State Corporations

Keeping track of Russia’s Railways

Pavel Luzin explains how keeping track of Russia’s railway plans can deliver insights into the country’s political mechanics

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Russia has been a railway country for the last hundred and fifty years. The railways were vital to economic life and have played a key role in domestic and foreign policy. It is enough to recall the role of railways in the Russian revolutions of 1905 and 1917. We can also remember the importance of the Chinese Eastern Railway for the foreign policy of Tsarist Russia first, and then for the Soviet Union. In most recent history, the railways have always provided the foundation for domestic trade. Moreover, the Russian authorities see the railways as one of those institutions that ensure the country’s integrity, security and growth. As a result, railway development programmes give us a view into the Russian political and economic system as a whole.

The transport paradox and the system of power

With 87,000 km of railways, Russia ranks third in the world after the United States and China, with their rail networks of about 250,000 and 124,000 km respectively. Interestingly, Russia is the only country with a developed railway network where this mode of transport still plays a dominant role in domestic cargo transport. When it comes to the total cargo turnover, railways account for 46%, or 2,600 out of over 5,600 billion t/km (in 2005: 40% and 1,858 billion t/km). Incidentally, pipelines account for almost 48% of cargo turnover (2,670 billion t/km), i.e. railways account for 87% of the cargo turnover if we deduct oil and gas pipelines.

By comparison, the cargo turnover in United States has relied on roads for decades. The share of railways in the U.S. cargo turnover is less than 34%. In Germany, railways lost their dominance in 1960–1990 in favour of road transport: the share of railways in cargo turnover fell from 56% to 20.5% and has since declined. In India, the share of railways in cargo turnover has also shrunk, falling from 62% to 27% in 1990–2015, giving way to road transport. In China, the share of railways in the total cargo turnover fell from 40.5% to 15% between 1990 and 2019. In that time, the share of water transport rose from 44% to 52%, and the share of road transport rose from 13% to 30%. Simply put, as a consumer economy expands, cargo flows within countries can grow more easily with transport routes that are more flexible than rail. This, of course, only happens in conjunction with investment in the relevant infrastructure and a “green light” for business.

Russia has another peculiarity in this field: less than 17% of the total cargo tonnage, in absolute terms, is transported by rail: 1,279 million tons in 2019 versus approximately 5,500 million tons in 2019 (67%) tons by road. The only problem is that cargo in Russia travels an average distance of only 47 km (although this figure was 29 km about fifteen years ago), while the average distance travelled by rail is more than 1800 km. Simply put, road transport supports the exchange of goods mainly within agglomerations and regions, while the Russian national market is connected mainly by rail.

However, if look at what is transported by the Russian railways, we will see that hard coal accounts for 372 million out 1,279 million tons of cargo. Combined with iron ore (120.2 million tons) and mineral fertilisers (60.5 million tons), coal is one of the goods that have been growing in volume over the last decade and a half, with only slight fluctuations. The volumes of all other types of cargo show varied dynamics, but they are far from peaking, recorded for most of them in 2007. At that time, more than 1,344 million tons were transported by rail, which is the maximum figure for the period of 2005–2019.

Overall, this state of affairs allows us to draw conclusions about the weak degree of development of the Russian commodity market, about the shortage of motorways, and an unfavourable environment for doing business. This picture also leads to the conclusion that the political and economic stagnation of the past decade contributed to the increase in the already high share of railways in Russia’s cargo transport, even though the total transported tonnage has decreased.

Despite all the facts listed above, the Russian authorities continue to rely on expanding the railway network. For instance, in 2019 Russian Railways used money from the federal budget, the National Welfare Fund and its own funds to invest more than 553 billion roubles (almost USD 8.5 billion), or 6.4 million roubles (USD 98.3 thousand) for every kilometre of the railway network, excluding the costs of locomotives and rail cars. For the sake of comparison, in 2019 Russia spent over 917 billion roubles (USD 14.2 billion) on road maintenance and expansion, which is a little over 760 thousand roubles (USD 12,000) per each kilometre out of approx. 1.2 million kilometres of paved roads, including urban streets.

The underlying reasons are political. The Kremlin is not concerned about the development of the consumer market or inter-regional economic communications. Otherwise, it would need to change its approach to transport development, as well as the business environment for SMEs, the tax system and decentralise the power relations. The Russian authorities have prioritised the support for large corporations — cornerstones of the political mechanism in Russia. And such corporations still rely on railways (and pipelines) in their business. Russian Railways are an important part of this mechanism. Infrastructure spending in Russia is a source of rent for various strata of the political establishment and a means of buying their loyalty. The distribution of rent helps to sustain the established order of power; it is much easier for the Kremlin to control the recipients of rent via the railways.

Surrogate ideology: coal, containers and giant construction projects

The political and economic singularities described above have also defined the strategy of the Russian Railways. Large-scale railway projects—from the modernisation of the Trans-Siberian and Baikal-Amur Railway to rail connections with ports—seem to be designed to expand the export potential of Russia’s raw materials sector and industrial giants. This should also help to diversify the Russian foreign trade relations thanks to the famous “turn towards the East,” driven by both economic and foreign policy considerations. Moreover, Russian Railways is trying to create conditions to replace the reduced cargo tonnage, and increase it to 1,500 million tons by 2025. In other words, it is trying to reverse the trend which emerged after 2007 by making a wilful effort. In practice, the railways have become more dependent on coal exports as a result. Gigantic investments turn into covert subsidies for Siberian coal companies.

Here, the idea of transit container traffic between East Asia and Europe has become a political imperative in recent years: again, the economy goes hand in hand with the interest of the authorities. For instance, the volume of transit containers transported along the Russian railways in 2018 amounted to 553 thousand TEU (the equivalent of a 20-foot container). Of these, almost 351 thousand TEU went from China to Europe and back. Although the Russian Railways had to use at least 4,400 trains for the latter, this represents only 1.5% of the container turnover between the two industrial centres of the modern world. Even the plan to increase all transit container traffic to 1,900 thousand TEU by 2025 will not substantially change the overall picture. However, the struggle for a single-digit share in the volume of transport services for China-Europe trade may stumble when this trade direction is re-examined after the current pandemic. Moreover, container transit served by the Russian Railways largely depends on the Chinese government’s subsidies for its exporters. The latter receive USD 3,000 to 5,000 per each loaded container shipped to Europe by rail. In other words, playing the game of “Eurasian Bridge” may entail additional political costs for Moscow.

Another politicised and extremely pricey project in the strategy pursued by Russian Railways is the construction of a railway to connect Labytnangi with Salekhard and Novy Urengoy — the so-called Northern Latitudinal Railway. This idea is largely a reanimation of Stalin’s idea of a transpolar highway, where work began thanks to the inmates of Soviet concentration camps. Today, this project is designed to carve out 1,000 km of the distance covered by oil and petroleum products from Khanty-Mansiysk and Yamalo-Nenets districts to the ports located in Russia’s North-West. In other words, if the project is implemented, it will be possible to speak again about covert subsidies for raw material companies at the expense of Russian taxpayers.

Nevertheless, such giant projects may not even need any further economic justification: as they are implemented, they will be simply replaced by new ones, such as a railway to Sakhalin or Magadan, coupled with another campaign to develop resources in Eastern Siberia and the Far East at the expense of Russian citizens. Apart from being a method for the authorities to seize and redistribute wealth, giant projects serve as an ideological rationale for the Russian political system.

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