(Bloomberg) -- Russia faces increasing difficulty shipping commodities to China through its vast eastern rail network, a sign of the growing economic challenges stemming from war and sanctions, despite the Kremlin’s assurances that all is well.
Russian Railways JSC — the state-owned carrier responsible for all rail transport throughout the country — last week approved a 30% cut in its investment program for next year amid soaring borrowing costs, news agency Tass reported, citing the transportation minister.
An increase in war-related cargoes is also compounding existing bottlenecks, while sanctions weigh on cross-border payments. Those factors, along with longstanding logistical issues, are slowing the transport of goods like coal and aluminum.
The railway “is experiencing its deepest slump since the 2008-09 crisis this year, and the trend is still going strong,” Moscow-based MMI Research said in a Telegram post this month. “We assume that this is due to both the needs of the army — loading the network with priority cargo — and the worsening problems with the rolling stock.”
Russian Railways didn’t respond to a request for comment.
The situation underscores the strains within Russia as the Kremlin’s war in Ukraine approaches its third full year. The central bank on Friday kept its key interest rate at a record 21% as it seeks to cool an overheated economy, which President Vladimir Putin has said is in sound condition.
“Everything is based on the economy,” Putin said during his annual call-in on Dec. 19. “The situation is normal, stable,” despite any external threats and sanctions. While noting that inflation is “worrying,” he added that GDP may grow by about 4% this year — higher than in many Western countries — while unemployment is at a record low.
Fabled Railway
For Russian Railways, the picture is not so rosy. The carrier, which often used to borrow in public markets for investment, has now been largely closed off to them due to sanctions. Government support is limited, as Moscow has re-prioritized its budget toward the war.
Russia shifted its trade in recent years toward Asia, placing greater reliance on the so-called Eastern Polygon rail network. Its 8,700 miles (14,000 kilometers) of track combine Russia’s two longest railroads — the fabled Trans-Siberian, linking Moscow to the Pacific Ocean, and the Baikal-Amur Mainline running from Siberia to the Far East.
The network has long been burdened by loading delays and inefficient infrastructure, but now it’s being stressed further. The shift toward Asia has increased the volume of transportation both to and from Russia, and demand for track space far exceeds what the system can handle — despite billions of dollars spent on upgrades.
Read: Russia to Bolster Famed Eastern Railroads as China Trade Booms
“We see the problems of the Eastern Polygon,” Transportation Minister Roman Starovoit said on state television this month. “Infrastructure constraints, despite the increase in carrying capacity, still exist on the Baikal Amur and the Trans-Siberian Railway.”
Putin in February outlined plans to expand annual shipping capacity on the network, though the current economic fissures are creating hurdles for the national rail carrier.
Russian Railways freight volume declined 5.2% year-on-year through November, according to MMI Research.
The company is now considering cutting its total investment program through 2030 by a third, to 7.9 trillion rubles ($77 billion), Kommersant newspaper reported last month, adding that the economy ministry has proposed an even sharper reduction. The ministry also suggested cutting spending on the expansion of the Eastern Polygon to about 15% of what was originally proposed, the newspaper said, though its report wasn’t officially confirmed.
The economy ministry didn’t respond to a request for comment.
Slower Shipments
Russia’s economic troubles and underinvestment in Russian Railways are starting to have knock-on effects on commodity shipments to the east.
Several coal miners aren’t able to ship as originally intended due to railway bottlenecks, executives at the companies said, asking not to be identified as the information is sensitive. The government held a meeting in the coal-rich Kusbass region in western Siberia this month to discuss the industry’s issues.
United Co. Rusal International PJSC, the biggest aluminum producer outside of China, has built up several hundred thousand tons of stock at its aluminum smelters in Siberia as limited railway capacity crimps its ability to ship the metal in a timely manner, people familiar with the situation said.
Before 2022, Rusal — which isn’t subject to sanctions by the US and its Group of Seven allies — was selling the metal in China only occasionally. But after Russia was hit by multiple penalties, the company rerouted a large portion of its exports to Asia from Europe and other markets. It now sells more than a million tons, or about a third of its annual output, in China.
A Rusal spokesperson declined to comment.
Russian Railways “needs to be improved, partly through investments” that are declining, said Dmitry Polevoy, investment director at Moscow-based Astra Asset Management. “In general, the railway and loading are always a mirror of what is happening in the economy.”
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