Alternative to Russia: Which New Transit Cargoes Can Ukraine Expect

Active work to diversify cargo transit routes can help Ukrzaliznytsia to compensate for its loss of revenue from transit of Russian goods. In addition to the Silk Road project, the cargo route from Black Sea ports to Ukraine’s western border crossings can be promising.
Ihor Hoshovskyi 08 February 2016 11:01

The record fall of 54% in the volume of transit cargo traffic that was recorded in January 2016 was the logical continuation of the trend of recent years. In total, Ukraine has lost about 23 million tons of transit cargo from Russia in five years, losing about 17% of its cargo traffic annually. The figures stated in Ukrzaliznytsia’s financial plan are even more pessimistic – the plan forecasts a 21% reduction in 2016.

The reasons for the sharp fall have been well known and well documented for a long time: they are Russia’s political decision to minimize cargo transit volumes for the benefit of Russian enterprises, the short-sighted tariff policy of Ukraine’s Ukrzaliznytsia public rail company, and several other reasons. "To preserve cargo traffic, it is necessary to create alternative transit routes. This will also allow diversification of sources of goods and reduction of our economic dependence on Russia," said Andrei Isayev, a consultant with CFTS Consulting.

The potential cargo traffic is very significant: the launch of two alternative routes bypassing Russia, if successful, can compensate for the loss of up to 8 million tons of cargo. For example, about 7 million tons of transit iron ore and coal from South Africa, Australia, and the United States can go via the Black Sea ports-western border crossings route to companies in Central and Eastern Europe. As for the eastern direction – a container train to China bypassing Russia – the Ministry of Infrastructure projects that cargo transit volumes can reach only 1 million tons annually, at best, in the near future.

The route to the east Ukraine test launched a container train bypassing Russia on 15 January. However, the number of questions about this route has not become fewer following the test launch of this train but more. There are still no official tariffs for the train (only rumors of USD 5,000 per 40-foot container in one direction) and the cargo base and even the exact travel time are unclear.

In such circumstances, there is nothing concrete to say about cargo shippers. Nevertheless, hints at the possibility of transporting cargoes on the new route have already begun in the European Union and the Chinese Foreign Ministry’s official representative Hua Chunying has even welcomed the launch of the new Ukrainian train on the Silk Road route bypassing Russia. "It (the launch of the train) is of great importance to the development of infrastructure and trade in the economic belt of the Silk Road. As for the new route that Ukraine has developed with the relevant countries, China also welcomes this," Chunying said.

It is possible that all of these statements are only aimed at sending a signal to Russia to let Russia know that it can lose its monopolist status regarding transit of Chinese and Central Asian goods to Europe and force it to grant discounts, stop playing games with counter-sanctions, and stop blocking the transit of goods through its territory. Recent statements by the Polish embassy in Uzbekistan, among other things, confirmed this indirectly. Uzbek media reported on 25 January that Poland intended to stabilize its trade turnover with Uzbekistan, which has fallen by more than 30%. One of the reasons for the reduction in bilateral trade between the two countries is the complication of cargo deliveries by Russian sanctions. Warsaw is now seeking alternative routes, including routes through the Caucasus, and the Ukrainian train may have been launched just in time for this.

"The Polish side sees establishment of a transit route bypassing Russia as one way of addressing this issue. There are bypass routes through the Caucasus and Turkmenistan, but it is still necessary to think about how to make this route more profitable," a Polish embassy employee said.

Polish exports to Uzbekistan are dominated by cattle (more than 30% of total exports), chemicals (24%), and machinery and equipment (about 17%). In total, Poland exports 20 types of goods to Uzbekistan. Polish imports from Uzbekistan are dominated by cotton, byproducts of its primary processing, and textiles (over 50% of total imports), followed by chemical products (more than 22%), and mineral products (about 19%).

In comments to the CFTS portal, Polish transport expert and deputy editor of the Rynek Kolejowy magazine, Michał Grobelny, said that Polish entrepreneurs were interested in any possible route for delivery of cargoes to/from Asia that is profitable and convenient. "It does not matter whether the route passes through Russia or bypasses it, and Ukraine could become an important element of new corridors," Grobelny said.

