Putin Has Been Working on the Railroads

The President looks to the private sector to help rebuild Russia's rails

Quick, what's the longest train line in the world? Russia's Trans-Siberian Railway, of course. But the storied route, running 9,335 km from Moscow to Vladivostok, is only one spoke in a sprawling network of rail lines that spiderweb across Russia. Trains are almost as important to the Russian economy as oil: 80% of freight traffic goes by rail, compared with around 20% in the West. But the once-mighty system is falling to pieces. According to official estimates, 58% of railway equipment is worn out. The tab to replace it is more than $20 billion.

The Russian government doesn't have that kind of money. So President Vladimir V. Putin is looking to the private sector for help. In May, the Kremlin will transfer the country's rail assets to a new government-controlled company called Russian Railways Co. It's the most important step so far in a 10-year plan to rejuvenate the rail system by breaking the control of the Railways Ministry, which now owns, operates, and regulates the entire rail network. Starting next year, the new company will be divided into subsidiaries, parts of which will be sold off to private investors later. While the infrastructure will remain government-controlled, 60% of the rolling stock should eventually be in private hands. "Our primary objective is to increase the competitiveness of the Russian economy," says deputy railways minister Anna Belova, appointed in 2001 to spearhead the sector's makeover.

The big question is whether private competition will be able to make much headway against such a powerful incumbent. Russian Railways Co. will inherit not only the track but also much of the rolling stock. That means it will have little incentive to welcome competitors on its rails. And while the Railways Ministry should in theory become an independent regulator, it is notoriously conservative, and its links with the state railway company are sure to stay strong. "The whole atmosphere is Soviet," says one U.S. diplomat in Moscow.

That may be. But some hardy entrepreneurs already are riding the rails. Private operators account for 9% of rail cargo transport in Russia, and they're making enough money to expand rapidly. "We've operated in this environment successfully for 10 years," says Gaspard Boot, finance director of Russkiy Mir, Russia's largest private railway company. Set up as an oil trading firm in 1991 by Western European investors, the company now owns 13,000 railcars. Its main selling point: You order a delivery, it's delivered -- promptly. "With [the state railways], the cargo is loaded into a container, but it doesn't follow that it is actually put on a train," says Boot.

Russkiy Mir's main customers are Rus-sian oil companies, which are now exporting like mad to cash in on high crude prices. They're keen to boost rail shipments, bypassing physical and legal limitations on their pipeline exports. As a result, some oil companies are getting heavily involved in the railways themselves. Yukos (YUKOY ), Russia's No. 2 oil producer, has built up a fleet of 6,000 tanker wagons in the last two years, and it's buying 3,000 more this year. Even without their own rolling stock, oil companies have a strong interest in seeing the railway sector reformed. "The sector is [organized] just the same as it was in the '30s or '50s, yet the country has gone a long way ahead," says Alexander Sapronov, Yukos' vice-president for transport and logistics. Metals companies and coal mines, too, are looking for ways to cut costs by handling their own rail transport. One incentive is a 23% rate discount, rising to 30% in July, for companies that supply their own wagons.

Little wonder investment by private companies in rolling stock is booming. Last year, private operators spent about $250 million on 10,000 new railcars. Their biggest complaint is that Russia's railcar factories can't produce quickly enough to meet demand. Russia's wider rail tracks and unique specifications mean that rolling stock cannot simply be imported. That's why some foreign manufacturers are considering investing in production in Russia. General Electric Co. (GE ), for instance, sees a great opportunity in upgrading Russia's 15- to 20-year-old locomotives -- locomotives even older than the post-Soviet regime. All aboard!

By Jason Bush in Moscow

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