Russia as a “Transit Country”: A Pure Illusion

Putinist Russia is a country deeply obsessed by a search for a national idea. Some see it in becoming a “bridge” connecting Europe with Asia by high-end transportation corridors.

For centuries, transportation has been a foundation of the global economy and an important element for success of any particular country. These days transport is a truly global industry with a combined revenue of $4.5 trillion; 72 out of 2,000 largest transnational corporations in terms of revenue are engaged in the sector. However, from the 18th century onwards, maritime commerce became dominant over inland transportation and vast landmasses gradually turned from an advantage into a curse.

With centuries passing, this fact became more and more apparent. Today more than 80 per cent of international goods turnover (8.7 billion metric tons in 2011) is handled by sea shipping companies. Russia looks here a clear laggard: the country possesses a merchant fleet with a deadweight of 20.4 million tons, or only 1.46 per cent of world total, and all its ports load 535 million tons of cargo a year (i.e. roughly the same amount, as does the port of Shanghai). In other areas Russia is not doing better: Average rail transportation speed in 2011 stood at 247 km per day compared to 1510 km in China; production of civil aircraft dropped from 297 in 1988 to an average of 11 a year in 2006– 2011, more than 700 airports and airfields were abandoned since 1991, and passenger traffic on domestic flights declined 1.4 times.

Russia, therefore, looks extremely uncompetitive in transportation—but the idea of turning it into a “bridge” unifying Europe and Asia is constantly reiterated by political elite, based on its leaders’ attitudes towards Siberia and the northern seas as reliable areas for moving vast amounts of goods. Not much time is needed to refute this “hypothesis.” Let us start with railroads.

Russia has a principal railway network size of more than 86,000 km. The amount of goods carried by railways in 2011 reached 2.13 trillion km per year which makes 81.5 per cent of the total transport turnover in Russia (if one excludes pipelines). Russian Railways’ gross revenue stays at 1.29 trillion rubles and the company employs 1.2 million people. However, what we are interested in are not these numbers, but transit potential. Which is in fact limited by Transsiberian line capacity estimated at 90–100 million tons per year. Nowadays up to 85 per cent of this flow comprises either of domestic shipments or of transporting Russian mineral goods (iron ore, coal and oil) for export markets. So only about 15 million tons of capacity remains for transit stuff—and this figure is negligible if one looks at the overall trade volumes between the EU and three largest Asian economies (China, Japan, South Korea) which exceeded 960 million metric tons in 2010; if someone controls 1.5 per cent of the traffic he cannot become a“trendsetter.” Therefore, the case may be closed. But no, the “show” goes on.

Russian Railways persistently lobbies for the transit development program even despite three factors, each of which makes it untenable.

First, it tries to exchange higher speed for greater price. Today the cost of shipping a 20-feet container from the eastern Russian ports to the border of Poland or Finland stays at $4,000 while the trip takes from 24 to 28 days. The total price of the carriage of the same container from Busan or Shanghai to Rotterdam or Hamburg does not exceed $2,300 while the process lasts 40–45 days. Given that the vast majority of cargo is manufactured goods capable of long storage, but of relatively low cost, one can assume that the factor of speed counts far less than the factor of price.

Secondly, the program of “modernizing” Transsiberian and Baikal-Amur railways proposed by Russian Railways to the federal government may result in increasing the total capacity of the corridor up to 25–30 million tons (if transit will be allocated half of the increase of overall capacity), i.e. will not exceed 2 per cent of the volume of seaborne trade which undoubtedly will also increase during this period—maintaining its share at the current level. For acquiring at least 30 per cent share of transit, Russia needs to build at minimum another three Transsiberian corridors, which, given the efficiency of the economy and its readiness for “mobilizing efforts,” looks completely unrealistic.

Third, before proposing the reconstruction of the Transsiberian route one needs to understand whether it may pay-off in the foreseeable future. Vladimir Yakunin, for example, estimates the cost of improving the capacity of Transsiberian corridor at 1.08 trillion rubles ($34.5 bn). However, in 2010 the combined revenue of shipping companies serving Asia–Europe routes reached $84 bn. If one supposes Transsiberian route may process 2 per cent of that amount pricing its services twice as high as the maritime shipping, he will get the brut revenue of $2.9–3.3 bn with profits hardly reaching a quarter of the sum—so the whole project will pay off in… about 50 years.

But there are even more exotic ideas on Russian Railways’ mind. The company dreams of highspeed freight service between the Far East and the European part of Russia. Despite the fact that not one mile of modern high-speed rail was built in the country (Siemens-produced Sapsan trains provide shuttle service between Moscow, St Petersburg and Nizhny Novgorod riding forty-years-old track with an average speed of 180 km per hour), this option is “seriously” debated. But the cost of laying a modern track in Russia looks extremely high (a preliminary offer for building a high-speed railway from Moscow to Yekaterinburg (1,720 km long at relatively simple construction conditions) is estimated at 1.5 trillion rubles ($48.1 bn)—so to reconstruct all 9,298 km of Transsiberian line will cost at least $260 bn).