"In reality, Polish businessmen are apolitical, they are interested only in their profits and new opportunities in foreign markets, including in the East. However, if Russian partners are becoming less independent, then there are problems," he said.

Grobelny believes that several new transit routes for transportation of cargo from Poland to Asia (Georgia, Azerbaijan, Kazakhstan, Uzbekistan, and China) are possible at the same time. The first of these involves the participation of Ukraine and the Polish railway company PKP LHS, which operates a broad-gauge track from Slawkow to the Ukrainian border. PKP LHS already has close ties with both Ukrainian and Russian freight forwarders and railway operators. The route from Slawkow through Ukraine is the easiest and most convenient, the expert said. However, this option has its drawbacks. "Of course, it is the conflict in the eastern part of Ukraine and the fact that the political situation [in Ukraine] is still uncertain," Grobelny said.

In these circumstances, a second route for transit of Polish goods is possible – it goes through Romania and then through the sea to the Caucasus and Central Asia. "The route through Romania could be an option, but it does not have sufficient infrastructure and the necessary experience," Grobelny said.

According to him, it is currently difficult to predict which route will become predominant. It has to be beneficial to all participants. It must be remembered that every service on such a long journey should be seen as a two-way interaction. Every country involved in this project should receive and send goods. Its viability will be lower if there are empty containers on any section of the route.

Transportation by rail from ports to Ukraine’s western border crossings is cheaper by an average of USD 4-5 per ton than transportation on the Topol-western border route

The route to the west The route “Black Sea ports-western border crossings” could be another promising area of diversification of transit cargo traffic. In contrast to the eastward route to Kazakhstan and China, this route focuses more on bulk cargo, primarily iron ore and coal.

The main customers for these raw materials include steel mills in Eastern Europe: US Steel’s steel plant in Kosice (Slovakia), ArcelorMittal’s European enterprises, the Třinecké železárny steel plant in the Czech Republic, ISD Dunaferr in Hungary, and others.

These enterprises are currently dependent on goods transported on transit through Russia to Eastern Europe, which also go through Ukraine and Belarus. The volume of this cargo traffic is very significant. In particular, about 5 million tons of iron ore and 2.3 million tons of coal passed through the territory of Ukraine alone on the route from Russia to western border crossings in 2015. However, given complicated political and general economic factors in the country, the fall in prices of raw materials, and low freight rates, this cargo traffic may be replaced by an alternative supply route through Ukrainian Black Sea ports and may have no Russian origin.

The economic conditions for this option are very significant. Firstly, the route from Black Sea ports to the western border of Ukraine is 400-500 kilometers shorter than the route from the eastern borders to these crossings. As a result, transportation by rail from seaports towards western border crossings is cheaper by an average of USD 4-5 per ton than transportation on the route Topol-western border, and Ukrzaliznytsia’s railcar fleet will be fully loaded.

Secondly, in this case, cheaper and high-quality iron ore can be bought from Brazil and Australia and coking coal, PCI coal and low-volatile thermal coal from Australia, South Africa, the United States, and Canada, thus diversifying supply channels and eliminating the dependence of the Eastern European steel and energy enterprises on Russian raw materials. A similar logistical scheme has already been tried in practice: the ISD Corporation imported iron ore from Brazil for its companies in 2005 and a similar scheme was used to supply coal to ArcelorMittal’s Eastern European steel mills recently.

Thirdly, Ukraine has deep-water port facilities and it is capable of efficiently handling large ship consignments and large vessels of the Capesize, Newcastlemax, and Wozmax classes. The 50% discount on port charges for transit goods that was introduced last year allows additional savings of USD 1 per ton. Thus, the railway gets the opportunity to preserve a transit cargo traffic of over 7 million tons, Black Sea ports get to operate at a sufficiently high capacity, and the country as a whole gets a real, not declarative, economic integration into the European Union.

Everything depends on implementation of promising ideas: the Ministry of Infrastructure and Ukrzaliznytsia need to hold the relevant negotiations on removal of technical barriers and creation of the economic conditions (a through rate, for example) that will make the Black Sea-western border route more attractive than the rapidly shrinking transit route from Russia.

Read more Through the Sea and the Desert: How the First Train Bypassing Russia was Launched

Tags: China, EU, cargo