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ITE Transport and Logistics

Russia's project cargo market: infrastructure woes, but big opportunities

Following a decade of deep financial, political and economic instability in the aftermath of the former Soviet Union’s collapse, the Russian economy enjoyed a significant upturn in fortunes during the 2000s, with a sustained period of solid economic growth, rising wages, and increased living standards. Buoyed by soaring revenues from oil and gas exports, Russia also saw a wholesale expansion in public sector investment, and modernization of the country’s outdated industrial, transport and energy sector infrastructure.
However, the last several years have marked a decidedly more challenging period for Russia, with the collapse in global commodity prices and elevated geopolitical tensions with the West seeing the economy move into recession in 2015.
Notwithstanding the recent economic downturn, the Russian market continues to present exciting opportunities for global project cargo operators, with Russia still heavily reliant on imported industrial goods and high-tech machinery to develop domestic infrastructure and the all-important oil and gas sector. Accompanying these opportunities, however, is a set of logistical challenges that reflect the vast size, harsh environment, and political and bureaucratic complexities distinguishing Russia from other European countries.
Dutch logistics services provider M-STAR Freight Services has wide operations throughout Russia, and has been particularly active with large-scale industrial projects during recent decades. With its core operations in Russia related to the oil, gas, petrochemical and energy sectors, M-STAR has delivered breakbulk cargoes consisting of predominantly European and U.S.-manufactured machinery and sourced from around the world for major Russian energy sector firms.
“In Russia a lot of things are very complicated, but finally almost everything is possible,” said Jan Euwema, the company’s business development manager. “We are triggered to really go to the limits to find a solution at the end for our clients.”
Coping With Extremes
Euwema highlighted the extreme weather conditions, and in particular the impact of harsh winters on transport infrastructure, as one of the main obstacles facing project cargo forwarders and logistics providers operating in the country. “Climate can be a challenge, with the long, cold winters frequently damaging infrastructure. In many parts of Russia, you have damaged roads, or no roads at all,” he said.
Obstacles associated with the challenging climate, and differences between operating in Russia compared to the EU or U.S. markets, were highlighted by M-STAR’s recent contract with a major engineering, procurement and construction company to deliver heavy components for a petrochemical plant from Bucharest, Romania, to Kstovo in the Nizhny Novgorod region. The local road system had been eroded by the previous winter and the firm was forced to undertake considerable road repairs to ensure the successful delivery of a cargo that included a long “pre-demethanizer column,” with dimensions of 33 meters by 3.9 meters by 3.9 meters, and weighing 99 tons.
While Euwema praised the reliability of Russia’s vast train network, and its capacity to operate reliably throughout the cold winter period, he also outlined that severe temperatures restrict the capacity of project cargo firms to utilize the country’s waterway, canal and river networks for up to six months of the year. “The river and canal system in Russia is frequently blocked during winter months, and open from only April until October. So you definitely need to prepare projects with consideration of the climate,” he said.
Complexities relating to Russia’s vast size, transport infrastructure and cold winter temperatures were also highlighted by Sergey Godlevskiy, general director at the Moscow-based office of freight forwarder deugro. “The majority of the industrial plants are located very far from the entry seaports. So the biggest and heaviest cargoes can be delivered only through internal waterways to the nearest river port. But the period of navigation through these waterways is limited,” he said. “Many construction sites in Russia are located in Siberia. The only way to deliver the heaviest and biggest cargoes to there is through the Northern Sea Route by heavy-lift vessel, with further reloading onto barges either at the existing ports or at the roads, and further barging up to the jetty nearest to the construction site.”
Added to which, infrastructure in Russia is not well developed, and it is sometimes necessary to build a jetty at the bank of the river or to prepare roads for transportation. “All these works involve a lot of permits and procedures quite often are very bureaucratic,” said Godlevskiy.

