping Company launched a strategic alliance for joint management and development of the First Container Terminal (FCT, the port of Saint-Petersburg) and the Baltic Container Terminal (the port of Ust-Luga). Nowadays, FCT is the leader of the terminal business in the RF (according to forecasts, the container handling volume is to amount to 870,000 TEU in 2006), and the project capacity of the first stage of the Baltic terminal is 600,000 TEU. Each of the parts will own 50% shareholding in the terminals. The united efforts of the two largest Russian companies operating on the container transportation market will enable to provide Russian and foreign cargo owners with door-to-door delivery in accordance with the world standards. It is to make for container transportation growth on the territory of the RF, firstly in the framework of the transport corridors «East-West» and «North-South».

As for the company’s work on the international container transportation market, in November 2006, FESCO and Wallem Shipmanagement Limited (Hong Kong) launched a joint venture. The new company will manage FESCO’s container fleet operating in the Pacific basin and flying foreign flags. For partial financing of the purchases, the shipping company attracted a USD 300 mln loan from ING Bank NV (London). The company is to pay it back by issuing shares and bonds in Q2 of 2007 (in order to create a reserve capital to pay credits back, FESCO sold 10 refrigerated vessels to South Korean company Yenwin International Freight Ltd for USD 55 mln).

FESCO also actively participates in the development of transportation along the Russian Railways network: a joint venture ZAO Russian Troyka, launched on parity basis with OAO RZD in 2004, specializes in container transportation operates the Transsib. Another company - Incotec Trans Service - operates in the North-Western region and on the Transsiberian railway. It specializes in container transportation, especially aluminium, using its own and rented rolling stock. Besides, the shipping company’s assets include Dalreftrans, one of Russia’s largest multimodal carriers of containerized refrigerated cargoes, and TIS forwarding company, providing 34% of container transportation along the Transsib. 

By the end of 2006, the Industrial Investors group of companies completed the next stage of Intermodal transport holding company creation on the basis of the Far Eastern Shipping Company. It concluded a contract for step-by-step purchase of one of the largest Russian railway operators – Transgarant company. As a result, the railway companies incorporated into the FESCO group of companies operate a wagon park of over 14,000 units, whereof 70% are the property of the group. 

FESCO has purchased 50% of Transgarant company at the next stage the shareholders of the remaining shares will exchange them for the shipping company’s shares, for which an additional issue of FESCO’s shares is to be held. Thus, Transgarant will be a 100% subsidiary of the enlarged holding company FESCO, and its owners will become shareholders of FESCO and partners of the Industrial Investors. This stage is to be completed in Q1 of 2007.

The top-management of the Industrial Investors group of companies believe that the merge of Transgarant and OAO FESCO will enable to provide clients with a new complex service of «door-to-door» delivering of all bulk and non-containerized cargoes, similar to the container transportation service provided by Russian Troyka since 2005. The experience of the new partners will enable to improve the efficiency of management of all the railway assets of the group and provide a strong impulse for their further development. 



«Natali» Comes Out

OAO Murmansk Sea Shipping Company, another large Russian vessel owner, transports 40% of the total volume of cargo carried by vessels flying the RF flag. The company plays the key role in freight delivering to the Arctic regions of Russia, providing up to 80% of transportation on the North Sea Route in the recent years. The fleet consists of 47 vessels with the deadweight of 874 thousand tons.

The most prospective direction of the shipping company’s development is the participation in hydrocarbon raw materials transportation to Europe and the USA. To realize the plans, construction of 47 th. tons dwt. tankers and purchase of sue tanker are necessary.

To improve the company’s competitiveness on the charter market, the Murmansk Sea Shipping Company carries out the programme of fleet renewal, cooperating actively with Chinese ship builders. The most important purchase of 2006 is the new bulk carrier «Grumant». It is the first vessel of the series of bulk carriers ordered at the Chinese shipyard Cxengxi Shipyard (JianYyin). The company ordered the aggregates for the bulk carriers constructed in China at Bryansk machine building plant. They concluded a contract for construction of three marine engines with the power of 9,480 kilowatt and the rotation frequency of 127 revs per minute. Bryansk machine building plant is to produce the first engine in February 2007, the second – in May 2007, and the last one – in April 2008. The vessels will transport freight in the Baltic and the White Seas. 

Moreover, in 2006 the company completed the unique modernization of the supertanker «Natali», purchased in 2005. It is one of the largest tankers flying the Russian flag. Until nowadays, no shipping company in the world succeeded in the re-equipment of a vessel with the deadweight of over 140 thousand tons. Now «Natali» meets all the international requirements to tanker exploitation. 

Using its available resource potential to the maximum, the company initiates and implements efficient business projects, including the ones concerning vessel modernization, oil terminals construction etc. Thus, in 2006, the company purchased 55.3% of OAO Northern River Shipping Company (Arkhangelsk). The cost of the contract amounted to RUR 94.5 mln.

The financing of the mentioned items amounted to RUR 2.3 bln, in spite of the significant reduction of the revenue from the state ice-breaking fleet asset management. The reasons for the latter are the lack of financing from the budget, and the refusal of several users of the North Sea Route to pay for piloting services. 



To Sum Up

The large scale of the projects carried out by the shipping companies in 2006 justifies the largest Russian vessel owners’ course for closer cooperation when realizing most important projects (not excluding competition). Besides, recently there is a tendency of companies enlargement by purchasing adjacent businesses and investing funds into development of the most prospective sectors of sea transportation. It is too early to speak of a companies’ consolidation in the sector (especially, of the merge of Sovcomflot and Novoship), although, some steps are already being made. Perhaps, the ambitions of the shipping companies prevent them from making a compromise, in spite of the fact that it is much easier for large companies to compensate for the losses from charter rates changes, because they can react to the changes of demand in different sectors of the market faster. Large companies also have more opportunities to renew and modernize their tanker fleet. The worsening market situation and vessel owners significant obligations stimulate the consolidation processes in the sector.



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