Simple calculations suggest that if the highspeed railway in Siberia would be built, transporting goods from Asia to Europe using it will increase their wholesale price 1.6–2.5 times—that looks ridiculous to any exporter. And even here Russian fantasies do not stop—in Moscow experts are talking about a railway binding Chukotka peninsula to the state of Alaska via 100-km-long tunnel under the Bering Strait (this plan has been officially mentioned in the State Strategy of Socio-Economic Development of the Far Eastern Federal Region). On this, I would prefer not to comment at all…

If one wanted to establish country as a transit power, why not establish a huge state-owned international shipping company? To move the same 30 million tons of cargo annually between Asia and the EU as Russian Railways hope to do by 2030, only 50 to 60 bulk carriers or container ships are needed with deadweight of 80 to 110 thousand tons each (making up to five round trips a year). Total cost of this fleet will not, if buying brand new ships at a catalog prices, exceed $6 bn, which is 6 times less expensive than modernizing Transsiberian route.

Such an idea seems to be of no interest for Russian leaders: the Kremlin guys have more original scheme. Russia, as one may know, possesses another “unique” transport corridor, except that in Siberia: one that stretches alongside the northern coast of the country. This Northern Sea Route is by far the shortest transit corridor between Asia and Europe: its length is only 7,600 nautical miles, while the way through the Suez channel takes 15,700 miles, and around Africa—18,300.

To “rejuvenate” the Northern Sea Route is another big project of Russian authorities. A state program “Development of Russia’s shipbuilding industry till 2030” maintains that 50 icebreakers and cargo ships that can operate in icy waters should be built by that time—at an estimated cost of more than 1.2 trillion rubles (nearly $40 bn). But even in 1987, the year that was the most successful one in the history of the Northern Sea Route, only 6.6 million tons of cargo was transported this way—without even one ton of transit load. By the early 2000s, amount dropped to 0.8 million tons later rising to 2.2 million in 2012 (among them 1.2 million tons of transit freight)— too small amount to be taken seriously, but connected with an enormous related costs. In addition, a significant problem may be caused by extremely low Arctic temperatures (during the winter they reach minus 29–32 degrees Celsius, and the average for the year is minus 12.9 degrees) which can damage sophisticated electronics or office equipment that is shipped from Asia to Europe and vice versa.

To sum it up, one may say that both officially discussed Russian transit projects look hardly feasible and economically effective. Moreover, they will not yield Russia either serious strategic benefits, or significant share in the transit market. At the same time, the Russian leadership is so deeply obsessed with these ideas it does not want to consider alternative strategies that could make the country a much more important player in the transit market.

Serious attention paid by Russian political elite to the different versions of a “big transit game” makes one wonder why Moscow completely neglects two other businesses directly related to transit as well.

Let us begin with the civil aviation. Today it is a huge and high-tech industry with more than 57 million people employed and a total revenue of air companies and airports of more than $1.4 trillion. These days around 35 per cent of all passengers manage their way to final destinations with one or several connections. So beginning from the 1990s new hubs start to pop up, trying to “catch” a part of traffic—the most important of them serving the passenger flows between Europe and Asia were established in Persian Gulf countries. Benefiting from their geographical positioning, these countries established big national carriers and rapidly developed state-of-the-art airport facilities. As a result, daily number of flights served at Dubai International airport grew 7.5 times between 1995 and 2010, and at airport of Doha—9.2 times. Passenger traffic on Emirates Airlines routes for the same period increased 12.3 times and on Qatar Airways’—more than 20 times.

The newly build Al Maktoum International Airport, partly opened in the summer of 2010, is designed for serving 160 million passengers a year—3.4 times more than the whole number of passengers served by all airports of the Russian Federation in 2009. In recent years, the Arabs were joined by the Turks. Statistics show that 53 per cent of passengers arriving in Ataturk airport in Istanbul (64 per cent of arriving in Dubai and around 70 per cent—in Doha) use these hubs just for changing planes. No wonder that the combined revenue of Emirates Airlines and of Dubai International Airport grew over the last ten years 6.5 times and reached $22.8 billion in 2011—exceeding the revenue that might be collected from the use of Transsiberian corridor by 2025 under the most optimistic scenario by factor of nine. The share of the aviation industry in Dubai’s GDP had reached stunning 28 per cent in 2011.

