Russian Railways Rescue

An ambitious plan to rejuvenate Russia’s sprawling and antiquated railways will cost the country hundreds of billions of dollars, and the nation’s rail freight system is leading a hunt for new capital in London with this week’s listing of Globaltrans.

Globaltrans, the second-biggest freight operator after the state-owned Russian Railways (RZD), has tapped the London market for $449 million (£228 million), but its move is only the start of a huge and lengthy fund-raising, according to the Russian Government, which intends to privatise the business of freight carriage, to replace 20,000 locomotives, overhaul a railway network of 84,000km (52,000 miles) and eventually bring private capital into the passenger transport network.

Dealings in Globaltrans stock will begin this week, valuing the company at about $1.5 billion, but further corporate activity is expected later in the year when RZD spins off Trans-container in a public offering. A 15 per cent stake in the freight subsidiary of the national railway was sold to a consortium of investors, including the European Bank for Reconstruction and Development, Moore Capital and GLG, for eight billion roubles (£171 million) and RZD plans to offer a further 30 per cent of the stock in November. First Freight, another freight company from the RZD stable, will be sold off next year.

Russian railway bonds, an icon of Imperial Russia in the 19th century, may soon return as a feature of global capital markets. RZD has approved an 80 billion rouble capital-raising via bonds in the local market, but it has plans to borrow 325 billion roubles by 2010, including $7 billion in overseas markets to fund expansion and upgrading.


Russia’s rail network is the backbone of a country divided by distance. The profitable business of moving the nation’s mineral resources has been lumbered until now with the task of subsidising unprofitable services. RZD reckons that the cost of subsidising the passenger is 53 billion roubles a year. The Government wants to liberate freight, to enable it to invest and improve the commercial infrastructure. Igor Levitin, the Transport Minister, has said that the company needed to raise nine trillion roubles for rail transport to rejuvenate a system that had received no investment for 20 years.

The burden of passenger traffic is huge and, in a three-stage reform programme, it was decided to remove the freight cross-subsidy, to bring private capital into freight transport and to shift the burden of supporting passenger traffic to a direct state subsidy.

The first stage, the creation of a joint stock holding company for OAO Russian Railways (RZD), was completed in 2003. The second stage is under way, with the hiving off of commercial activities, such as freight, into profit-making ventures. The final step is the most complicated and politically difficult, since involves the rejuvenation of the passenger service and solving the subsidy dilemma.

Mr Levitin said that vast distances in Russia made passenger rail transport costly. “The longer you go, the cheaper it is [for passengers] by kilometre,” he said. “The Government is going to have to compensate for this difference.”

Private operators will be brought in to run new high-speed trains on shorter routes that might compete with air traffic, but introducing private capital to passenger transport must wait until after 2015. The priority is to get freight moving more efficiently and profitably. Eighty per cent of freight goes by rail in Russia and 60 per cent of passenger traffic.

Mr Levitin said: “Reform of rail transport is a very challenging task and we could do it faster, but it is the backbone and blood vessels of the country. There must not be hesitation, but we must not make mistakes.”