Russian Railways Seeks to Fix ‘Mistake’ of Lost Monopoly

OAO Russian Railways is seeking to regain the right to manage rolling stock a decade after the government weakened its monopoly by opening the market to competitors, Chief Executive Officer Vladimir Yakunin said.

“It’s becoming clearer to me that we made a mistake when we decided to privatize 100 percent of the rolling stock,” Yakunin said in an interview. State-run Russian Railways wants to manage or lease railcars, not re-nationalize the market, and hasn’t started talks with the government yet, he said.

Billionaires Gennady Timchenko and Vladimir Lisin have built up rail fleets to break free of dependence on state-owned rail cars. Railroad operators have spent more than 1 trillion rubles ($32 billion) to buy 500,000 cars during the past decade, upgrading more than half of the country’s aging fleet, according to the Market Council, an industry group.

Russian Railways transferred its rolling stock to separate units while maintaining control over the nation’s rail lines. The state asset sales have complicated logistics and given rise to an “artificial deficit,” Yakunin said. Private operators focus on expensive cargo over cheap, often overusing terminal time and clogging some routes, while leaving others without cars, he said.

Russian Railways is seeking to manage at least 30 percent of the country’s railcars, which would allow the company to deploy them where needed, Yakunin said. Gondolas, which are used for less expensive bulk cargo, are most in demand, he said.

‘Old Friend’

The time frame for Russian Railways to start lobbying the government to restore its operational rights will depend on the market, Yakunin said. Any commercial agreements reached will be set up “in accordance with market principles,” he said.

Russian Railways faces a drop in revenue in 2014 as the government plans to freeze tariffs for natural monopolies to help fight inflation. The the central bank has missed its target rate of 5 percent to 6 percent for 12 months. President Vladimir Putin is seeking to jolt the economy out of the worst slowdown since the 2009 recession.

Timchenko, whom Yakunin has called an “old friend,” founded Transoil, now Russia’s largest rail transporter of crude and oil products, in 2003. Lisin bought Russian Railways’ OAO Freight One for 175.5 billion rubles in 2011 and 2012.

Locomotives

Entrepreneurs Konstantin Nikolaev, Nikita Mishin and Andrey Filatov founded Globaltrans Investment Plc, which has a market value of $2.5 billion based on today’s share price in London. Timchenko and Lisin are among the 15 richest Russians, according to the Bloomberg Billionaires Index.

Dmitry Baukov, a spokesman for Freight One, declined to comment. Natalya Timakova, Prime Minister Dmitry Medvedev’s spokeswoman, declined to comment before Russian Railways submits a proposal to the government.

The opening of the market has lowered operational fees and created a surplus of rail cars, Transoil Chairman Igor Romashov by e-mail, calling for the government to continue reforms and allow investors to enter the locomotive market.

“I think it’s possible if there is an agreement between the government, the private sector and industry experts,” Yakunin said about getting back the right to manage rolling stock. “The British were not afraid to change the wrong reform and nobody accused them of abandoning the market economy”.

Britain privatized its railroad system in 1994 only to re-nationalize it in 2002 after the group of companies operating the network failed to earn enough to finance infrastructure upgrades, which were blamed for a serious of deadly accidents.

Russia’s government last year delayed its plan to open the locomotive market to non-state investors, which could attract as much as 400 billion rubles through 2020 to help revamp the country’s aging fleet. Russian Railways last year said it would spend 259 billion rubles over three years on locomotives.

“The life expectancy of a locomotive is 40 years,” Yakunin said, noting that investors usually want to see returns within eight years, which would require raising tariffs. “Do you think there’s a private investor who would agree to freeze his money for 40 years?”

Translation from Russian article: Якунин предлагает исправить ’ошибку’ в реформе железных дорог

To contact the reporters on this story: Irina Reznik in Moscow at ireznik@bloomberg.net; Ekaterina Shatalova in Moscow at eshatalova@bloomberg.net

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

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