Russia already lost this kind of transit business. While around 60 per cent of all flights in Russia’s airspace are in fact transit flights, there is no intention to organize a significant transfer hub in the country. There are no airports in Siberia that may evolve into a modern global hub. Novosibirsk’s Tolmachevo airport serves only 2.8 million people a year, Krasnoyarsk’s Emelyanovo airport—around 1.6 million. Russia does not make any use of its Eastern territories even for a non-stop transit: flights from America and Europe to Asia via the North Pole and the Eastern Siberia remain risky, since the “Northern air bridge” project was never completed. These days the Siberian corridor is used for not more than 600 flights a month with aircraft flying for hours without navigation—as they usually do when crossing the oceans. Russian authorities could have developed a network of monitoring stations throughout the region for increasing the number of flights up to 120–150 thousand a year—but in Moscow politicians used to dream about Transsiberian railway corridor or Northern Sea Route, not preoccupying themselves with such trifles. Transit potential of Moscow and St. Petersburg as hubs cannot be fully utilized also—first of all because there are three poorly interconnected airports in Moscow and two in St. Petersburg, and also because of the fact that one needs Russian visa to exit one airport and to reach another.

Sadly, the same can be said about cargo air traffic as well. Although in terms of tonnage air transportation carries an insignificant amount of goods (0.2 per cent of total tonnage), it accounts for 15 per cent of the value of global trade since international air freight is about 70 times more valuable than its maritime counterpart and about 30 times more valuable than freight carried over land. And even while Soviet Union and Russian Federation once had a huge experience in building the world’s largest air freighters, it managed to lower its share in the global airfreight operations virtually to zero.

As another “lost” theme, the transit of energy resources should certainly be named. For decades, the Soviet Union has established a vast pipeline system, which at some point became one of the most developed in the world (as of 1990, USSR possessed more than 70,000 km of principal oil and gas pipelines, trailing only the United States with 85,000 km). However, becoming an independent state and declaring itself an “energy superpower”, Russia almost completely forgot about its transit potential. The results seem quite obvious now. If in 1992 Azerbaijan exported all its oil through pipelines crossing Russian territory, today it doesn’t use them at all; if Kazakhstan and Turkmenistan exported the same way up to 98 per cent of their oil and 97 per cent of their gas, today the first figure dropped to 65 per cent, while in the second case it has been reduced to well below 30 per cent.

Instead of becoming an effective and reliable interconnector between Trans-Caucasian and Central Asian nations and the European markets that seem to be most attractive for them, Russia has completely blocked the access of Turkmen gas to Ukraine and the EU, thus pushing the country to a strategic alliance with China, where around 50 per cent of Turkmen gas is exported these days. Such a“policy” toward neighbors conducted from 1990s onwards, resulted in appearance of both a series of pipelines circumventing Russia’s territory— like Baku-Supsa and Baku-Tbilisi-Ceyhan pipelines already in operation and a planned Trans-Caspian pipeline from Turkmenistan to Turkey—and of many new pipelines directly linking Central Asian nations to China—like Atyrau- Alashankou or Saman-Tebe—Khorgos supplying China with Kazakh oil and Turkmen gas.

If Russia would be able to pump at least half of Azeri and Central Asian gas and oil to the Western markets, it may get around $2.7 bn a year (if one uses the price applied by Ukraine to Russian oil and gas transit to Europe as a base for tariff calculation). But the interests of “Gazprom” which seeks to consolidate its monopoly of provisions led to the situation when Russian energy transit, being very promising area, has been entirely disrupted. The will of the management of a single “state-led” company easily outweighed the basic interests of the Russian Federation.

A widening gap may be seen in Russia—a gap between declared intentions to turn the country into a serious player in the international transit markets and a harsh reality suggesting that not one of the announced plans can be implemented under the current political regime. The main problem is caused by a purely ideological approach to the task that is dominant inside the Russian political elite. Development of modern transportation routes is considered by the Kremlin not as an effective commercial undertaking that could boost the modernization of Russia’s economy, but as a geopolitical project aimed on strengthening country’s claims on a very special role in a globalized world. Such an approach presupposes little attention to financial aspects of all new initiatives which, in turn, will inevitably lead to a huge loss of financial investment and, presumably, to a failure of all the grand projects Russians are dreaming of.

The global political game of today is subjected not to the laws coined by the 19th-century geostrategists, but to the rules of economic efficiency and competitiveness. Everything has to be done faster, more efficiently and at lowest possible price—but leaving, after all, some room for profitability. Russia’s transit pipe dreams do not meet any of these requirements. Therefore, with all my confidence, I can recommend European and Asian transport companies and governments to act as if Russia’s ideas and plans to transform the country into one of the active players in transit market never existed.

Vladislav Inozemtsev

Professor of Economics, Chair of the Department of International Economy at Moscow State University’s School of Public Governance.

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