Reform of Russia’s rail system has left the country with one giant company - Russian Railways, a joint-stock company - and dozens of private firms trying to get a piece of the action.

In fact, Russian Railways, or RZD, estimates that more than 100 private companies will get involved in the rail freight transport sector this year.

Private companies accounted for around 20 percent, or some 25 million tons, of total rail freight transport in 2003, and they own more than 30 percent, or about 70,000, of the total fleet of freight wagons.

But RZD insists that it can withstand the competition and says that it works more efficiently than the private companies battling for business. "A large company always has a lot more opportunities in a whole number of areas to make transport cheaper and more effective," RZD Vice President Anna Belova said.

"We have wagon turnover of less than eight days now, and we reduced it by 10.6 hours last year," she added. "The companies that own their own wagons have a turnover time of more than ten days."

However, independent analysts, while they might agree that RZD has the advantage, allege that private companies face unequal competition. This, they say, hurts the entire sector because it prevents real competition, which would make overall operations more efficient.

RZD has slowly yielded part of the market to private companies, as did its predecessor, the Railway Ministry. Private companies now control more than half the oil and petroleum products transport market, 25 percent of the fertilizer transport market, 21 percent of car transport and 20 percent of the iron ore transport market.

But RZD says it intends to fight to keep its share of these profitable sectors and to reclaim any lost ground.

RZD’s Belova said that the Railways Ministry used to have 17 regional railways, which complicated the decision-making process and made it hard to manage a fleet of wagons operated by almost 20 different legal entities.

"Now we can say that we can offer quality freight transport services for oil companies, and this is something that interests us," Belova said in a recent newspaper interview.

RZD said it is even willing to bring down its prices to compete with private companies. "Today, what we want is for tariffs to be less regulated so we can react to the market situation and in some cases even lower our prices," Belova said.

Unlike RZD, private companies cannot lower prices because their revenues come only from wagons — a modest 15.4 percent of the total transport costs. RZD, on the other hand, can distribute expenses between various operations and compensate for the drop in the basic rate through providing services such as security guards that are paid for separately.

Under the latest price list, the cost of these additional services has increased, even doubling in price by some assessments. If RZD lowers prices even by 10 percent, it could squeeze out private companies even in the segments where they now currently hold a sizeable share of the market.

A real battle is also underway between private companies and the state monopoly for the wagons. In previous years, RZD did not invest in modernizing its wagons and locomotives, and it even sold some of its old wagons to private companies that subsequently reconstructed and upgraded them. RZD bought virtually no new wagons.

"In 1991, the Railways Ministry bought 37,500 freight wagons, in 1998, it bought 2,100 wagons, in 2002 it bought just over 100, and only 1,400 wagons in the first three quarters of 2003," said Georgy Davydov, president of the National Transport Association.

Private companies bought 14,000 wagons in 2003, spending 14.5 billion rubles. This gap was putting the state monopoly in danger of losing many important freight sectors. Railways Minister Vadim Morozov estimated that freight transport would increase by 26 percent by 2010, and passenger transport would increase by 6-7 percent, which would require at least 625,000 new wagons. This year alone, however, 365,000 wagons are due to end their service lives.

This situation now has RZD and the private transporters actively buying new wagons. In 2002, Russian wagon-building plants were working at only 65 percent capacity, but in 2003 they were working at near full capacity. The wagon makers are unable to keep up with the orders. Demand for wagons and cisterns is now so high that client companies were having to line up to place their orders. Some plants, such as Uralvagonzavod, reacted by adopting a system of selling many completed wagons by auction.

These conditions give RZD the advantage through the greater lobbying clout it can wield. The head of RZD went to Yekaterinburg and concluded an exclusive agreement with Uralvagonzavod under which the plant will deliver 20,000 wagons and spare parts for them for a total of 3-4 billion rubles by 2010. RZD allocated 11 billion rubles for buying wagons in 2004. This is essentially leaving the independent operators without the means to get new equipment.

RZD does not see itself as going against the principles of railway reform. "I agree that there is a certain problem with operators today, and that we need to resolve it," RZD’s Belova said. "But these protests that RZD is not letting anyone else buy wagons are coming from those who want to buy the wagons for less than the market price. If you need wagons, offer a better price than RZD and the manufacturers will no doubt sell them to you. If we are talking about an honest market, then let the sellers set their own policies. It is normal that the main customer should get some particular attention and discounts."

In January, RZD nonetheless went back on the agreements it had concluded with the wagon makers last autumn, cutting the orders by half. Most likely, the company was simply not ready to acquire so many new wagons after all, and along with the purchase cost, this would involve increased expenses for their maintenance and operation.

Independent companies are cautious about the railway reform process. RZD now has access to vast financial resources that it can use to buy new wagons and adjust tariffs. RZD plans to raise 10 billion rubles in bank loans this year, to issue ruble-denominated bonds for 10 billion rubles and buy 12 billion rubles worth of equipment through leasing schemes. Private companies do not yet have the means to raise this kind of money, though they are beginning to make their first attempts. Severstaltrans, for example, has announced the placement of credit notes for $100 million with the funds going towards buying new equipment. Incidentally, the new transport minister used to work at Severstaltrans.

The likely scenario is that private companies will find themselves pushed out of all but a few sectors except for those where they reach some kind of agreement with RZD. One company, Novaya Perevozochnaya Kompaniya, for example, already announced last November that it would enter the grain transport market. Analysts noted at that time that private competitors would face little competition in this sector from RZD because the state company has not sought to develop this market.

This is because as a highly seasonal market, this sector is not very profitable and wagons end up sitting idle a lot of the time. With highly regulated tariffs, this leads to losses for the transporter, and so RZD is looking for ways to get out of these loss-generating sectors. Private companies, on the other hand, are convinced that they can make normal profits in these sectors by reorganizing the transport process, avoiding running empty wagons and finding clients in April-June when grain transport drops and wagons can be used instead for transporting raw materials for the sugar industry.

RZD wants to concentrate on the most profitable sectors where it has automatic advantages over the independent companies. It is systematically pushing private operators out of the universal transport sector, for example.

"Freight transport using universal wagons is not loss-generating, though profits are not as high as for transporting oil," said the National Transport Association’s Davydov. "But oil cisterns are a specialized kind of transport means and their operating conditions mean they make the return run empty. Universal wagons, on the other hand, can be used for all types of transport and are convenient to operate. They can be loaded at any station and they have a high turnover, so even though they are not very profitable in themselves, this transport sector is attractive. Given RZD’s dispatching potential, it has a huge monopoly advantage in this sector and will be above the competition for a long time yet."

Even before the Railway Ministry’s reorganization into RZD, railway officials made every effort to restrict private companies’ access to the universal transport sector. The current share of the wagons in the transport costs does not fully reflect the expenses for operating the fleet of universal wagons. RZD can compensate for this by means of the more profitable infrastructure component, while private companies have no such opportunity.