Europe View: Transport a bear for Russia

Europe View: Transport a bear for Russia

LONDON -- Foreign investors who welcomed Russian President Vladimir Putin's re-election as a harbinger of an accelerated move to capitalism should take a closer look at the gaping hole in his grand plan -- a woefully inadequate transport system that would not look out of place in the Third World.

Russia is almost a non-starter in container traffic, perhaps the most reliable yardstick of a country's level of industrialization. Western Europe boasts around one container per 10 people, while Russia manages just one per 100.

Foreign trade flows are improving as ports are upgraded, often by foreign firms, but road and rail transport within the country is continually snarled and service levels are abysmally low by western standards. The trans-Siberian railroad never lured more than a tiny fraction of Europe-Asia seaborne container traffic despite touting attractive rates because shippers couldn't count on reliable service.

Nothing sums up better the dire situation facing transport firms, including an increasing number of western operators following their customers into the country, than the travails of FedEx Corp., whose iconic status as a super-efficient service provider took a big hit a couple of months ago when thousands of packages were stranded in customs at Moscow's Domodedovo airport. Whatever the reason -- a sudden change in the customs code that took officials by surprise, FedEx's decision to change its customs broker -- the fact is Russia couldn't handle a system that works in scores of supposedly less developed nations.

Big Four boosting package deliveries

But it's not all bad news as most sectors are notching up double digit growth, albeit from a low base, accompanied by a mushrooming of private firms taking on the laggard state-owned companies whose performance hasn't improved much from the Soviet era.

The package delivery business has grown by between 25 percent and 40 percent annually over the past three years, and the big four western operators -- TNT, DHL Worldwide, United Parcel Service and FedEx -- account for the bulk of the market. International deliveries currently account for most of the volume but future growth will be driven by domestic shipments as Russia's economy expands, prompting western operators to build up their domestic networks.

DHL has more than 100 offices and TNT has doubled its domestic business over the past year. FedEx remains bullish despite its recent troubles, and plans to add 25 new offices around the country this year to link with sorting depots in Moscow and St. Petersburg. There are over 100 domestic firms in the express market with the top three accounting for between 10 percent and 25 percent of shipments, depending on the type of service. State-owned Russian Post, which has more than 40,000 outlets, has moved into the domestic market and recently took over the international operations of another state company, EMS Garantpost, but it will need time to train its staff and install technology before it can mount a challenge to the established players.

Opportunity in rail market

Private rail operators have captured nearly 10 percent of that market, cashing in on higher paying cargoes like oil products, fertilizers and automobiles.

The success of the private firms has compounded the problems facing state-owned Russian Railways, or RZD, which is burdened with an obligation to carry marginally profitable bulk commodities such as coal and construction materials, and has limited freedom from government-mandated freight rates that have frozen container tariffs since 1995. The rail network, which prospered under communism because it was regarded as a military priority , is rapidly decaying: according to official estimates $20 billion is needed to replace and upgrade worn-out equipment. RZD has set itself ambitious goals, including boosting cargo traffic by 21 percent and trimming delivery times by 10 percent by 2007, but without substantial investment it will continue to lose business to the private sector. But even private companies face obstacles because domestic railcar manufacturers can't keep up with demand and Russia's wider gauge and unique technical specifications mean rolling stock can't be imported.

The government is trying to shake up the transport by eroding the power of the monopolies and easing the entry of western firms. Earlier this month the Duma backed a bill permitting foreign investors to own up to 49 percent of new airlines, up from 25 percent, in a bid to help Russian carriers compete in the world market. The railway ministry overhauled its tariff structure so that rail operators only pay for using the infrastructure and Russian Railways' locomotives, and not for rail cars, a move designed to encourage private firms to buy their own cars and spur competition with the state railway.

What Russia does have going for it is the massive potential of a fast-developing consumer market of 190 million people that eventually will pay dividends for companies shipping goods around its nine times zones. But foreign firms vying for a slice of this alluring market must be prepared to commit themselves to the long haul.

Bruce Barnard is the European correspondent for The Journal of Commerce Online.