Sanctions, war and a record interest rate are tightening the noose around Russian rail freight. In order to adapt to the new reality, national rail operator Russian Railways (RZD) needs to make large investments. But contrary to what it needs to do, it now plans to cut investment in rail infrastructure by at least a third next year. The country’s ambitions for its rail sector may be in trouble.
In 2025, RZD plans to invest 834 billion rubles (7,7 billion euros) as part of its investment programme. That number is lower than the investment for 2024 by 36,7 per cent, according to Russian publication Kommersant, which got its hands on an internal document presented to the Russian government on 28 November.
In order to fulfill all of its investment objectives, RZD would need at least 1,3 trillion rubles in 2025, a long shot from what it is proposing to the government. The company’s investment plans for the next five years are also subject to 36-per cent funding reductions, and are now being proposed at 7,94 trillion rubles (72,8 billion euros).
Money for locomotives, not for infrastructure
Reportedly, major construction projects are going to suffer most from the reduction in investment, among which are the crucial Trans-Siberian and Baikal-Amur mainline. Those two lines can count on 75 billion rubles, which stands in stark contrast to the 360 billion rubles of 2024. The money that RZD does want to invest in 2025 is supposed to go towards the acquisition of additional locomotives and other fixed assets.
Of the total 834-billion ruble investment, approximately 114 billion will go to new locomotives, and 95 billion will go towards modernisation of rolling stock. RZD plans to purchase and upgrade 354 locomotives, 176 passenger cars and an installation batch of rolling stock for the high-speed between Moscow and St. Petersburg for 3,1 billion rubles.
Trade with China
RZD’s inability to invest sufficiently in rail infrastructure comes at an unfortunate time for Russia. Its hostile relationship with previously important trading partners has forced the country to reorient its trade flows to China. Rail infrastructure plays a crucial role in importing and exporting goods in the east, not only to land borders, but also to ports to further destinations.
Where it plays a crucial role in trade, rail infrastructure is also an important bottleneck. In a lot of places, there are only single-track or non-electrified lines. Russia has set the goal of expanding rail throughput capacity to 270 million tonnes annually in the Far East by 2032. In 2024, that number reached 180 million tonnes. In the absence of sufficient investments (it needs 3,7 trillion rubles), no throughput capacity growth is expected in 2025, throwing a spanner in the works of the country’s plans.
A myriad of challenges
It is clear that RZD is prioritising rolling stock purchasing and maintenance over construction works, which is not entirely surprising. Earlier, RailFreight.com found that at least 93 per cent of Russia’s rail freight loading decline is attributable to a persistent locomotive shortage, based on RZD’s own numbers. During each month of 2024, the rail operator recorded lower loading compared to the year prior. In 2024 overall, a decline of 4 per cent is projected.
RZD is therefore giving priority to its most pressing issue, but it is dealing with a myriad of related challenges. For example, there are not enough spare parts due to sanctions, there is also insufficient qualified personnel to provide maintenance services, both aggravating the locomotive shortage. Another persistent problem is the driver shortage, which has now run in the thousands: according to RZD itself, it needs 2,500 more drivers to meet its demand. The shortages are taking a toll on RZD’s ability to transport freight around the country.
Soaring interest rates
The primary reason for RZD’s financial limitations seem to be record-high interest rates in Russia, with the official rate now being 21 per cent. A Kommersant source told the publication that there is a liquidity deficit on the Russian market, and there are no obligations for terms longer than three years being placed, making the attraction of funding difficult: “The interest rate, for which long-term investments are being attracted, is becoming disadvantageous”, the source is quoting as saying.
RZD has a lot of debt pegged to the official interest rate, and with each of the central bank’s interest rate hikes, the company’s debt grows. RZD is expecting its interest payment to grow up to 7 billion dollars (6,63 billion euros) in 2025. At the moment, those interest payments are around 3 billion, meaning that they are likely to more than double over the next year.
The 7 billion euros in interest payments next year constitute a six-fold increase from 2023. In the first six months of 2024, RZD spent around one billion euros in interest payments. Its total debt will likely grow to 37 billion euros in 2025, according to a company document.
The Russian rail operator is increasing its rail tariffs by 13,8 per cent from December onwards to boost its income, but that does not compare to the expected growth in expenses for the next year.