Tied Up In Bureaucracy
Notwithstanding these complications, the main challenge facing international project cargo operators remains Russia’s time-consuming, complex and inflexible bureaucratic system. The current process necessitates paperwork being presented at both the border crossing into Russia, and also at the point of final delivery. It is further complicated by the need for cargo transporters to adhere to local as well as national regulations. Failure to comply with the exact letter of these regulations can result in cargo entry being delayed or denied entry altogether, with Russian customs officials also less flexible than those within the EU.
Byzantine bureaucracy is also related to a complex domestic political landscape, with the often-fraught relationship between Russia and its neighboring countries leading to periodic restrictions and delays in cross-border trade, as highlighted by recent military conflicts with Georgia and Ukraine. Geopolitical tensions have soured relations between Moscow and the West during the last decade, with Russia’s 2014 annexation of Crimea in particular resulting in EU and U.S. sanctions that have restricted exports to the Russian energy sector, and brought an additional layer of complexity for project cargo firms. In conjunction with a dramatic decline in global energy prices, Western sanctions saw the Russian economy move into recession last year. The International Monetary Fund estimated that real gross domestic product contracted by about 4 percent.
Deteriorating underlying economic conditions have led to the postponement or cancellation of infrastructure projects and other major investment initiatives in Russia. According to Alina Zaborovskaya, partner and head of project finance and infrastructure services in the CIS at Ernst and Young, the collapse in global energy prices over the last 18 months has had a particularly pernicious impact on government investment expenditure.
“Oil and gas revenues are the main parts for the federal budget income. The fall in prices has led to a decrease in the value of budget funds available for financing of public and private partnerships,” she said. “This resulted in a stricter approach to the selection of infrastructure projects that can obtain government financing. Implementation of many announced projects have been postponed repeatedly.”
Instability And Retrenchment
While government investment prospects have been hit by the widening gulf between realized revenues and pre-planned expenditure, private sector investment has also retrenched in recent years, with the enhanced political risk associated with the souring relations between the West and Moscow creating a less stable environment for domestic and foreign investors. Currency market instability is another factor that has discouraged investment, with the sharp fall in the ruble seeing a correspondingly significant rise in the cost of imported goods and services.
Stabilization in energy prices, following the precipitous fall of last year, led to a moderation in the Russian recession in early 2016. Analysts nevertheless expect that weak fundamentals will continue to hold back the Russian economy and disrupt investment flows over the short term forecast horizon.
According to Michelle Karavias, global head of infrastructure at BMI Research: “Russia’s construction industry has been in recession since 2013. We expect it reached its deepest point in 2015, with an estimated 6.6 percent contraction, and with a mild improvement for 2016 as a result of low base effects and the adjustment of the economy to the new ‘norm’ of low oil prices.
“Nevertheless, we still expect a contraction of 1.8 percent for 2016, before a return to modest growth from 2017 onwards.”
Karavias added that up to US$100 billion of Russian construction projects have been put on hold due to the worsening economic and fiscal outlook, with a similar volume also under risk of delay or possible cancellation.
Notwithstanding the weak outlook, analysts identify a number of important investment projects that are set to proceed over the coming years, which will necessitate a significant volume of imported goods and are likely to present opportunities for the international project cargo industry. According to Ernst and Young’s Zaborovskaya, the Russian government, at federal and regional levels, has planned for modernization and construction of a number of large-scale infrastructure projects, including highways, high-speed rail networks and airports. Planned future projects include the Moscow Central Ring Road, and a 770-kilometer high-speed rail line from Moscow to Kazan, China, that represents wider efforts to strengthen economic ties between the Russian and Chinese governments.
Preparations for Russia’s hosting of the 2018 football World Cup will also represent another focal point for public and private sector investment over the next two years. The government has earmarked about US$10 billion for updating and constructing new stadiums and transport infrastructure. With operating costs and wages for the most part denominated in domestic currency rather than U.S. dollars, the fall in the ruble’s value will also help to cushion the balance sheet impact for Russian energy firms from the wider slide in global oil prices, boosting their capacity to carry out future investments.

This article originally appeared in Breakbulk Magazine with the title ''Russia's recession brings industry woes'. Breakbulk Magazine’s mission is to be the global thought leader providing breakbulk & project cargo logistics intelligence (news, trending, data & metrics in print and online) that helps logisticians worldwide move their breakbulk and project cargo more efficiently. 


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