Love thy neighbor

Love thy neighbor

When Alex von Stempel is asked how Russia's trade and transportation infrastructure can improve, he suggests the answer can be found on the country's western border. Von Stempel, editorial director of the Transport and Logistics Russia 2004 conference held in April in Moscow, believes that big changes in countries to Russia's west will help boost Russia's container exports, and drive infrastructure upgrades.

Ten countries are scheduled to join the European Union in May - the Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland, Slovakia, Slovenia, Malta and Cyprus. Bulgaria and Romania may be asked to join in 2007, if they can reform their economies enough to meet EU standards. Von Stempel believes the expansion ultimately will work in Russia's favor. Manufacturers, expecting higher costs in these countries as living standards rise, may move their factories to Russia to capitalize on its lower cost structure, von Stempel said.

This development will provide containerized shipping with a much-needed boost, he said. The increase in Russian manufacturing will help balance the country's container imports and exports, now skewed heavily on the import side, he said.

Recent economic news also has been good. Russia, the world's second-largest oil exporter, is expected to export 242 million tons this year, up 17 percent over 2003. Industrial activity is also strong. The country's gross domestic product increased about 6.7 percent in 2003, and is expected to increase by 4.3 percent this year, according to Trade Horizons, a publication of the Port Import/Export Reporting Service, a sister company of The Journal of Commerce.

That's the good news. The bad news is that Russia's road, rail and port structure are all stretched to capacity and need to be upgraded before the country can handle additional trade. "Outside of Moscow and St. Petersburg, the infrastructure in Russia is far from any standard that would be acceptable in se-curity-conscious Western Europe or North America," said David Lind, managing director of NYK Logistics, CIS. "The rail network is perhaps the most extensive, but equipment and rolling stock has not received consistent investment or maintenance."

Russian Railways Co. announced in March that it plans to expand its cargo business by focusing on two goals: increasing oil deliveries to China and increasing container shipments between Europe and Asia. The railroad already moves 80 percent of the country's cargo shipments. Gennady Fedayev, president of Russian Railways, said the company wants to boost freight transportation as a way of supplementing $1 billion in funds earmarked to modernize the railroad.

The railroad wants to increase its cargo volume by 22.5 percent by 2007, surpassing volumes it reached in the early 1990s. It also wants to increase oil shipments to China by nearly 50 percent and to increase container volume fivefold by 2007. The company also announced a partnership with Far Eastern Shipping Co. that will transport 40-foot containers between Europe and Asia, starting in the second half of this year.

But big challenges remain. Russian Railways needs $2.4 billion per year to modernize its rolling stock, a program it plans to begin next year. By 2010, the railway said it will need 7,500 electric and 8,000 diesel locomotives. It also says it will need to buy approximately 17,000 new freight cars every year.

Changing business processes is another major challenge. The country's transport system was built to move bulk products. A shortage of flatcars to move containers is a chronic problem. "The Russian transport system, historically, was used to move big volumes of raw materials from the Urals or Siberia to big industrial centers," said Yury A. Shcherbanin, vice president of the Euro-Asian Transport Union.

And as von Stempel noted, "If you're exporting bulk products, timing deliveries to the port to meet a carrier's schedule isn't as important as it is with container exports."

A container-terminal project at Ust-Luga should help the country serve the next generation of large ships. St. Petersburg, the closest container port to Moscow, is located in the middle of a city of 5 million people, so expansion opportunities are limited. The terminal in Ust-Luga, on the Estonian border, about 70 miles west of St. Petersburg, will be operated by Russia's National Container Co. Eurogate, the European port operator, will have a 26 percent stake in the project. The terminal, which will have capacity for 3 million TEUs, is scheduled to be operational in 2007. National Container Co. said the port will be navigable without the use of an icebreaker for almost 330 days a year and will have a depth of 54 feet.

"We have been generally impressed with the productivity gains at the Port of St. Petersburg, and believe it can accommodate further growth," said Poul Kristensen, managing director of APL CIS. One of the problems for Russia's ports has been the draft restrictions in the Gulf of Finland, where St. Petersburg is located, and in the Bosporus for the Black Sea ports. As a result, those ports are restricted to smaller container ships. "Ust-Luga will overcome the draft problem in the Baltic," Kristensen said.

Ust-Luga should handle between 500,000 and 800,000 TEUs in its first year, but there is room to expand because it is located in a "greenfield" area, said Vladimir Ashurkov, general director of TransCare Russia, an international logistics consulting firm. Russia's import and export container volume reached a record 1.5 million TEUs last year, including containers destined for Russia but unloaded in Baltic and Finnish ports.

That number should increase significantly, Ashurkov said. In Western Europe, container flow is one per every 10 people. In Russia, it's one for every 100. But Russia's economic growth will cut the difference to half of Western Europe's container per capita in 10 years, and equal it in 30 years, he said.

Russian planners see the country's location as an asset, because it can act as a midway point for cargo from Europe to Asia, and from South Asia to Northern and Central Europe. Russia's Ministry of Transport envisions the Port of Olya, on the Caspian Sea, as an alternate transport link for cargo from South Asia to Russia, as well as for Asia-to-Europe cargo. The link would run from the Port of Mumbai, India, to Bandar Abbas on the Caspian in Iran, and then on to Olya. The ministry projects that the link could handle 15 million to 20 million tons of cargo a year, and would save 10 to 15 days in transit for cargo from South Asia to Russia. Most of that cargo now moves to Russia through Black Sea ports or to St. Petersburg. Ashurkov said the plan is a long shot. "The route has a lot of transshipment points, and Iran isn't the safest place for cargo," he said.

Russia also aims to capitalize on its location between China and Europe, using its Trans-Siberian Railway as the link. The 6,000-mile rail corridor connects Moscow to the Pacific Ocean port of Vladivostok. But the corridor has been underutilized. This was graphically illustrated at the Trans-Russia 2004 Con-ference in Moscow in late March when Boris Lukhov, first dep-uty general secretary of the International Coordinating Council on Trans-Siberian Transportation, said the trans-Siberian route for container shipments moving from Asia to Europe will carry no more than 70,000 TEUS this year, even though the line is designed to carry 140,000. A restriction on the availability of flatcars to haul containers was blamed for the shortfall. "The trans-Siberian can take a lot more traffic than it is handling now," Ashurkov said. "But after the breakup of the Soviet Union, Russia was not seen as secure, and transit volumes have decreased significantly."

If Russia is to capitalize on its location, its highway system must also be modernized. "It's clear that the existing road system in Russia is not enough for achieving the economic goals set by President Putin," Dmitry Larionov, a senior officer at the Moscow office of the International Road Transport Union, told the Moscow Times in March. The paper reported that highway funding has fallen from $11.2 billion to approximately $5.6 billion this year, because of changes in the Russian tax code.

The country's Transportation and Communications Ministry estimates that 53 percent of the country's highway system needs repair. Another problem is that Russia's highways tend to radiate from major cities rather than act as links between them, so driving from one city to another can be a logistical challenge.

There has been some progress. The Trans-Siberian Highway has been earmarked for completion, with funding help from the European Bank for Reconstruction and Development. The road, started in the 1960s, is scheduled to be completed by 2008.

In 2001, the government announced a $150 billion National Development Plan to cover 2002 to 2010. Roads are to receive $69 billion; rail, $51 billion; maritime transport, $13 billion; and air transport, $14 billion over this time period. While these funds are needed, private investment is just as crucial to infrastructure improvement, Ashurkov said.

"In some areas, you don't need government intervention," he said. Warehouses in Moscow and the surrounding area are "sprouting up like mushrooms," he said, and this has happened largely without the government's help.