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March 1st 1998

Russian Economics

The International Monetary Fund is on collision course with the Kremlin over the railways

The Russian railway isn't just a company, it actually has its own government department. So the Minister of Railways doesn't have to do what the Minister of Transport says. Similarly to the railways of North America, the railways were key to unlocking the vast potential of Russia's natural resources and the industrial revolution. Typically, the American railways produced millionaires, while the Russian ones spawned a government department.

In 1995, the railways had 2.15 million employees, owned 402 hospitals and managed 11 universities. This probably won't continue. The Russian government has decided to break up the company into several competing "enterprises" for freight and passenger transportation -- presumably train operating companies. But they will not be sold, in accordance with several pledges by both President Boris Yeltsin and Deputy Prime Minister Boris Nemtsov, in charge of monopoly utilities.

Or will they be? The International Monetary Fund last week made loans condition on breaking up and privatizing the railways. This may be called for, given the enormity of the organization.

Is the IMF right to bud in? On the one hand, Russia business surely needs a lot of breaking up and privatizing. On the other hand, the railway is moving in the right direction (see below).

Revenue has grown from US$9.9 in 1996 and $11 billion in 97 to a forecast of more than $15 billion this year. At the same time, demand has fallen and so have prices. Most recently, freight rates fell by 10% on December 1st, and passenger rates also fell.

This is of course hard to believe. But the explanation probably lies in the dysfunctional Russian pricing system and the phenomenon of capital-destroying businesses. Untill a few years ago, there were businesses which made products that were actually worth less than the raw materials used to make them. Liquidating these businesses made an immediate contribution to the country's wealth. Similarly, the railway probably stopped capital-destroying activities.

Another explanation for the increased revenues is an effort to actually collect payment from customers and fining those who get on trains without tickets. Lowering of prices may be a way of bringing them in line with what customers actually pay. As employees worry about losing their jobs and the workforce is reduced to match the amount of work to be done, customer service has improved.

1997 was the year Russia turned the corner to growth -- official numbers show minimal growth last year, ending years of precipitous curves. And that's not including the thriving black economy, widely thought to be 40% of the size of the official economy.

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