How does Russia's railway restructuring work? - point of view

Railway Age, Oct, 2003 by Randy Bregman

In May 2001, Russia's government laid out a program to fundamentally reform its railway system by 2010, the purpose of which is to create a market environnnent by separating the ownership function from the regulatory function. Rail is critical to Russia's growing economy: 80% of all freight and 40% of passenger travel is carried by rail. Because of the size of the Russian Federation and the absence of road transportation in much of the country, rail is in many places the only means of transportation.

The effort to break up the monopolistic control of Russia's Rail Ministry is moving forward on schedule, unlike similar efforts to de-monopolize and privatize the Russian power and natural gas industries. This year, Russia's Duma (parliament) adopted a package of laws consisting of new laws and amendments to existing legislation. The Law on Federal Rail Transport and the Natural Monopoly Law were amended, a Railway Charter replaced the Transportation Charter of Railways, and a new Law on Management and Disposition of Railway Property was enacted. The two most important components of these legal changes are creation of a Russian joint stock company that will own and manage railroad property; and redefining the functions of the Russian Rail Ministry.

The Law on Management and Disposition of Railway Property called for the transfer of almost all of the property currently owned by the Russian Ministry of Railways to a new Joint Stock Company, 100% of the shares of which are owned by the Russian state. This company was formed in May; the president was appointed by the Russian government. It has the ability to sell or transfer property, excluding main lines, traffic management data information equipment, and equipment and facilities for military use. Some property can be sold, transferred, or encumbered on the basis of permission or decisions of the Russian government, including low-density lines, shares of subsidiary companies, and certain real property connected to public transportation infrastructure.

The restructuring plan envisions spinning off certain enterprises within the Joint Stock Company during 2004-2005. These enterprises include commuter and long-distance passenger trains, refrigerated trains, and railway maintenance. A third and final stage to be implemented in 2006-2010 envisions creation of subsidiaries in other activities that will be sold as a means of attracting investment into the rail sector.

At this point, only the infrastructure and the centralized dispatching system will remain under the control of the Russian government and will not be sold. As a result of the reforms, the Rail Ministry will assume only a regulatory role in connection with rail transportation, analogous to the role of the Russian Transportation Ministry, which regulates marine and air transportation. The Rail Ministry will regulate security and safety, environmental preservation, labor conditions, and use of railway equipment.

Tariffs are currently determined mostly by the Anti-Monopoly Ministry; the Rail Ministry sets tariffs only for exporting, which is the most profitable service. The Russian government has proposed setting up a commission for determining all rail tariffs during the period of rail reform. This commission will give equal voice to both the Anti-Monopoly and the Rail Ministry. The commission has not yet come into existence and it is still unclear whether it will ever become a reality. There is ongoing discussion of assigning all regulatory functions to the Ministry of Transportation, but this is not yet in the legislation.

In addition to the Rail Ministry reforms, the legislation includes a so-called Railway Charter that reflects the new property relationships resulting from the restructuring. The Charter introduces new contract provisions, including penalties for delays and other liabilities, and new rights for carriers and users of rail service. Its purpose is to bring contract and administrative law in the rail sector into harmony with the other new legislation; in particular, to define the rights and obligations of the new Joint Stock Company.

All this changes the basic structure of Russia's railway industry, offering for the first time an opportunity, to operate on market-based principles and creating opportunities tbr Russian and foreign investors. U.S. companies working in this sector should be able to find profitable ways to take part in this comprehensive reform process.

Randy Bregman, a partner in the New York office of global law firm Salans, heads up the U.S. desk of Salans's CIS practice. Bregman's practice encompasses international transactions and CIS trade and investment. He serves as Chairman of the Russia Sub-Committee of the U.S. Council for International Business and is also on the Board of the Russian American Institute for Law and the Economy.