Russian Rail to Lock in Locomotives as Tycoons Encroach

Photographer: Andrey Rudakov/Bloomberg

A passenger smokes a cigarette in the doorway of a railway carriage on the Murmank-Sochi train, operated by OAO Russian Railways, at Pridacha station in Voronezh region, Russia. Close

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Photographer: Andrey Rudakov/Bloomberg

A passenger smokes a cigarette in the doorway of a railway carriage on the Murmank-Sochi train, operated by OAO Russian Railways, at Pridacha station in Voronezh region, Russia.

OAO Russian Railways is planning to spend 259 billion rubles ($8.3 billion) in the next three years on locomotives to defend a market that billionaire investors such as steel magnate Vladimir Lisin are seeking to enter.

Russian Railways Chief Executive Officer Vladimir Yakunin is resisting government plans to reduce state dominance in the industry and to sell a stake in the company itself. Lisin last month bid to wrap up his purchase of Russian Railways’ biggest cargo unit, accounting for 40 percent of its railcars, in a transaction that was part of the privatization plan.

“Russian Rail clearly doesn’t want to part with a source of cash flow like locomotives after losing control over freight,” Kirill Kazanli, an analyst at Citigroup Inc. in Moscow, said by phone. Locomotives earn back their purchase price “significantly” faster than railcars do, he said.

Prime Minister Dmitry Medvedev’s government is targeting proceeds of 260 billion to 270 billion rubles from state asset sales next year, following 223 billion rubles of sales this year, Economy Minister Andrei Belousov said on Oct. 25. That is less than the 300 billion-ruble plan approved by the Cabinet in June. Last year, before Vladimir Putin resumed the presidency after Medvedev, such sales reached 121 billion rubles.

With the shaky global economy eroding valuations, some of the asset sales may be delayed. The sale of a stake in OAO Sovcomflot, the owner of the world’s largest number of tankers, was delayed from this year to next as overcapacity drove down prices and squeezed valuations. Yakunin has opposed a government proposal to offer a stake of Russian Railways as early as next year, this month calling for a delay of four to five years.

Locomotive Revenue

Russian Railways, which owns all the country’s national rail lines, increased its three-year investment program to 1.1 trillion rubles this month for fleet and infrastructure upgrades, while fighting to maintain the revenue streams provided by its control over the locomotive market. One goal is to convince the government that the company can meet the country’s transportation needs and keep private investors out, said Andrey Rozhkov, an analyst at IFC Metropol in Moscow.

The premium investors demand to hold Russian Rail’s bonds due in April 2022 over the country’s sovereign debt of similar maturity grew to 128 basis points, or 1.28 percentage points on Nov. 13, the widest in almost four months, as the company plans to borrow more to fund investments.

Rising Ratio

Investors have reacted negatively to Russian Railways’ plans to increase its ratio of debt to earnings before interest, taxes, depreciation and amortization to 2.2 from 0.56 in 2011, said Igor Golubev, a bond analyst at Nomos Bank in Moscow.

Russian Railways, based in Moscow, kicked off the expansion last week by confirming a deal to purchase 221 engines from Siemens AG (SIE)’s Russian venture with Sinara Group by 2016 and awarding the venture an order for 675 more from 2016, worth 2.5- billion-euro ($3.2 billion). Putin and German Chancellor Angela Merkel attended the signing ceremony.

The government is supposed to be opening the locomotive market to non-state investors this year under a development program for the freight market to 2015 published on the Economy Ministry’s website. The measure was part of Russia’s plan to create more competition in the market and attract private investment.

“Liberalization of the locomotive park has stalled as Russian Railways tries to convince the government to keep private investors out of the market,” Rozhkov said by phone.

Run Down

More than 97 percent of Russia’s locomotives belong to Russian Railways, according to Sergey Maltsev, CEO of freight operator Globaltrans Investment Plc. (GLTR) “The park is catastrophically run down, which hurts hauling capacity,” Maltsev said. A full revamp would require the purchase of 1,000 engines a year to 2015, he said.

OAO Freight One, the Moscow-based operator that Lisin bought from Russian Railways, is ready to invest as much as 100 billion rubles in five years to buy locomotives, Oleg Bukin, the CEO of the unit, said in April.

Lisin’s fortune of $15.5 billion places him 46th on the Bloomberg Billionaire Index of the richest people in the world.

Russian Railways plans to buy more than 770 locomotives annually under its three-year spending program, compared with a total of 2,200 in the previous five years.

With engines contributing about 35 percent of its revenue last year, Russian Railways has no incentive to share the market, according to analyst Rozhkov. About 30 percent of the cost of moving freight in Russia is payment for engines, compared with 50 percent for infrastructure use and 20 percent for railcars, he said.

Rental Rates

Non-state operators may be squeezed after investments swelled fleets. Average rental rates for boxcars in Russia have fallen to 1,100 rubles ($35) a day from 1,400 rubles in the second quarter on oversupply and Russian Railways’ low prices, business newspaper Kommersant said yesterday, citing unidentified people familiar with the market and estimates by INFOline-Analitika.

Operators have spent 850 billion rubles to purchase new cars since 2003, when they first received the right to operate their own fleets, the press service of the Market Council, which represents private operators, said Nov. 19.

Investors are continuing to push for access to the lucrative market. Russian Railways isn’t moving fast enough, even with its expanding purchases, to replace worn-out engines, said Globaltrans’ Maltsev, who also is president of the council.

“Without market mechanisms in this sector, it’s impossible to solve the problem,” he said.

To contact the reporter on this story: Ekaterina Shatalova in Moscow at eshatalova@bloomberg.net

To contact the editor responsible for this story: Denis Maternovsky in Moscow at dmaternovsky@bloomberg.net

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